Zambia May Need to Cut Spending After Reversal on Mining Taxes

Zambia will probably cut spending and boost borrowing to make up for a revenue shortfall after scrapping a plan to collect more taxes from mining companies, according to Razia Khan, chief economist for Africa at Standard Chartered Bank Plc.

The government announced on Monday it will roll back increases in royalties imposed in January, returning to a previous system based on profit taxes. The change will cost less than 2.3 billion kwachas ($310 million), government spokesman Vincent Mwale said.

“The modification to the mining royalties is good news ultimately,” Khan said in response to e-mailed questions. In the short term, though, government will probably resort to a “combination of some spending cuts as well as external borrowing, given a potentially larger deficit.”

President Edgar Lungu ordered revisions to the tax last month after it was fiercely opposed by the industry. Barrick Gold Corp. said it would halt operations at its Lumwana mine.

The revenue hit comes as Zambia, Africa’s second-biggest copper producer, seeks to trim its budget deficit to 4.6 percent of economic output this year, from 5.5 percent in 2014. The new mining tax system will come into force on July 1.

Road Plans

Borrowing more to plug the deficit will be costly and government should focus on cutting spending, though that won’t be easy with elections due next year, said Oliver Saasa, chief executive officer at Lusaka-based Premier Consult Ltd. He said savings can be found in road-building plans, and by combining ministries and reducing travel costs for civil servants.

Finance Minister Alexander Chikwanda budgeted 5.6 billion kwachas for road infrastructure this year, or 12 percent of total spending.

Zambia’s fiscal deficit “will certainly be higher than planned,” though its size won’t be clear until parliament approves adjustments to the budget, Praveen Kumar, lead economist for Zambia, Zimbabwe and Malawi at the World Bank, said in an e-mailed response to questions.

The government could remove fuel subsidies, keep a wage freeze in place, sell corn and cut capital spending to contain the deficit, and it may also need to “borrow more than was originally planned,” Kumar said.

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