Economic Analysis - Quick View: Tax Hike to Hurt Zambian Copper Production

Implications: We have long been highlighting that Zambia’s worrying fiscal dynamics and structural obstacles to pare back the size of the government’s fiscal deficit increased risks to the business environment in the country (see ‘ Zambia's Struggle to Consolidate Fiscal Deficit Posing Risks to Growth’, September 5). We think that a significant increase in business operation costs due to the new tax regulations will weigh on economic activity in the sector, presenting serious headwinds to investment and growth. Shortly after the budget speech, Zambia Chamber of Mines President Nathan Chishimba declared that the measures will push many firms into loss-making positions, forcing them to scale back production, hurting headline economic growth. We have indeed revised down our forecasts for growth in the economy from 4.5% and 4.6% in 2019 and 2020 to 3.9% and 4.0%, respectively.

What’s Next: The measures proposed will need to be implemented by January 2019, with the Sales Tax to be implemented by April 2019. We have previously seen the Zambian government backtracking on increases in mineral royalty taxes in 2015 after Barrick Gold Corporation threatened to suspend operations at its Lumwana open pit copper mine. That said, we don’t think President Edgar Lungu’s administration will likely back off this time, as investor concerns over debt sustainability will force the government to implement the needed reforms, while rising copper prices will offer a key bargaining chip in tax negotiations with the miners. Indeed, our Mining team has revised down its forecast for copper production growth in the country from 6.0% and 8.0% in 2019 and 2020 to 5.0% and 4.0%, respectively. The situation in Zambia draws some parallels with a similar set of events that occurred in Tanzania, where the government reformed its tax regime in March 2017, imposing a ban on unprocessed mineral exports and approving regulations stipulating that the government will have the right to renegotiate or dissolve existing mining contracts at any time (see ‘ Weak Lending and Gold Export Ban Will See Growth Slow’, May 25). While Tanzania’s set of tax reforms were well-intentioned, being part of an effort to increase revenues for development projects, reduce fiscal risks and consolidate popular support, the long-term detrimental effects on investor perception has been significant. In a similar vein, we believe that the absence of a consolidated plan for debt reduction in the medium term and concerns over the longer term consequences of a slowdown in copper production will gradually override short term respite over a possible slowing in debt accumulation.