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How the global crisis is hitting Zambia (and the mining companies are taking advantage)

March 31, 2009
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As part of Oxfam’s flurry of studies of the development impact of the global crisis (for an overview click here), here’s a summary of a new paper of mine on the impact of the global crisis on Zambia. The main story is perhaps how the mining lobby has used the crisis to reverse some progress on taxing copper revenues.

As in many low income countries, the financial sector in Zambia plays a less important role than in rich countries. Although largely foreign-owned, Zambia’s banks were not caught up directly in the global financial crisis of mid-late 2008. Now, however the recession in the real global economy is having a serious impact and early optimism appears to be giving way to increasing alarm at what lies in store for Zambians over the next 2-3 years. By February 2009, the Economist Intelligence Unit had slashed its 2009 growth forecast from 6% to 1.6%.

Copper: In international trade, Zambia is a one-product economy. Copper accounts for some 70% of its exports, so the sudden and precipitate collapse of copper prices by two thirds, from $9,000 per tonne in July 2008 to $2,900 by the end of the year, has been traumatic. If copper prices stay at their current level, exports will halve in 2009, to about $1.6bn.

Jobs: The most immediate social impact has been the loss of some 5,000 out of a total of some 30,000 mining jobs in the mining sector. That may sound relatively few, but formal sector jobs are scarce in Zambia, and by one estimate, each one supports another 20 jobs in services, suppliers and the wider informal economy.

Tax: after decades of mismanagement of the mining sector, in April 2008 the Zambian government had finally introduced a modern system of taxes and royalties that was expected to generate significant resources from a hitherto untaxed sector and yet were, according to the Financial Times ‘no harsher than standard rates worldwide’. The new tax regime was expected to add an extra 9% to the government’s domestic revenue collection, although due to implementation problems and the refusal of several mining companies to pay up, in its first year, it raised only one third of this amount.

In January 2009, barely 9 months after its introduction, that system was abandoned as the downturn allowed the large, foreign owned copper companies to undertake what the Financial Times described as ‘intense lobbying’ of the government. The government gave the following concessions to the companies:

· It scrapped the ‘windfall tax’, which fell due when copper prices exceeded a certain level. In fact, prices had fallen below this level in October 2008, so no further tax was liable. However, companies were keen to get rid of the tax, arguing that it penalized high cost mines because it was levied on the overall value of copper produced, not on profits.
· The government allowed hedging income to be included as part of mining income for tax purposes. This is a serious setback as it is relatively easy to demonstrate a loss on hedging (and move any profits offshore), allowing companies to further minimise their tax payments.
· It allowed companies to write off 100% of any investment against tax as depreciation in the year in which the expense occurs – well beyond the international norm, according to tax experts.

What is left is the standard corporate tax, a mineral royalty of 3% of gross value, and a variable levy on profits. The government and mining companies argue that this is fairer, since it does not penalize high cost companies, but in the words of one international aid official, ‘the tax on profits is excellent in theory, but these are massive mining companies with the best tax lawyers – they will run rings round them.’ It is bread and butter work for international tax lawyers and accountants to minimise tax liabilities by minimising the paper profits of their employer. The sense of helplessness is palpable. As one senior government official ruefully remarked, ‘those companies who didn’t pay the windfall tax owe us – but when my son is sitting where I am sitting, we will still be asking them!’

Conclusion
It is very hard to see with any certainty what lies in store for Zambia as the global recession deepens. Interviews found both optimists and pessimists. The optimists argue that poor people in Zambia are largely isolated from the global economy – just as they did not share in the benefits of the boom, so they will largely be immune from the impact of the bust. To them, talk of a ‘crisis’ seems very ‘northern’ – most Zambians are already living in what northerners would see as a permanently critical condition. The pessimists see darker clouds on the horizon, as the global crisis leaches into Zambians’ lives through multiple channels including employment, taxation and aid. Over recent months, the voices of gloom seem to have grown stronger. The Bank of Zambia struck a particularly sombre note in March 2009 when it warned ‘A collapse in incomes reduces peoples’ capability to meet their basic social and human needs such as food, health, shelter and education. The likely consequence over time is social upheaval.’

What is clear though, is that Zambia has only limited options. It is therefore likely to fall to other institutions, both Zambian and international, to introduce a greater sense of urgency. Civil society organizations, academics, media and international donors, in alliance with those politicians and civil servants who appreciate the need for action, must all play a role. This should include monitoring and responding rapidly to the multi-faceted impact on poor people generated by falling copper prices, declining tax revenues, and the global slowdown. There is a compelling case for increasing aid, reintroducing a proper system of mining taxation, so that Zambians all benefit when, as expected, mineral prices start to rise again.

The alternative is grim. In the words of Oxfam country director Ann Witteveen, ‘this country was poised to take a huge step forwards and now that’s been taken away. A lost opportunity is not as newsworthy as X million people losing their jobs, but it’s still desperately sad.’

5 comments

  1. Duncan, well done again for your work at Oxfam UK and for your interesting blog. You are a great writer and you are read by many. And you are misleading many.

    I don’t claim to know as much about this stuff as you – in fact I don’t claim to know anything really which is why I don’t have a blog! I am not competing with you, this is not a competition of knowledge (if it was – you win hands down!) But this is a call for a more accurate community led depiction of events as they unfold. I would not argue that you are not an expert in your field – I congratulate you for your work. But this latest piece of yours perhaps illustrates the need for development stories to come from the people in the majority world and perhaps less from “experts” in the minority world.

    Here are some interesting comments on the above story which I got from a discussion (about your blog), with a Zambian friend, a senior economist working in Lusaka:

    1. The windfall tax was first introduced in Zambia in 1966.

    2. Low tax rates have historically been set by governments attempting to lure investment. The mines in Zambia have struggled in the last 15 years with production levels as the ore quantity and quality are reduced. In 2002 the largest coper mine in Zambia was shut down due to low production. The Zambian government would be ill advised to not provide foreign investors with low tax rates to encourage the development of the industry.

    3. The price of copper has surged from 2004. The falling price now is back to roughly 2004 levels. Zambia recorded a 5.4% real GDP growth rate in 2004.

    4. Copper prices have just seen their largest quarterly rise since 2006.

    5. Agriculture accounts for 85% of employment (formal and informal).

    6. In 2008 the Agricultural sector experienced a fall in growth due to heavy rains and flooding but there was still a surplus in food production.

    7. “Preliminary estimates indicate that the Zambian economy grew by 5.8 percent in 2008. This performance was mainly driven by growth in the transport, storage and communication; mining; manufacturing; and trade sectors.” – an extract from the Sitembeko Musokotwane, Minister of Finance’s 2009 parliamentary speech – http://www.boz.zm/publishing/speeches/Budgetspeech2009.pdf .

    8. In 2008 the budget deficit was 2.7% of GDP.

    9. You are right to point out the problems with the Zambian tax system: “after decades of mismanagement of the mining sector, in April 2008 the Zambian government had finally introduced a modern system of taxes and royalties that was expected to generate significant resources from a hitherto untaxed sector.”

    But:
    a. The new mining tax regime replaced a tax system that was not efficient. But could you explain how the old system was not “modern”? That description seems a bit patronising? Easy to say from where you are sitting but perhaps not the best term to use in describing a taxation system of a majority country?
    b. And another statement that left my friend in Lusaka and me very confused: “Hitherto untaxed sector”. Please explain how the mining sector up till 2008 was not taxed?

    10. Your Oxfam country director stated that : “this country was poised to take a huge step forwards and now that’s been taken away.” Based on the comments above perhaps you could elaborate on what has been taken away and on what basis the country manager has made that claim?

    Perhaps if you had a chat with my friend – or any Zambian for that matter – you may have got a clearer picture.

    But keep up the good work Duncan -I am learning a lot from you and your posts are definitely keeping us all on our intellectual toes!

  2. Hi Shupiwe, well I did talk to Zambians, quite a few of them actually, as I did the research for the report in Zambia in February!
    On the Zambian tax system, the point raised by the paper and numerous interviewees is that in the negotiation between mining companies and the Zambian government, the government had given more ground than in other countries. The mines always say ‘if you don’t reduce taxes, we will go elsewhere’. When copper prices are high, that argument is unconvincing, and governments are able to introduce higher tax rates, which means more schools and hospitals. Zambia came late to that realization, and then backed off as soon as the prices fell back.
    That improvement lasted precisely nine months, before the government dropped the new windfall tax in January. Now that’s what I call sad, not least because even if copper prices bounce back, Zambia will have to depend on the fickle fortunes of foreign aid, when it could have been generating resources domestically.

  3. I think there are essentially two factors governing the financial relationship between GRZ and the mines.

    The first is that under the one party state the mines came to be taxed “informally”. They funded the ruling party; they paid for potentially embarrassing things like executive jets; they ran municipalities; they were leaned on to help GRZ out of a crisis. This was initially Mwanawasa’s preferred form of relationship (he personally saw to it that KCM never paid a cent in compensation to victims of pollution for example). Something persuaded him – maybe donor or opposition pressure – to create a more formal and transparent system last year and it has lasted 9 months before reverting to a non transparent system again.

    The second big factor is that Zambian deficits get made up for with aid. If we run up too big a debt the international community simply forgives it; if we are 100M short on the budget it is given as budget support. Of course there are meetings and agreed benchmarks etc but in the end the donors need Zambia to succeed. So where is the incentive to collect tax if it will merely replace aid?

    Combining the two considerations the best of all worlds is attained: there is informal tax that is unseen and thus paid out again in the form of budget support.

    The parliamentary opposition incidentally vigorously opposed the abandonment of windfall tax, the increase in capital allowances and the consolidation of speculative trading. I would guess that most Zambians back the opposition on this issue as on most others that have come up recently.

  4. hello Guy, It is nice to hear from a Zambian on this tricky issue. Your second point on aid is similar to the arguments in Dambisa Moyo’s book. I wonder if you would comment on that Duncan?

    Guy – Good luck with your work as the opposition in Zambia, you are continuing to do a great job for Zambia. Thank you.

  5. I think there is a danger that aid weakens the social contract between state and citizen, reflected in the need to raise tax. Good aid needs to be designed to compensate for that risk, for example by strengthening tax systems and citizen watchdogs. But I’ve head several conversations in recent months with African officials whos stress the need to shift from aid to domestic taxation to reduce their dependence on the whims of donors, eg the Ugandan minister who told me ‘when 60% of our revenue came from tax, we had to go to the World Bank on two knees. Now it’s down to 30% and we can say no when we don’t like their conditions.’ Unfortunately, the conditions were environmental and social safeguards on a new dam, so this all gets a bit complicated!

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