Africa Mining: Zambia Proposed changes to Its Mining Tax Regime, a signal unstable fiscal policy

Zambia parliament
Zambia Parliament

The government of Zambia (B3 negative) submitted a proposal to parliament that would reduce mining royalties paid to the state. If approved, the reduction would be the third shift in the tax regime since January 2015 and would continue a pattern of frequent changes to the country’s tax regime over the past 10 years.

Such changes to Zambia’s mining royalty regime are credit negative for the sovereign because they illustrate the country’s unpredictable and unstable fiscal policy, which also lacks credibility and deters investment.

If approved by the parliament before its dissolution on 13 May (general elections are set for August), the new regime would be retroactive to 1 April. The exhibit below describes Zambia’s repeated changes to its mining royalty regime. Under the proposed rules, the tax rate on copper would equal 4% when the price is less than $4,500 per ton, 5% when the price is $4,500-$6,000 and 6% when the price is more than $6,000. Royalty rates would be set at 5% for other base metals and at 6% for precious metals.

Sources: International Monetary Fund and the Ministry of Mines of Zambia

The proposal also includes the suspension of a 10% export duty on ores and concentrates for materials that were not processed in Zambia. This suggests that investors can export raw materials without having to pay a penalty tax. The measures diminish incentives for companies to undertake mineral processing and export higher value-added products, thus reinforcing country’s dependence on basic commodities and discouraging development of local manufacturing. The changes to the mining tax are a response to mining companies that had warned that they would cut thousands of jobs or halt operations entirely if Zambia did not implement a more conducive taxation regime. However, the changes are occurring at a time when Zambia’s fiscal situation is under extreme pressure: the government already is facing liquidity shortages and a further reduction in revenues that is likely to result from these tax changes would make timely fiscal consolidation even less likely. Zambia’s 2015 deficit was 8.1% of GDP, and absent major expenditure cuts we expect it to be at least 7% this year. It is highly likely that the proposed regime will not be Zambia’s last given that the country’s tax system is progressive and thus is susceptible to additional changes as a result of pressure from mining companies for reduced tax rates once prices start to rise. Zambia’s overall lack of effective fiscal policy and credibility is reflected in its institutional strength score of “very low +” based on our methodology. Frequent changes to the mining regime hamper transparency and challenge investors’ ability to stay current with the regime, while preventing them from making effective multi-year investment plans.

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