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

March 31, 2009

     By Duncan Green     

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!’

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.’