David Malingha Doya Nairobi
ZAMBIA may keep its budget deficit below 6 percent this year because of increased revenue resulting from changes to the mine tax system, according to Moody’s Investors Service.
The International Monetary Fund last week forecast that the fiscal gap in Africa’s second-biggest copper producer would climb to 7.7 percent of gross domestic product (GDP) this year.
That is higher than the government’s projection of at least 6 percent, which it raised from 4.6 percent after an increase of mining royalties and scrapping of a profit tax in January disrupted revenue flows from the industry. The changes to those levies will be reversed from the start of next month.
“We don’t expect the deficit for the second half to be anywhere near as large, in fact it could be a surplus for that six-month period, ultimately resulting in a fiscal deficit somewhere in the vicinity of 5 percent to 6 percent of GDP,” Matt Robinson, the credit manager at Moody’s, said this week in the Kenyan capital, Nairobi.
Zambia plans on setting the royalty for underground miners at 6 percent, scrapping an earlier plan to charge the same 9 percent rate set for opencast mines. A 30 percent profit tax will also be reintroduced for both types of operations. The current tax system that came into effect in January charges a 20 percent royalty for open-pit mines and 8 percent for underground operations.
“The mining tax regime revision means lots of the revenue may accrue in the second half of the year, rather than the first half,” Robinson said.
Uncertainties
Zambia’s copper production may stay close to a three-year low of 708 258 tons in 2015, because of power shortages and uncertainties caused by changes to the tax regime, according to the Mines Ministry.
The Finance Ministry plans to cut spending by at least 5 billion kwacha (R8.22bn) this year, and said it would probably sell eurobonds to raise as much as $2bn (R24bn) to boost the budget.
The negative outlook that Moody’s assigned to Zambia’s B1 rating last month captured the “likelihood for a further fiscal deterioration”, Robinson said. Moody’s could reposition Zambia’s rating lower to the B2 level, if the deterioration, partly the foreign currency risk caused by selling more foreign currency debt, continued for the next year, he said.
“What has underpinned credit quality for a long time in Zambia is relatively low debt, but we are seeing that debt burden increase,” Robinson said.
“It’s been a current account surplus, but we have now seen that translate into a current account deficit with a decline in copper production and decline in copper prices
.”
Copper accounts for more than 70 percent of Zambia’s export earnings and 12 percent of government revenue.
Yields on Zambia’s $1bn of dollar notes maturing in April 2024 have risen 107 basis points this year to Wednesday, while the kwacha has weakened 15 percent. – Bloomberg