In this week’s article, I explore the consequences of the government collecting mineral taxes in US dollars rather than the local currency, the kwacha. I explore potential considerations and solutions to mitigate losses incurred due to this practice.
During the peak of the COVID-19 pandemic, the Bank of Zambia (BOZ) implemented various measures to alleviate pressure on the exchange rate, which had depreciated to 21.17 ZMK per US dollar by the end of 2020. To address the situation, the BOZ implemented measures such as tightening interbank foreign exchange market rules and prioritizing foreign exchange demands from specific sectors. Most notably, the government introduced an administrative measure mandating all mining taxes to be paid directly to the central bank in US dollars—a measure that persists despite the reversal of other pandemic-induced policies. Consequently, the BOZ has assumed a more significant role in the foreign exchange market.
While this measure aimed to align with market interests and allow significant central bank intervention in the foreign exchange market, it also implies that a weaker kwacha is beneficial for the government, as mineral taxes are received in dollars. For instance, in 2021, mineral royalty collections reached 12.4 billion ZMK, surpassing the 5.7 billion ZMK target, primarily due to the kwacha’s depreciation while the taxes were paid in US dollars into the central bank. This trend extends to all other mineral taxes. In addition, the BOZ’s increased control over the availability of dollars also aids in managing higher fuel importation costs.
This situation presents a paradox in the BOZ’s foreign exchange management strategy. While the government reaps benefits from receiving taxes in dollars, this potentially restrains the BOZ from implementing measures that would appreciate the kwacha against the dollar. It is important for the government to weigh these advantages against the broader economic benefits of a stronger kwacha, which stimulates economic activities and supports business growth. Ideally, the government should reconsider its stance and revert to receiving mining taxes in kwacha rather than US dollars. This shift would enable the BOZ to concentrate on medium-term strategies aimed at reducing the exchange rate, fostering a more balanced and sustainable economic environment.
In conclusion, the current practice of receiving mining taxes in US dollars, while advantageous in the short term, may hinder long-term economic growth. A revision of this approach, favoring the reception of mining taxes in kwacha, aligns with the government’s broader economic goals. This strategy allows for a balance between immediate fiscal gains and the imperative of “Social- Economic Transformation for Improved Livelihoods” as championed by the eighth national development plan.
About the Author
Ibrahim Kamara is the Head of Research at the Centre for Trade Policy and Development. He holds a bachelor’s degree in Economics and Finance as well as a master’s degree in Public Finance and Taxation from the University of Lusaka.