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Zambia’s Fight To Boost Investment Incentives for mining

Lisa Koch
May 19, 2016

Posted in Mining Southern Africa

The current commodities cycle and related economic risks continue to contribute to suboptimal levels of investment in mining in Africa. The onus is shifting to African governments to boost investment incentives, and Zambia is proposing to do this by changing its tax regime.

The Risks

The fall in commodity prices has sent projects into restructuring, forced miners to reduce their leverage and dampened incentives to invest. Zambia in particular has been negatively affected by the price of copper declining approximately 20% over the past year (by comparison the price of gold increased by 8%). At the same time the Fed has hiked rates once, and adopted a more hawkish tone at the most recent FOMC meeting. This gives the Fed room to hike again at its June meeting ahead of the US elections, without surprising investors. A hike would likely mean higher borrowing costs for potential investors and governments, and a stronger US dollar. Higher borrowing costs would impair the ability of the Zambian government to finance infrastructure projects to support the mining industry without running an unsustainable budget deficit. As commodities are generally traded in US dollars, a stronger dollar could put further downward pressure on global commodity prices, which in turn would reduce incentives to invest in new projects.

Zambia’s Response

With these risks on the horizon, Zambia has been forced to do more to encourage investment. The government has proposed a draft bill which would introduce a sliding royalty rate of 4-6% depending on the price of copper. If the price of copper is below $4,500/MT the rate will be 4%, if it is above $6,000/MT, the rate will be 6%, and the rate will be 5% for any price between $4,500 and $6,000. This represents a reduction from the current system which imposes a royalty of 6% for underground mines and 9% for opencast mines. Zambia also proposes to remove the variable profit tax on income from mining operations, and is currently prioritising limited electricity supplies to the Copperbelt. The proposal arose as Zambia’s president came under pressure, after miners announced mass redundancies and Zambia’s Chamber of Mines initiated a dialogue emphasising the need for the government to support the mining industry.

This proposal should make Zambia relatively more attractive as it vies for foreign investment with the likes of the DRC. The World Bank has suggested that this type of relief for the mining industry is necessary to encourage sustained long-term investment, particularly as mining in Zambia is relatively expensive.

Sceptics may question whether the proposal will actually result in dividends. However, if early indications are anything to go by, Glencore’s announcement that it will invest $1.1 billion in the Mopani project is encouraging. It is possible for the government’s new proposal to have an appreciable impact: it may only take a marginal percentage change to costs— of which royalties is a key input— to take a project from being unfeasible to feasible.

It will be interesting to see how Zambia’s action impacts long-term investment, particularly as another rate hike from the Fed is likely to come this year. The proposal shows investors that the government has the political will to support the mining industry. Combined with the fact that Zambia has no foreign exchange controls and is generally viewed as a comparably easier country in Africa in which to do business , investors should look favourably on Zambia over the long term.

The Inside Africa team would like to thank Tomisin Mosuro, Trainee, for his contribution to this blog post.

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