Government revenue from the mining sector in Zambia-past trends and future prospects

In a new vein- Zambia

The Mineral Development Policy (MDRP) of 2013 was dictated by a number of important developments that have taken place since 1995 when the Government last reviewed and articulated its policy direction for the mining sector. The most significant development was the transfer of ownership of the mining industry to the private sector following completion of the privatisation of the mining industry in March 2000. Already in 1995, Zambia’s Mineral Policy was designed to facilitate the development of a private sector driven mining industry, primarily through the privatisation of state controlled Zambia Consolidated Copper Mines (ZCCM). Following the privatisation process, according to government figures, between 1996 and 2011, US$ 5 billion Foreign Direct Investment (FDI) were invested in Zambia’s mining industry leading to the expansion of existing mines and the opening of new mines. These developments resulted in an increase in mineral production. Copper production in particular increased by an average of 15.9% to 819,574 mt in 2011 compared to 250,000 mt produced in 2000 and increased again to 915,773 mt in 2013.

Despite contributing almost 9% of GDP in 2007, the sector’s contribution to the treasury remained however tenuous, at 1.1% of GDP and declining from the years of public ownership, when mineral revenue as a share of total government revenue was, on average, 4%. Interestingly, copper prices and mineral output were on the upward trend when the sector was under private control and on a downward spiral when the mining industry was under state ownership. Limited revenue generation under state ownership was attributed to poor management of the mines and a decline in copper prices. Under private ownership, the limited revenue stream during favourable market conditions was instead attributed to tax policies that provided overly generous terms to companies including no VAT charge for mining related products, capital expenditure having a deductible expense of 100% and low mining royalties set at 0.6%.

As a result, the Mines and Minerals Act of 2008 paved the way for the introduction of new fiscal regime including a graduated windfall tax (currently disapplied), an increase in royalty rates to 3% of gross revenue on copper (now increased at 6%) and an increase from 25% to 30% in the Corporate Income Tax (now increased to 35% with an incentive of 30% for companies listed on the Lusaka Stock Exchenge).

In 2013, the government also enacted a law for monitoring international transactions (GRZ, 2013). The Bank of Zambia (Balance of Payments) Regulation enacted as Statutory Instrument No. 55 (SI 55), applied to all international transactions including profits, dividends, remittances, loans granted to non-residents, and investments abroad by persons resident in Zambia, among other things. The law also applied to payments for imports and settlement of private external debt, on principal and interest cost. SI 55 was meant to accurately capture revenues from exports, but also to better understand how funds generated from exporting activities were externalized while a new law, Statutory Instrument No. 33 (SI 33) prohibited the use of foreign currency on domestic transactions. Following challenges in the implantation of the two statutory instruments and the depreciation of the Kwacha, to other currencies, particularly the US dollar, both SI 55 and SI 33 were however revoked in March 2014.

Following the tax changes introduced by the Mines and Minerals Act in 2008 (implemented in 2011) Zambia now achieved an increase in revenue from the mining industry of 46% to K35 billion per month in 2012 (the latest year for which figures were available) with the largest source of revenue being corporation tax (33% of total mining revenues) and increased royalty rates (11% of total mining revenues).

However, the success of Zambia’s fiscal policy will not be automatic. The challenge will consist in striking a balance that will ensure more benefits from the industry to the country while concurrently rewarding investors. If the management of this transformation is not effective, Zambia, like other countries in Sub-Saharan Africa, will  continue to increase its economic output while reducing its national wealth.

Throughout this process, issues relating to governance, transparency and accountability over revenues will remain central – only if Zambia can get this balance right will the country’s mineral wealth contribute to its long-term economic and social development and ensure more benefits from the industry to the country and its investors.

This article will appear in Market Monitor’s Copperbelt Outlook Series of October 2014. To participate in this report please contact us on info@mktmonitor.com  

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