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Zambia’s low foreign reserves and the effect on mining in the country

In their 2017 reports, the IMF Executive Board commended Zambia for the improved economic indicators. However, the institution warned that the gains were risky and as such are easily lost for lack of decisive fiscal action. The outfit attributed the aforementioned improvement to good rains and rising world copper price.

However, inflation is on the upward trajectory at 7.4%; the kwacha is now above the K10 threshold to a dollar and foreign reserves are an eight year low. The low foreign reserves are one of the major economic challenges facing the country. Moreover, it is connected to other factors under the President’s control.

As of April 2017, Zambia’s foreign exchange reserves were estimated at US $2.4Bn. However, this reduced as of February, 2018 to US $1.867Bn. The alarming drop of approximately 29% took place in less than a year. Earlier on this year, the Central bank governor, Dr. Denny Kalyalya complained about the low level of foreign reserves.

However, according to media reports, the Governor’s statement sugarcoated the current situation noting that he failed to outline why the reserves are low despite the copper prices rising. This, according to the reports, are in  fear of offending the forces of mining houses who are the major contributors to the low level of reserves both consciously or otherwise.

Mines excessive foreign exchange retention

Two years back in May 2016, the Copper price stood at US $4,695. It currently holds US $6,900 per tonne, a 47% increase. Which begs the question why the country’s reserve indicate a contradictory picture while copper prices are on a steady increase for the last two years.

Unknown to many, inasmuch as copper prices may be on an upward trend, the foreign exchange earned is mostly retained by mines in their off shore accounts abroad. As such, the alleged 70 % of exports earnings coming from copper is but a sham. This is because the foreign currency retained by mines is above 40%; leaving little to no correlation between copper prices and the foreign exchange reserves. Furthermore, the International Monetary Fund (IMF), in one of their country report, confirm this.

The best solution for this lies the President of Zambia. According to media reports, he should be tasked with ensuring the other arms of government do carry out their bit to contribute to the objective of having sufficient reserves and protecting the kwacha. On the other hand, solutions to the low foreign reserve issue can be dealt with either or in the short, medium and long term.

Initially, the Government should start by progressively reducing the amount of foreign currency banked abroad by mining houses. This will leave them with no choice but to bring and bank it in Zambia.  Originally, such concessions were fine as the conditions permitted at the time of the arrangement. This is because the mining houses needed huge retentions. These were used to pay for equipment, raw materials and debt servicing to name a few.  Unfortunately, the retentions have since become conduits of illicit financial flows. This partly explain why almost all mines have been making losses for over 20 years without shareholders revolting in their home countries as they do receive dividends while not paying income taxes in Zambia.

Furthermore, Zambia has made too many concessions with the mines on taxes. Unfortunately, while countries like Botswana and Tanzania are pulling no punches when it comes to putting the interests of their countries first when it comes to foreign mining investors, Zambia is lagging behind. Choosing to act tough on the other hand, will probably work in their favor, since the mining house are too smart to leave with the prices so high. This is in addition to the expected copper boom in the future.

Meanwhile, the mines should be encouraged to influence their equipment and spares suppliers to relocate and set up shop in Zambia. This will be like it was before when affiliate industries to the mines were located on the Copperbelt. This guaranteed skills transfer as well as technological advancement. There is also creation of employment opportunities and the country gets to benefit as these industries pay taxes.

 

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