Zambia Budget Deficit May Exceed Target After Mine Tax Reversal

Zambia’s budget deficit may exceed the government’s target this year after Africa’s second-biggest copper producer agreed to reverse a mine tax system introduced in January, Deputy Finance Minister Christopher Mvunga said.

“It may as well be” larger than the 4.6 percent target, Mvunga told reporters on Wednesday in Lusaka, the capital. It’s premature to say whether government will prioritize spending cuts or external borrowing to cover the deficit as parliament still needs to approve the mine tax changes, he said.

Zambia’s cabinet this month agreed to revert to a profit-and royalty-based tax system for producers after the industry said the new royalties-only regime would cause minecolsures and about 12,000 job losses. The Chamber of Mines welcomed the principal of reintroducing profit tax and its members are yet to say how the proposals will affect their businesses.

The change will cut Zambia’s government revenue this year by less than 2.3 billion kwacha ($314 million), Vincent Mwale, an acting government spokesman, said April 20.

“When parliament reconvenes in June it will also be asked to approve significant changes to the budget,” Clare Allenson, a London-based analyst at Eurasia Group, said in an April 21 note to clients. “The supplementary budget will likely include spending cuts on items like road construction.”

Because of the budget deficit, government has been compelled to borrow more locally, pushing up one-year treasury bill yields to 22.48 percent in an April 16 auction. Mvunga said government is concerned about “exorbitant” borrowing costs.

“It’s actually not sustainable for locals to borrow at the current rates of 23 percent,” he said. “The rate is ridiculously high, there’s no doubt about it.”

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