Zambia needs money, and mines in Africa’s second-biggest copper producer may be the first place the finance minister looks when he presents his 2015 budget.
Alexander Chikwanda, who delivers his budget today in the capital, Lusaka, faces pressure to reduce the fiscal deficit from the 5.8 percent of gross domestic product Fitch Ratings Ltd. predicts for 2014. He also needs to spur growth and job creation. Failure to rein in the shortfall will make it more difficult in 2016, when an election is due, said Yvonne Mhango, a sub-Saharan African economist at Renaissance Capital.
“The mining sector will be an important part of this year’s budget, unfortunately to the detriment of the mining companies,” Mhango said by phone from Johannesburg yesterday. “Government is trying to mobilize revenue wherever they can.”
Chikwanda is considering scrapping corporate income taxes for mines and increasing royalties instead, as this would be simpler to administer, a person with knowledge of the matter said last week. At the same time, the Zambia Revenue Authority has withheld more than $600 million in value-added tax refunds from mining companies as part of a dispute.
Mineral royalties will rise to 8 percent for underground mines and 20 percent for open-pit operations, the Lusaka-based Post newspaper reported today, citing people it didn’t identify. Chikwanda doubled the rate to 6 percent in 2011.
Tax Avoiders
Mineral producers have repeatedly been accused of tax avoidance in the country, allegations they deny. First Quantum Minerals Ltd. and Barrick Gold Corp. have open-pit mines in Zambia, while Vedanta Resources Plc (VED) and Glencore Plc have underground operations. The country lost its place last year as Africa’s biggest copper producer to the Democratic Republic of Congo.
It will be important for the finance minister to address the issue of the VAT refunds, which has hurt business confidence in Zambia, Mhango said.
“If there’s uncertainty in the operating environment for investors, you’re going to see the currency come under pressure,” she said. “The performance of the kwacha has markedly reflected sentiment more so than almost any other currency in the region.”
Zambia’s kwacha is Africa’s worst performer this year after the Ghanaian cedi among 24 African currencies tracked by Bloomberg, slumping 12 percent against the dollar. It fell less than 1 percent to 6.32 per dollar by 11:22 a.m. in Lusaka, weakening for an 11th day.
Top Priority
Clarification on the VAT dispute is the top priority for the Zambia Chamber of Mines, Jackson Sikamo, president of the lobby group, said by phone from Kitwe in Copperbelt province. He declined to comment on whether royalties may rise.
The timing of a potential increase in mineral royalties would be “unfortunate,” as “we’re in a softening commodities environment right now,” Mhango said.
Chikwanda will maintain a wage freeze for government workers next year, the Post reported yesterday, citing people it didn’t identify. He’ll probably announce 46 billion kwacha ($7.3 billion) in spending, the Post said. That’s a 7.7 percent increase on the 42.7 billion kwacha announced for 2014.
To raise revenue, government will sell 27 percent of the shares it holds in ZCCM Investments, through which it owns minority stakes in mines, the Post reported. ZCCM Investments, 87 percent-owed by the government, has a market value of about $763 million on the Lusaka Stock Exchange. The company is considering listing in London, its chief executive office said this week.
“We believe the government will look to further consolidate its fiscal position,” Standard & Poor’s analysts including Benjamin Young said in an Oct. 3 report. “Measures to increase revenues are uncertain, and expenditure pressure from important infrastructure projects and the need for job creation remains significant.”
By Matthew Hill
Source: Bloomberg News
