What if copper prices rise? rise?
Published On May 6, 2015 » 1751 Views» By Davies M.M Chanda » Business, Columns
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policy analysis 3 (1)A FORTNIGHT  ago, I indicated that the direct and obvious result of the proposed changes to the Mineral Royalty Tax regime is the K2.3 billion annual loss of revenue.
Apart from that, there are other imports, positive and negative ones.
Last week I should have continued looking at part two of the article on some effects of the changes, the lessons drawn from them and the best way forward but I was unwell.
Admittedly, the changes to the 2015 mining tax regime were inevitable?because of the many reasons which have been alluded to.?Indeed, it was just a question of when the changes should have been made and to what extent!
In terms of implications, the immediate and evident one is that the Government will have to make a choice on whether to maintain the approved K46.7 billion budget and start bridging the widened deficit.
The deficit has now been widened by the K2.3 billion.
The advantage for this move would be that all the expenditures would go on as planned.?Given the fiscal tightness, however, is it easy to find that amount?
The second choice and more plausible is to revise the K46.7 billion budget by K2.3 billion, so that the new budget drops to K44.4 billion.
This will reduce the annual increase to below K2 billion since the 2014 National Budget was K42.6 billion.
The advantage of this choice is that the Government would concentrate on the planned income raising ventures with minimal difficulties.
There is, however, need to look at the opportunity costs of foregoing the K2.3 billion – many projects for which that amount is supposed to cater would suffer if the Government went that route.
Apart from completely doing away with the expenditures on which the K2.3 billion was supposed to be used, there could be some austerity measures aimed at limiting spending.
The Government has already hinted at introducing stringent measures to?limit public expenditures on non-critical areas to help offset this loss of revenue.
Finance Minister Alexander Chikwanda said, while in Washington DC last?month, that the Government would ensure that it maintained critical expenditure in areas like health, education and infrastructure.
On a positive note, the tax changes have already started bearing fruit, restoring some semblance of economic stability in the country.
Yes, there is some resemblance of steadiness among most of the economic targets like inflation and the foreign exchange rate.
This is critical if the Government is to achieve its specific 2015 annual objectives like a real Gross Domestic Product (GDP) growth rate of above seven per cent and an end-year inflation rate of not more than seven per cent.
The measures that the Government has now approved include the uniform?mineral royalty of nine per cent from 20 per cent for open-cast mining and from eight per cent for underground.
That, in my view, could have been done differently by maintaining some?variation between the mineral royalty for open-pit mining and the underground operations, given the disparities in the production costs.
Paradoxically, the new changes do not seem to take into account any positive changes in the prices of copper and other minerals.?What has happened is reminiscent of the period of ZCCM privatisation?in the late 1990s when the prices of copper on the international market were as low as US$4,000 per tonnes.
The sellers of the national assets did not seem to have envisioned that by 2011 the prices of copper could breach the $10,000 per-tonne mark.
There were no mechanism within the then mining tax regime to trigger?higher tax obligations by the investors, should the prices rise to certain levels!
Equally now, this is what is needed since, among many other factors, the Government based its decision to reduce the mineral royalty on low prices of copper on the international market and low local production.
By the time the Government was approving the new charges, the prices of copper on the international market had reduced from the projected $6,780 per tonne to $5,665.?Production, which was also assumed at the peak of 959,696 tonnes, dropped to 839,000 tonnes.
Suppose, however, the prices of copper skyrockets to say $8,000 per tonnes, or even higher before the end of this year?
And suppose the higher prices trigger mass production rise beyond even the initial assumption of 960,000 tonnes per year?
What mechanism has been embedded within the proposed mining tax system?to ensure that the country partakes from that economic boom?
There should be a mechanism to trigger the payment of higher taxes every time there is a supernormal increase in prices of copper and other minerals.?For comments call: 260 0955 431442, 0977 246099 or email: jmuyanwa@gmail.com.

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