A TOUGH ECONOMIC BEGININNG, THE YEAR 2015
THE decade 2004-2014 saw Zambia’s unprecedented economic growth, only compared to the economic growth of the post-independence era. The economy grew at an annual average rate of more than six percent and this growth was mainly driven by sectors Transport, Tourism, Agriculture, Construction, Manufacturing, and Mining.
Furthermore, Margaret Mwanakatwe in her remarks as Minister of Commerce, Trade and Industry at the time in the A to Z of Business in Zambia Magazine argued that “the real Gross Domestic Product (GDP) for the year 2015 would be higher than 6.5 percent, driven by a good harvest in the 2013/14 farming season, increased electricity generation, investments in both private and public infrastructure and growth in manufacturing, transport and communications.”
This projection however, did not come to fruition as the real GDP for the year 2015 was only 3.6 percent due to innumerable of adverse economic factors at both local and international levels.
This economic growth performance shift from the 6-7 percent average economic growth per year that was enjoyed in the decade 2004-2014 to 3.6 percent in 2015 was as a result of a number of challenges.
For instance, at the local scene, there was a reduced output in the mining and agriculture sectors, due in part to squabbles surrounding government taxing of mines and poor weather patterns which affected negatively crop output and consequently saw shortages in the national staple Maize.
The nation also experienced the worst electricity crisis ever faced which almost crippled our industries.
At the international level, China which is largest consumer of copper in the world started to rebalance its economy and this was marked by a shift in their growth based on heavy industry and investment, which used to get most of our copper, to growth based on consumer spending and service industries.
This meant that even the prices of copper at the international market went down hence directly harmfully affecting our copper dependent economy.
Despite the fact that President Lungu took over the reins of power at a time when the global economy was gloomy and that this was inadvertently affecting the Zambian economy negatively, he was still quite optimistic that with hard work from all the stakeholders, the country would rise like the eagle on its green-black-red-orange flag, and accelerate its march to middle income status by 2030.
At the local scene, the economy was struggling to replicate the economic fortunes of the past decade. According, Kawezi (2015; p 8), he highlighted a tragedy in the mining sector in 2015 that saw Zambia Environmental Management Agency (ZEMA) ordering China Copper Mines in Chingola to cease operations in the processing plants and subsequently requested that an environmental audit be conducted following allegations of pollution of the Fitula and Muntimpa streams and the surrounding environment resulting from the leaching and solvent extractions operations and later on following receipt of the ex-parte order injunction and other summons, China Copper Mines immediately stopped production.
This negatively affected the Copper production in the country and the loss of employment for some miners who were laid off following the suspension of operations.
At the same time, annual inflation increased to double digit level in October 2015 (rising to 14.3 percent from 7.7 percent in September 2015) largely on account of significant depreciation of the Kwacha (by over 72 percent in the last quarter of 2015). In the same period, external debt was US $6.41 billion and domestic debt was at K27.51 billion (averaging 15.03 percent of GDP) as government continued to borrow and increased spending on infrastructure projects to stimulate broad-based and inclusive economic growth which in turn was expected to create employment and reduce poverty.
Consequently, Minister of Finance at the time Alexander Chikwanda through the 2015 budget proposed new mining taxes which according to the Zambia Chamber of Mines, as reported by Ostensson (2015), were likely to have a boomerang effect likely to result in lower copper production, job losses and declining tax revenue for the treasury. The proposed new tax measures included:
- Mineral royalty for underground mining was to be increased from six to eight percent;
- Mineral royalty for open cast mining operations was to be increased from 6 to 20 percent;
- Thirty percent corporate income tax on income earned from processing of purchased mineral ores, concentrates and any other semi-processed minerals, currently taxed as income from mining operations was to be imposed; and
- Thirty percent corporate income tax on profits from mining operations was to be removed.
Government stated that the measures were with good intentions and aimed at simplifying mining taxation and avoids the type of conflicts over the interpretation of tax legislation that had undermined relations between the Zambian mining industry and the government.
Furthermore, these changes were to take into account the differences in operating costs between open pit and underground copper mines in Zambia and maintain total government revenue from mining at roughly the same level as it would have been under the old system.
This is evident that the government of President Lungu meant no harm nor ill to the sector rather was looking for tangible solution both in the sector and in the economy for sustainable development.
However, the changes in the mining taxation were perceived by many industry experts to be bad and argued that they would bring about substantial lower tax revenue from the mining sector due to the proposed removal of the 30 percent corporate income tax on profits from mining operations.
Additionally, a negative effect was expected in unemployment and poverty reduction efforts by the government as the new proposed taxes were seen to reverse this effort by government and the future of the industry was likely to be severely compromised due to the deterrent effect on investment.
This argument from the industry experts and some mining companies was not side lined by President Lungu. Him being a listening President and the fact that his government seeks to liberate the Zambian people from poverty through maximising revenue collection that can be used for developmental projects in the country, President Lungu and his Patriotic Front government took time to study the submissions and as you will see later in following article, the 30 percent corporate tax removed was reversed in 2016 among other adjustments to the mining tax regime.
As a result of these tax changes made in 2015, Kalukeki Kawezi in his article entitled ‘Foreign Direct Investment, Threat or Help?’ in the Partners Guide Magazine, 2016 Election Special Edition reported that Glencore, the owners of Mopani Copper Mines threatened to lay off over 4, 000 and reportedly cancelled over US$800 million worth of Copper projects in Zambia.
Again, in the same year, 2015, First Quantum Minerals (Zambia’s largest Copper producer) also delayed investment projects worth US$ $1.5 billion in Zambia against a background of a taxation system at the time that they argued slowed down job creation and inevitably deterred entrepreneurs from investing in the country.
From a global perspective, it is evident that the economy of Zambia was directly impacted by the plummeting Copper prices at the international market mainly caused by the slow consumption of copper from the world’s biggest copper consumer, China, as it continued to rebalance its economy.
Furthermore, the International Monetary Fund (IMF) in 2016 argued that the lower prices of energy and other commodities at the international market, and the gradual tightening in monetary policy in the United States of America in the context of a resilient U.S recovery as several other major advanced economy central banks continued to ease monetary policy was another factor that affected growth adversely in emerging markets and developing economies in which Zambia falls.
The world economic growth was estimated at 3.1 percent while that of Zambia’s stood at 2.9 in the same year, falling only short by 0.2 percent to the world economic growth rate.
This in global context goes to show that the country managed to grow at a fairly slow rate yet very competitively compared with the global economic growth rate attained.
This was mainly attributed to the overall economic performance of China which hard a spillover effect on other economies through trade channels, as the case with Zambia, and weaker commodity prices as well as diminishing confidence and increasing volatility in financial markets (IMF 2016: 1).
The manufacturing activity and trade remained weak globally, reflecting not only developments in China but also subdued global demand and investment more broadly and notably a decline in investment in extractive industries.
This is true as in the case of Zambia where two mining giants, Mopani Copper Mines and First Quantum Minerals with a total work force of over 6, 000 miners, declared that they had halted investments in the country due to the unstable mining tax regime after Government revised the mining taxes in 2015.
From the foregoing, it is clear that while investment was not favourable at the time, the issue of tax was surely not the main reason for the halt in the investment as figures show that global demand and trade were low and in turn affecting investment in extractive industries.
Global economic factors prevailing at the time adversely affected the nation and yet under the able leadership of President Lungu the economy remained resilient and growth was projected in the following year.
Arising from the impacts of a subdued global economy as well as other local economic factors that affected the nation negatively under the year 2015, the government of President Lungu made several continued attempts to stir economic growth with an aim to reduce poverty and create employment for the majority Zambian people.
The President working closely with Finance Minister, Alexander Chikwanda and the entire cabinet made resolutions as indicated to revise the mining tax regime in an effort to simplify tax regulations and attract investment in the sector.
Another intervention by the PF government was to take measures to address the impact of power shortages that rocked the year 2015 arising from low water levels at Lake Kariba and in the Kafue River and the inability over the years to attract investment in electricity generation on account of low electricity tariffs, President Lungu said while addressing parliament in September, 2015.
According to President Lungu (2016; 2), Government took immediate measures to a deal with the power shortages ranging from the importation of electricity from the neighbouring countries; adjusting the price of electricity from an average retail tariff of 5.64 to 10.35 cents per kilo watts per hour for commercial entities to attract increased investment in electricity generation; to developing alternative sources of energy such as solar and thermal and promoting the use of energy efficient electric bulbs.
In the long term, the PF government under President Lungu has partnered with the Government of Zimbabwe to develop a 1, 800 Megawatt (MW) power station at Batoka Gorge in Southern Province; the expansion of the Kafue Lower Hydro Power Plant which was completed in 2018 and commissioned and is now generating an additional 750 MW of electricity; increasing power generation at Chishimba and Musonda Falls; upgrading Lusiwasi Hydro Power Project in Serenje District and commissioning of the coal-fired power station at Maamba Collieries.
This Maamba Collieries project was completed in July 2016 and now contributes an extra 300 MW to the national grid. In addition, the government President Lungu commissioned the 120 MW Itezhi-Tezhi hydro power station in Central Province in March, 2016 and is now contributing to the reliability, stable and quality of power supply in the country (Lungu 2016; 2).
In addressing the effects of drought experienced in most parts of the country like Sikongo which brought about crop failure due to poor rains during the 2014/2015 farming season, the PF government took an in-depth vulnerability and needs assessment in 48 districts in Central, Luapula, North-Western, Copperbelt, Eastern, Muchinga, Southern and Western provinces.
According to President Lungu in his address to Parliament on September 15, 2015, his government took immediate interventions of relief food to 131, 158 households covering 798, 948 people in 31 districts as well as rehabilitation and sinking of 1, 598 boreholes in all the 48 assessed districts and provision of water through dams and water schemes.
In sum, the Zambian economy performance in 2015 was that inflation rate was at over 21 percent, light years above the seven percent initially forecast such that 14 percent more than the target while the external debt stood at US$6.4 billion (1.3 percent of the GDP), below the internationally accepted threshold of 40 percent and when the domestic debt and the ratio of total public debt to GDP it came to 52.7 percent which was 3.3 percent below the international threshold of 56 percent. Customs and excise duty was below target by 26 percent due to reduced import volumes whilst mineral royalty collections underperformed by 37 percent due to reduction in rates. Furthermore, in 2015 the government managed to raise K34.1 billion in revenues and grants against a budget target of K35.4 billion, i.e. it underperformed by four percent while during the same period government spent K51.26 billion (10 percent above the set target of K 46.6 billion). Fiscal deficit in the year 2015 was over eight percent of GDP while Zambia’s main diversification sector, agriculture also contracted by eight percent while mining sector significantly slowed due to among many reasons those highlighted here such that it only grew by a 1.5 percent. Positive growth was also recorded in the construction, transport and communication and manufacturing (Mafa, 2016).
Despite this dismal economic performance, it is absolutely very clear that the resolve, vision and plan of President Lungu remained on course as he walked the talk in his unparalleled stance to bring about economic emancipation to the people of Zambia while engaging both local and global adverse impacts to the Zambian economy.
This can be seen from a number of interventions highlighted here that the PF government under President Lungu took in 2015. This is the more reason that the people of Zambia should have confidence in his leadership and the PF government seeing how well and determined they remained under very difficult circumstances to diversify and sustain the economy of Zambia during such a troublesome year.
*ABOUT THE AUTHOR
Lengwe Cornelius Bwalya (BIRD-MU; DPPPR-ZIDIS; CD-ComDev) is the founder and Executive Director of RHOMA Foreign Relations Institute, an international affairs policy think tank registered in Zambia. Mr. Bwalya is also a blogger, Image Builder and an International Relations and Political Analyst with over five years’ experience in both national and international politics. For comments, suggestions or questions, please email firstname.lastname@example.org or visit rhomaforeignrelationinstituteorg.wordpress.com or simply call on +260 950 004 050. © RHOMA Institute 2020