Zambia Mine Tax Increase Risks Cutting Revenues, JPMorgan Says
LUSAKA (Capital Markets in Africa) – Zambia’s mining-tax increase could lower government revenues instead of boosting them as copper miners fire workers and curb production, according to JPMorgan Cazenove.
Under the higher royalties introduced on Jan. 1, almost one-third of the country’s mine output is unprofitable, JPMorgan said in a note to clients dated Jan. 7. That means the new tax regime could backfire on Africa’s second-biggest copper producer.
“These higher-cost operations are also the more labor-intensive mines in the country, increasing the risk of significant job losses,” the bank said. “If further capacity is taken offline and copper prices remain subdued, this could put greater pressure on Zambia’s exports and tax revenue.”
Companies including First Quantum Minerals Ltd. and Vedanta Resources Plc have already announced either production cuts or job losses. Zambia’s mines lobby group expects more than 21,000 jobs could be cut because of the tax hikes.
Any contraction in the mining industry will exacerbate the economic woes faced by Zambia, which relies on copper for more than 70 percent of its export earnings. The nation’s currency has slumped more than 15 percent over the past 12 months, while foreign exchange reserves dwindled to a decade low in October as the country services its ballooning debt.
Debt Distress
The International Monetary Fund has said Zambia’s rising external borrowing puts it at a high risk of debt distress. That situation could deteriorate should the government’s mining-tax increase boomerang, according to Gregory Smith, a fixed-income strategist at Renaissance Capital.
It was “aimed at increasing foreign currency earnings, so government can meet debt servicing needs that are projected to increase rapidly in 2019,” he said. “However, if increased royalty rates resulted in reduced copper production and in turn lower foreign-exchange inflows, then it would make debt servicing harder and not easier.”
Source: Bloomberg Business News