Zambian seeks balance between encouraging investors and reducing poverty levels.
Zambia is the second largest copper producer in Africa, recently taken over by the Democratic Republic of Congo (DRC), and eighth largest producer globally. The Zambian economy naturally relies heavily on its mining industry, which employs over 13 million citizens. Over the last decade the country has achieved an average annual growth rate from 5% to 6%, which makes it one of the 10 fastest growing economies in sub-Saharan Africa. GDP growth in 2013 dropped slightly from 7.3% in 2012 to 6.5% in 2013. Although privatization initiatives and market liberalization has contributed significantly to this growth, the fourfold increase increase in copper prices from 2001 to 2011 has played a pivotal role in the flourishing of the mining industry.
The mining sector in Zambia currently contributes almost 10% to the country’s GDP and is a primary source of government earnings. Apart from tax revenues and mineral royalties, approximately 75% of Zambia’s export earnings are generated by this sector (PWC 2013). New developments in the country’s copper landscape with the expansion of Mopani copper mines and First Quantum’s quantum leap in copper production, means that Zambia will reach copper production of 1,5 million metric tons per annum by 2016. This means that the mining sector contribution to GDP will grow to 20% over the medium term to reach $1.35 billion by the end of 2015 due to increased mining activities, rendering Zambia amongst the world’s top five copper producers.
Unfortunately, with 60% of the population still living below the poverty line, Zambia’s impressive economic growth is not reflected in the greater socio-economic sphere. The fact that the poverty incidence in the Copperbelt is relatively low at 22% compared to rural areas, where poverty rates are greater than 70%, explains why the government has been focused on creating a favorable environment for international mining companies operating in Zambia (World Bank 2013). The government however, is adamant that Zambians can and should be benefitting more from their mining industry as well as the peripheral sectors such as manufacturing and infrastructure and has introduced measures to aid in achieving this goal.
In 2012 the Zambian government increased the rate of mineral royalties from 3% to 6% in an attempt to attain a more equitable distribution of wealth derived from mineral resources. Other tax reforms in the mining sector included the introduction of property transfer tax of 10% on mining rights as well as a reduction of capital allowances from 100% to 25%, the latter to be phased over two years.
However, recently, the focus has been on Statutory Instrument 32 (SI 33) and Statutory Instrument 55 (SI 55), implemented in July 2013, and revoked a year later. The system called for the Bank of Zambia to establish a system of electronic reporting and monitoring to capture data on the collection of revenue as well as import and export movements. However, the implementation of these instruments appeared to have created investor uncertainty and a sense of panic in the market and contributed to the drop in GDP growth and foreign direct investment. While the aim for greater transparency through SI 55 and 33 was noble, the private sector and even the World Bank welcomed the Zambian government’s revocation of the instruments in July, as it demonstrates government’s commitment to work with investors to drive economic growth in a responsible manner.
It remains to be seen if these instruments will resurface in a different form in the near future. The expectations are that there will soon be rumblings of an improved policy as Zambia, like other African mining destinations, take better control over the economic well being of the country and its citizens. What is certain is that the Zambian government and the mining sector are engaged in open dialogue that facilitates cooperation from the sector and therefore implementation of policy. The fact that the Zambian government was willing to retract a policy after seeing detrimental affects on the mining sector reiterates the sentiment that the country is open for business and unique in the region when it comes to its commitment to find ways to satisfy international investors. It is, however, only natural that it would like to see a fair share of benefits and have the ability to redistribute wealth amongst its citizens.
This article was written as part of the research being conducted by GBR for its upcoming Mining in Africa Country Investment Guide (MACIG) 2015. To participate in this report, please contact Sharon Saylor at email@example.com.