Zambian President Edgar Lungu

Zambia - The combination of the new Zambia mining tax and weak copper prices is dealing heavy blows to Zambia’s economy.

As such it is deteriorating quickly being from one of Africa’s best mining destinations with abundant copper offerings to one of negative sentiment with investor appetite dropping quickly.

A BMI Research report recently issued states: “Miner's operating in Zambia will threaten to deter mining investment and shelve expansion projects, due to the country's deteriorating regulatory environment.”

Regulatory Outlook

BMI says Zambia's mining tax will hinder the country's copper production growth and deter investment. The government has shown itself capable and willing to take a hard-line approach towards decisions made by foreign companies operating in the country. The latest of which is the new mining tax, implemented on 1 January 2015, which raises royalties on open pit mining from 6% to 20%.

Copper Outlook

According to the report, BMI expects global copper prices to remain weak, which is based on its view of a structural slowdown in China. “We forecast copper prices to average $5 750/t in 2015, significantly lower than $6 830/t in 2014. The decline in copper prices will squeeze miners' profit margins and reduce government revenue from the mining sector.”

Political Outlook

Zambian President Edgar Lungu
Zambian President Edgar Lungu

On 27 January 2015, Edward Lungu was elected as the country's sixth president. Lungu's election will mean a continuation of the populist policies of recently deceased president Michael Sata, whose death in October 2014 prompted the January election.

Nevertheless, BMI notes that president Lungu has not secured a strong mandate. With Zambia facing its greatest macroeconomic challenges in recent years, and set to go to the polls once more in 2016, Lungu will face difficulties in maintaining policy continuity beyond the next 18 months.

IMF welcomes mining tax review

“The Zambian economy is experiencing strong headwinds. Policy uncertainties at home and external shocks are dampening economic activity. In particular, the mining sector, which accounts for three quarters of the country’s export earnings, has been burdened by on-going tax issues and by copper prices that declined to five-year lows in January 2015,” says IMF division chief Tsidi Tskikata

“[We however] welcome president Lungu’s directive call for a review of the mining tax regime that came into effect at the beginning of this year, which has had a negative impact on the sector.” The IMF hopes resolution of the impasse will result in a transparent system applicable to all mines rather than mine-by-mine agreements that would likely entail the government foregoing substantial revenues to keep individual mines in operation.

The full BMI report can be purchased and downloaded here.

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