Following the January 30 2008 release of Zambia's 2007 IMF 'Article IV' Consultation document, a team of eight IMF board members have recently visited the country to assess economic progress since the Fund, the World Bank and other western financiers cancelled Zambia’s debt in 2006. After the group reported their findings, the headline in the Lusaka Times today is 'IMF backs new Govt mining taxes' and the report claims they backed Zambia’s plans to raise mining taxes but warned that critical power shortages will curtail investments in new projects. State media, in the form of the Times of Zambia provide a comically propagandistic read on the meetings. The Times reports that IMF board members said Zambia was one of the showcases in terms of economic performance, that the country was on the right economic path and all it needed to do was to address a few challenges on the way to ensure continued success.
However, the story is a little more subtle than the reports suggest, Greek delegate Miranda Xafa, an alternate IMF executive director, welcomed moves to raise mining taxes. “The taxes previously were extraordinarily low, not just within Africa but also globally, and we so believe there is room to increase the taxes,” she told reporters. However, she then added, “But of course that is up to the government and the foreign investors to negotiate the taxes.” Throughout the Article IV document, the IMF insisted that mine taxes will be 'negotiated', which, remember, is what the Government said it was planning (the document also reveals that the IMF was providing 'technical assistance' to the Zambian state to consider its mining taxes - DFID recently reported they were one of two donors proviing TA to the negotiating team - is this confirmation that the IMF was the other, or was the a broader review, not just the mining one?). But why should we still be talking about negotiations? The Government has now laid out what the taxes involve and has introduced legislation to ensure new revenues are collected from April 1, unilaterally announcing the cancellation of negotiations. So, why would the IMF mention negotiations if not to support companies pushing the Government to backtrack?
At the same time, like other donors, the IMF seems to accept that the Government will act, whatever the donors' and companies' preferences. In the Article IV document, the IMF noted only that, "No major tax policy initiatives are expected in the 2008 budget as efforts are currently focused on renegotiating development agreements with the mining companies." (p. 12) The document included conservative assumptions about what might be achieved through these negotiations, expecting little extra tax income to the state. Now, however, Xafa noted, “We would note two important challenges … the first being how to manage the macro impact of large foreign exchange inflow.. You certainly do not want to get into a boom (and) bust cycle that others have found themselves in, in that while the boom and bust lasts, they try to spend it all at once and while commodity prices fall, they slow down in possible recession.”
Xafa also warned that Zambia should not be “too ambitious” with new mining projects because it did not have the capacity to supply power to new projects. “I understand there are investors waiting to come in with mining projects but there is not enough energy right now to service these new requests,” she said. “So, I think, before we can talk about plans to expand production, it is important to remove these bottlenecks.”
Zambia has suffered outages that have hit output at mines, and is looking at ways to shore up waning capacity. It announced plans this month to spend $1 billion to build a new 750 megawatt plant. The Fund said Zambia has made strides in growing its economy but needs to handle commodity price windfalls prudently and develop infrastructure to avert a possible recession.
The Times report shows Mwanawasa pitching to the IMF for an infrastructure loan to back new energy needs for the expansion of mining. "Many African economies, such as mine, have responded well to the reforms. To go further, however, their economies need infrastructure, which costs much more," he said. Western NGOs and bilateral aid donors have driven a significant shift away from infrastructure funding over the last decade and many African Governments, including Zambia, have been frustrated by the exclusive focus on social sector provision without any concern for productive investment. Recent power cuts and load shedding across Southern Africa have highlighted the massive dangers of neglecting infrastructure for national economies dependent on mining.Mwanawasa said, the available concession funding could not meet the demand and wondered whether countries should give up the opportunities to expand the economies because of that."Are there no other possible solutions to prevent reckless borrowing associated with non-concessionary borrowing? The IMF should help us answer that," he said. Mwanawasa said the Zambian economy had greatly improved and it was being boosted by the export of minerals and non-metal goods, resulting in the quadrupling of export earnings while the national reserve was now more than U.S.$1billion. He was, however, quick to mention that development was a shifting target with never-ending challenges. Currently, the most significant one was to expand the economy and ensure that development trickled down to the poor. The President said it was for that reason that the Government introduced a new tax regime for the mining sector. He assured that no mining company would get less than what they projected to get at the inception of their investments. To prevent frustration of economic growth, he said, the Government had singled out energy as one of the hurdles and it would invest in new generation capacity as well as efficient management of the existing ones.
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