The International Monetary Fund (IMF) on Monday backed Zambia’s plans to raise mining taxes but warned that critical power shortages will curtail investments in new projects.
A team of eight IMF board members assigned to assess economic progress since the Fund, the World Bank and other western financiers cancelled Zambia’s debt in 2006, said power shortages posed a major challenge to further growth in mining.
Miranda Xafa, an alternate IMF executive director, welcomed moves to raise mining taxes.
“The taxes previously were extraordinarily low, not just within Africa but also globally, and we so believe there is room to increase the taxes,” she told reporters.
“But of course that is up to the government and the foreign investors to negotiate the taxes.”
Zambian wants to lift taxes from April to generate more revenue from its extensive deposits of copper and cobalt, the lifeblood of the southern African economy.
They have proposed a windfall profit tax at a minimum of 25 percent, raising the mineral royalty to 3.0 percent from 0.6 percent, a variable profit tax at 15 percent on taxable income above eight percent and plan to lift corporate tax to 30 percent from 25 percent.
Foreign mining companies have criticised the proposals, and argue the government had not consulted them over the plans.
But Xafa also warned that Zambia should not be “too ambitious” with new mining projects because it did not have the capacity to supply power to new projects.
“I understand there are investors waiting to come in with mining projects but there is not enough energy right now to service these new requests,” she said.
“So, I think, before we can talk about plans to expand production, it is important to remove these bottlenecks.”
Zambia has suffered outages that have hit output at mines, and is looking at ways to shore up waning capacity. It announced plans this month to spend $1 billion to build a new 750 megawatt plant.
The Fund said Zambia has made strides in growing its economy but needs to handle commodity price windfalls prudently and develop infrastructure to avert a possible recession.
“We acknowledge that despite the impressive economic performance and positive medium term outlook, challenges and risks remain,” the IMF directors said in a statement after a meeting with President Levy Mwanawasa.
Zambia’s economy has grown by an average 5 percent in the past six years and it has brought inflation to single digits for the first time in three decades.
The Fund said Zambia needed to manage windfall from higher commodity prices wisely to maintain steady economic growth. Copper mining is the cornerstone of the Zambian economy.
“We would note two important challenges … the first being how to manage the macro impact of large foreign exchange inflow,” said Miranda Xafa, an IMF director.
“You certainly do not want to get into a boom (and) bust cycle that others have found themselves in, in that while the boom and bust lasts, they try to spend it all at once and while commodity prices fall, they slow down in possible recession.”
Treasury data showed Zambia received nearly $1.5 billion in foreign direct investments while earnings in copper exports were around $4.7 billion in 2007.
“The second challenge is building the infrastructure and removing impediments to private sector development . . . to improve the business climate by facilitating investments and growth,” Xafa said.
The IMF also discussed a new financing package of a “small” undisclosed amount with Zambia after the expiry of the $320 million three-year poverty reduction growth facility.
The IMF warned Zambia about managing its debt.
“We are aware that the government is now seeking a sovereign credit rating that will facilitate access to international capital markets and we are confident that the government will use these funds wisely,” Xafa said.
“We would caution that after this debt forgiveness, it is important to maintain debt sustainability by using non-concessionary borrowing to finance viable projects (that) have a rate of return high enough to justify the borrowing.”
Mwanawasa told the board members that Zambia would continue with prudent macroeconomic management and economic reforms to attract further foreign direct investments.
