Zambia's recently elected government is to double royalties on copper mines, it announced on Friday as it unveiled its 2012 budget, which aims to back its election pledge of distributing more equitably the southern African state's mineral wealth.
Alexander Chikwanda, finance minister, said he proposed to increase the mineral royalty rate to 6 per cent from 3 per cent for base metals, including copper, and from 5 per cent for precious metals.
He also proposed to separate income arising from hedging activities from core mining activities for income tax purposes. Through the two measures, he said he expected to raise 981bn kwacha ($197m).
A change in the mining sector's tax regime had been expected since Michael Sata, a veteran opposition politician, was elected as president in September on a ticket of reducing corruption and tackling the rampant poverty that blights Zambia, Africa's biggest copper producer.
Zambia's copper production is expected to be about 730,000 tons this year. Industry officials have estimated that production could double to 1.5m tons by 2016, but that would require an investment of about $5bn.
Several international companies have operations in the country including London-listed Glencore and Vedanta, Toronto-listed First Quantum, and Vale of Brazil.
In spite of the country's mineral wealth, which has driven a strong economic performance in recent years, Zambia suffers from widespread poverty, with about 60 per cent of the population living below the poverty line.
The budget envisages an increase in spending from about 21 per cent of gross domestic product this year to 26.5 per cent of GDP, with rises in spending on health and education. It also reduces corporate tax on agriculture from 15 per cent to 10 per cent, in a bid to increase investment.
"It's a pro-poor, pro-growth budget with spending on things that do have an impact at grass roots," said Razia Khan, an analyst at Standard Chartered. "It looks like a fairly significant increase in spending, but Zambia is in a position to afford it and it's not a large adjustment in mining royalties. It's not significantly different to what would have been anticipated by the mining sector."
Frederick Bantubonse, general manager at Zambia's Chamber of Mines, the industry body, said the increase in mining royalties would have a small impact on low-cost producers, but could affect older and deeper mines where the costs of production are higher.
"Each project is different from the other so there are lots of permutations," he said, adding that the effects would also depend on metal prices.
Mr Chikwanda said Zambia would also seek to issue a $500m eurobond to fund infrastructure projects.
"It is very clear the PF (Patriotic Front) government has a very ambitious plan to transform the Zambian economy," he said. "To do so we need to carefully balance the demands of our citizens for lower taxes against the demands for higher spending, especially on poverty-reducing programmes. This means that we must rebalance the burden of taxation."
