MUSOKOTWANE AND THE MINES - A tragic relationship that robs Zambia billions of dollars

By Amb. Emmanuel Mwamba

● Musokotwane has consistently implemented mining policies that deprived Zambia billions of dollars.

● In 2009, Musokotwane abolished windfall and other tax measures that earned Zambia upto $600million in 2008 alone.

● In 2021, Musokotwane abolished mineral royalties tax that was non-deductible and profit sharing scaling model, the total that was earning the country $1billion per year since 2019.

● The contraversial ZCCM-IH, FQM DEAL on Kansanshi to convert dividend rights to a royalty payment over Kansanshi Mine and the possible loss of $2.5billion that Government has not expressed interest to recover.

Every time I engage in discussions around the economy, I arrive at the conclusion that the presence of Hon. Dr. Situmbeko Musokotwane, being at the heart of Zambia’s economic and mining policies, has been the single-most period when Zambia has lost billions of dollars.

Make no mistake, Musokotwane has an impressive résumé.

He is a PhD holder in Monetary Economics obtained from the Konstanz University in Germany.

He has also acted as an alternate Governor at the IMF, African Development Bank, and the World Bank.

He was instrumental in introducing the Bank of Zambia to open market operations and was key in the re-introduction of Treasury Bills and Government securities auctions in Zambia.

He also holds a Master of Arts degree in Monetary Economics from the University of Dar-Es-Salaam and a Bachelor of Arts Degree in Economics from the University of Zambia.

But despite his impressive résumé, his tenure as Minister of Finance has actually exposed him as a danger to our country and must not be allowed near crafting and implementing Zambia’s economic policies.

Here is why.

When President Levy Mwanawasa passed away in 2008, his Vice President, Rupiah Banda took over as new President of Zambia.

His competitor for the throne during the transition process of the somewhat disputed succession was the Minister of Finance, Ngandu Magande.

Magande was a star Minister of Finance in Africa and had achieved the write-off of Zambia's foreign debt.

He had previously served as Managing Director, Lima Bank Limited, an Executive Director for the Industrial Development Corporation of Zambia (INDECO), and as Managing Director, Zambia National Commercial Bank.

He also served as the Secretary-General of the African, Caribbean And Pacific Group of States (ACP), headquartered in Brussels, Belgium.

When he was Minister of Finance, Zambia had been following the Highly Indebted Poor Countries Initiative (HIPC) Program.

The IMF and World Bank launched the Heavily Indebted Poor Countries (HIPC) Initiative to ensure that no poor country faced an unmanageable debt burden.

In 2005, to accelerate progress toward the United Nations’ Sustainable Development Goals, the HIPC Initiative was supplemented by the Multi-lateral Debt Relief Initiative. This allowed countries completing the HIPC Initiative process to receive hundred (100) percent relief on eligible debts by the IMF, the World Bank, and the African Development Fund.

By 2008 Zambia had qualified by reaching the HIPC Initiative Completion Point and had about the bulk of her foreign debt written off.

Zambia’s foreign debt came down from $7.1 billion to $502 million.

MAGANDE IMPLEMENTS WINDFALL TAX

In the 2008, despite serious strong objections from mine houses,

In his budget speech for the 2008 fiscal year, Magande presented fundamental changes to the fiscal and regulatory regime for the mining sector.

The fiscal changes were intended to increase the estimated effective tax

for a model large-scale copper mine.

Magande proceeded to introduce windfall tax on base metals at a minimum rate of 25 percent.

He also increased mineral royalty tax to 3 percent from 0.6 per cent.

Magande also introduced 15 percent profit variable tax on base metal profits.

In 2008 alone, for the first time since it privatised the mines, Zambia earned $600 million in mine tax revenue from the sector.

ENTER MUSOKOTWANE

Newly elected President, Rupiah Banda fired Magande and replaced him with Situmbeko Musokotwane.

MUSOKOTWANE REVERSES WINDFALL TAX

In 2009, Musokotwane's first call of business was the shocking reversal of these milestone tax revenue measures.

Musokotwane dropped the 25 percent windfall tax and reduced mineral royalties from the 3 percent to 0.6.

He also zero-rated the 15 percent profit variable tax that was imposed on the mines.

Mine owners and their association, the Chamber of Mines, cheered Musokotwane on for the reversal of these "unfriendly" tax measures while many Zambians were shocked at such development.

Musokotwane also went into a borrowing spree racking up Zambia's debt from $502million to $2.2 billion by end of 2011.

He was borrowing anything from loans to buy mobile hospitals for $53million and loans under the IMF Extended Credit Facility.

The IMF Staff Report for the year 2012 for Article IV Consultation on Debt Sustainability Analysis, revealed that external public and publicly guarantee debt was $2.1billion, about 11.6 percent of GDP in 2011.

Of course, the new Government of the Patriotic Front under Minister of Finance, Alexander, Chikwanda continued to borrow from China and the open markets. By 2021, the debt had grown from $ 2.1 billion to $ 11.9 billion by 2021.

MINE TAX REVENUE EARNS ZAMBIA $1BILLION ANNUALLY

In 2018, Finance Minister Margaret Mwanakatwe, in her maiden budget speech, announced new radical tax measures designed for the country to benefit from the mining sector.

Depending on the price of copper, mineral royalties would range from 5.5% to 10% versus 4% to 6% previously.

Additionally, importation of copper-cobalt concentrates, primarily from neighbouring Democratic Republic of Congo (DRC) for refining and smelting in Zambia, attracted a 5% import duty while a 15% export duty will be introduced for precious metals such as gold and other gemstones.

The 30% corporate income tax (CIT) remained, but mineral royalty tax was no longer deductible for CIT purposes.

Mwanakatwe also abolished the Value Added Tax (VAT) and replaced it with a non-refundable sales tax.

It was established that the payment of VAT refunds by ZRA had become a major revenue leakage and unaccountable process.

MUSOKOTWANE RETURNS

Newly elected President Hakainde Hichilema, immediately appointed Musokotwane as his Minister of Finance and National Planning.

Musokotwane announced tax breaks to the mining sector as part of the 2022 budget discussions.

He stated that he would implement mining-friendly policies to revive investment in existing mines and investors’ interest in new projects.

He accused the government of former President Edgar Lungu of literally engaging in resource nationalism with KCM and Mopani Copper Mines.

He also accused the previous government of demonstrating an unstable mining policies.

He condemned the implementation of higher mining taxes, greater state ownership of mines and tense relationship with key foreign mining players.

On 29 October 2021, Musokotwane presented the 2022 Budget to the National Assembly.

He announced that mineral royalty will be deductible for corporate income tax purposes.

When

"Our Economy has shrunk and stagnated" Bank of Zambia Governor, Dr. Denny Kalyalya

This is the most honest statement from any government official.

As at September 2021, central Government external debt was US $12.99 billion while guaranteed and non-guaranteed external debt for State Owned Enterprises was US $1.56 billion and US $164.52 million, respectively.

The stock of Government guarantees was US $1.56 billion as at end September 2021 for the power utility ZESCO.

Zambia's external debt now stands at $18.6 billion at the end of 2022. $14.3 billion is the foreign debt.

The $18.6billion includes debt-service arreas that maybe written off if the debt restructuring programme was succesful.

For example on the Eurobond alone, Zambia owes $821million in debt-service arreas since December 2020.

Total Local debt has risen from K198 billion as at December 2021 to K236 billion as at September 2023.

This includes audited Central Government domestic arrears, or pending bills, including fuel and electricity bills owed to independent power producers.

The bulk of the arrears are to road contractors, suppliers of goods and services, Value Added Tax refunds, and personnel related emoluments to public service workers.Musokotwane also entered into another shady deal.

Musokotwane announced that ZCCM-IH, that held 20% shareholding in Kansanshi Copper and Gold Mine, agreed to convert its dividend rights in Kansanshi Mine into a life of mineral royalty payment.

The first payment that FQM would pay ZCCM-IH would be sourced from the outstanding Value-Added Tax refunds from Zambia Revenue Authority due as at 30 June 20222.

The payments will be less 20%

of any VAT claim costs incurred, as and when received by Kansanshi Copper Mine from ZRA post the closing of the Transaction.

The aggregated

amount of the VAT refund was:

1. US$ 442 million and

2. ZMW 433 million an agreement and drop criminal charges against

Kansanshi

Copper Mine

directors, as part of the conditions

precedent for FQM to declare a dividend

in the sum of the amount that the

government had been claiming from the

mining giant majority-owned by First Quantum Minerals (FQM) – to a 3.1% revenue royalty.

MUSOKOTWANE AND THE FQM DEAL

Musokotwane also entered into another shady deal.

Musokotwane announced that ZCCM-IH, that held 20% shareholding in Kansanshi Copper and Gold Mine agreed to convert its dividend rights in Kansanshi Mine into a life of mineral royalty payment.

The first payment that FQM would pay ZCCM-IH would be sourced from the outstanding Zambia Reveneue Authority Value-Added Tax refunds due as at 30 June 20222.

This will be less 20% of any VAT claim costs incurred, as and when received by Kansanshi Copper Mine from ZRA post the closing of the Transaction.

The aggregated

amount of the VAT refund was:

1. US$ 442 million and

2. ZMW 433 million.

Further Government directed that the DPP drop criminal charges

against

Kansanshi

Copper Mine

Directors, as part of the conditions

precedent for FQM to declare a dividend

in the sum of the amount that the

government had been claiming from the

mining giant majority-owned by First Quantum Minerals (FQM) – to a 3.1% revenue royalty.

In this case am audit revealed that FQM Directors had illegally repatriated $2.5billion from Kansasnhi Copper Mines to develop Cobre Panamá Mine, a new and large-scale open-pit copper mine in Panama.

No details was disclosed how the Zambian Government would recover these collasal sums.

CONCLUSION

The loss of revenue as a results of u justified tax incentives given to the mines and the failure by Musokotwane to recover $2.5billion owed to Kansashi Mine from FQM makes Musokotwane the most dangerous man to this country.