Zambia plans to trim its fiscal deficit next year even as Africa’s second-biggest copper producer boosts spending.
It may be considering raising mine taxes to achieve that, according to analysts.
The Finance Ministry is targeting a budget shortfall of 6.5 per cent of gross domestic product next year, compared to 7.4 per cent this year, according to a medium-term expenditure plan that sets its fiscal course until 2021. At the same time, it forecasts mineral-royalty and mine-profit tax revenue increasing by about a quarter, as copper output grows 3.7 per cent and prices remain flat.
That suggests an increase in rates for both profit tax and royalties for companies including Glencore Plc, First Quantum Minerals Ltd. and Barrick Gold Corp., said Mark Bohlund, an Africa economist with Bloomberg.
“The sharp increase in mining royalties and mining corporation income tax appear to be based on a change in the taxation regime,” he said in reply to emailed questions. A Finance Ministry spokesman didn’t immediately respond to a request for comment.
Finance Minister Margaret Mwanakatwe is due to present the 2019 budget to lawmakers this month. She’s trying to allay fears around Zambia’s external debt that grew to $9.4 billion at the end of June, almost double the amount at the end of 2014, and get the International Monetary Fund to resume talks over a potential $1.3 billion bailout.
Last year, the IMF classified the country as being at high risk of external debt distress. Standard & Poor’s and Moody’s Investors Service both cut their credit ratings further into junk territory in August, and the southern African nation’s Eurobonds have been the world’s worst performers this year. Yields on its $1 billion bond due 2024 rose to a record 16.4 per cent on Wednesday.
The MTEF forecasts total revenue will increase by 14 per cent next year from a 2018 target of 49 billion kwacha ($4.8 billion). Income from mineral royalties is seen growing 23 per cent to ZMK 4.4 billion, with receipts from mining-profit tax climbing 27 per cent to ZMK 2.5 billion.
The estimates suggest the government may be considering higher royalty rates, said Renaissance Capital Fixed Income Strategist Gregory Smith. The levies are currently at six per cent when the copper price is above $6,000 per metric ton, and 5 per cent if below that level, but higher than $4,500.
“Without an increase in royalty rates the 23 per cent growth appears optimistic,” Smith said in emailed comments.
Zambian mining companies have enjoyed a period of “relative stability” in the taxation regime after upheaval in 2014 and 2015 that saw some operators threatening to close, the country’s mines lobby group said.
“It would be an unfortunate travesty if the government were to consider a short-term revenue grab in the middle of such a positive environment between government and industry,” Zambia Chamber of Mines President Nathan Chishimba said in emailed comments. “We hope sanity will prevail.”
The Finance Ministry reiterated plans to slow debt accumulation in the expenditure plan.
“Projects that are at least 80 per cent complete will be prioritized for financing,” it said. “In addition, contraction of commercial foreign debt to finance new projects will be postponed until the debt situation is reduced to moderate risk. Some of the negotiated loans that are yet to be disbursed will be cancelled.”
The government plans to set aside 4.4 billion kwacha for a sinking fund, meant to enable it to meet its future debt obligations, it said.
The government’s targets may not be sufficient, according to Smith.
“The fiscal deficit target of 5.1 per cent of GDP in 2021 and the gradual pace of getting there might not be enough for the IMF to rekindle discussions on a possible program,” he said.
Bohlund was skeptical of the targets in the spending plan, saying the document “can be viewed as pure fiction as it has little basis on real-life economic conditions.”