Mining remains the backbone of Zambia’s economy accounting for 14% of Gross Domestic Product (GDP), over 14% of domestic revenue generation, and over 70% of foreign exchange earnings. The sector also contributes substantially to employment levels. These benefits are proliferated or subdued depending on the status of mineral commodity prices. For instance, in high copper prices, the country tends to economically benefit more through increased foreign exchange earnings and high domestic revenue generation through fiscal instruments such as the sliding scale copper mineral royalty. However, we must appreciate that the opposite is also true.
The economic principle of mining business is that high prices must provide maximal economic benefit to the jurisdiction where mining is being undertaken but at the same time mining companies should have adequate fiscal space to attain horizontal and vertical integration. Additionally, in low mineral prices the government should receive a considerable portion of mining revenue to discharge its social functions but at the same time mining companies should have the adequate cash flow to continue in operation. It must be mentioned that achieving this balance is no easy task.
It is important to appreciate the fact that mineral commodity prices are cyclic. Therefore, there is an immediate need for Zambia to design a mining fiscal policy framework that works well both in low and high prices. The copper sliding scale mineral royalty is one such progressive piece that provides high revenue for the government when copper prices are high but at the same time provides fiscal relief to mining companies when copper prices are low. Such progressive fiscal instruments must not be confined to the copper mining sector. This is because there is a need to extend such progressive measures to other sub-mineral sectors (i.e., gold, manganese, and cobalt) if the country is to comprehensively benefit from mining. This being so, it is important to stress the fact that the conception of crafting robust mining policy must not be conceived when mineral prices are high but must be an ongoing process even when prices are low. As a country we need to move away from the reactive notion of re-designing fiscal policy to only address the short-term effects, rather we need to craft policy that stands the test of time.
Currently, copper price is pegged over $9000 per tonne. The immediate question that needs to be answered is how the country will benefit from this state of affairs both in the short and long term. Focusing on the long-term measures, the government needs to incentivise exploration activities. This is because these activities are paramount to the discovery of new deposits and the opening up of new mines. Failure to do so will result in the stifling of investments in exploration. This means new deposits will never be discovered and new mines will never be open. This will have a primary ripple effect of reduced tax revenue generation and employment levels. Secondly, the government needs to design policy that enhances value addition in the copper mining sector by supporting activities that attain forward vertical integration e.g. a lower mineral royalty rate can be given to mining companies up the mineral value chain. In addressing short term effects only, although not the best approach of managing affairs, the government can undertake the following:
1. Increase the production base of mining companies by giving them at least 25% capital allowances.
2. Reintroduce the deductibility of mineral royalty for the purpose of computing Corporate Income Tax (CIT) payable. However, this must be limited to 50% of the mineral royalty payable. This will provide a win-win situation between the government and mining companies. This will have the duo effect of mining companies having cash flow relief to continue in business and the government will have a considerable amount of mining revenue to service the country’s debt and provide social services to the citizenry.
In going forward, there is a need to comprehensively evaluate mining policy in Zambia and curtail the reactive approach of redesigning the fiscal regime to respond only in the short term. Additionally, there is a need to extend the above-discussed measures to other sub-mineral sectors other than the copper mining sector. Doing so will ensure that the country garners the maximum economic benefit from mining. This is it for this week. Look out for another exciting article on Mining next week.
About the Author
Webby Banda is a Senior Researcher (Extractives) at The Centre for Trade Policy and Development (CTPD) and a Lecturer with the University of Zambia, School of Mines.