No surprises as Zambian budget speech calls for increased burden on miners

by Irmgard Erasmus 0

The address was entitled “Celebrating our Golden Jubilee as One Zambia One Nation by making economic independence a reality for all”.

According to the socio-economic policy objectives for the 2015 fiscal year, Zambia targets real GDP growth of seven per cent while restricting end-year inflation to seven per cent year-on-year and firming the external buffer to at least four months of import cover.

The fiscal stance remains decidedly expansionary, with the government proposing to spend 46.7 billion Zambian kwachas in 2015, of which 75.2 per cent will be sourced from domestic revenues.

The government recognised that recurrent expenditures need to be limited to create fiscal space for capital expenditure, and cited the need to restrict expenditure on maize marketing and ensure cost-reflective fuel pricing in particular.

The minister projects that grants will amount to 1.2 billion Zambian kwachas, equal to 2.6 per cent of the total budget. The government further proposed to borrow 3.8 billion Zambian kwachas from the domestic market, while 4.2 billion Zambian kwachas will be sourced from foreign programme and project financing. Proceeds from the 2014 Eurobond will be used for the balance of the 2.4 billion Zambian kwachas.

High government borrowing on the domestic market increases borrowing costs, which crowds out the private sector due to the resultant higher commercial bank interest rates, with adverse consequences for private sector-led economic development and job creation.

In terms of domestic revenues, the buck will be passed to the corporate sector instead of voting citizens. For miners, the two-tiered tax system will be replaced with – as final tax – a higher mineral royalty tax rate regime. Specifically, underground mining operations will be liable to pay an eight per cent mineral royalty rate, while open cast mining operations face a 20 per cent mineral royalty tax rate.

Mineral royalties are currently taxed at six per cent, after being doubled in 2011. Furthermore, income earned from tolling, as well as “the processing of purchased mineral ores, concentrates and other semi-processed minerals, currently taxed as income from mining operations” will be taxed at a flat rate of 30 per cent.

The government has however acknowledged the need to strengthen fiscal consolidation to both create fiscal space for infrastructural development and to address crowding out of the private sector.

Minister Chikwanda noted that the fiscal deficit is projected to fall within the target of 5.5 per cent of GDP in 2014 before narrowing to 4.6 per cent of GDP in 2015, compared to 6.5 per cent of rebased GDP in 2013.

The government expects that operational streamlining via the Treasury Single Account innovation and e-based tax and customs administration will translate into an improved fiscal position.

Some economists remain circumspect of the government’s ability to rein in fiscal expenditures in 2015 – while pre-election spending pressures will most certainly mount – and raise the budgeted amount via foreign financing within a global context of significant liquidity shifts.

An inability to raise the budgeted foreign financing amount during 2013 has proven to be an expensive mistake on Zambia’s part, as fiscal strain necessitated expensive borrowing on the domestic market and contributed to the significant divergence between the budgeted and actual fiscal outturn.

Unsurprisingly, the government passed the burden of an expansionary fiscal stance to the corporate sector rather than voters, and has shown short-sightedness in doing so.

The mining sector in particular has struggled with higher administered costs, electricity constraints, unpaid VAT claims and a higher domestic interest rate environment while commodity prices have softened, and are expected to face significant headwinds next year.

There is concern that Zambia’s effective overall mining tax rate structure is quite high, and any further increases may certainly adversely affect foreign direct investment (FDI) decisions.

Standard & Poor’s (S&P) affirmed Zambia’s sovereign credit risk rating at “B+” with a negative outlook on 3 October. The ratings agency cited fiscal and external vulnerability while conveying cautious optimism regarding International Monetary Fund (IMF) involvement.

The negative outlook reflects S&P’s view that Zambia’s weakened fiscal position renders the sovereign vulnerable to renewed external pressures. The ratings could be revised lower if external or fiscal pressures rise significantly. The rating agency expects that the pace of fiscal consolidation will be slow, and warned against short-term volatility in corporate revenue streams.