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

Zambian Business Times - - MIN­ING - Source: BMI Re­search

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.

Newspapers in English

Newspapers from Zambia

© PressReader. All rights reserved.