In the case of copper, prices have plummeted from US$ 6,165 in January 2020 to US$ 4,776/tonne on Thursday 26th March 2020. This rapid decrease has put a lot of financial stress on the Zambian mining industry and the economy at large.
A slump in copper prices has an immediate short term effect of reduced generated tax revenue and export earnings. This is likely to affect tax collection because tax instruments like mineral royalty are price-based. These impacts will thereafter affect the exchange rate and translate into higher inflation because Zambia is an import-dependent country. This will further induce macroeconomic instability and negatively affect the growth prospect of Zambia in the short term.
Further in cushioning the impact of plummeted Mineral commodity prices, mining companies are likely to undertake cost savings measures such as cutting down of labour and suspending non-essential projects as a way of responding to the drop in mineral commodity prices. This will be done in an effort to minimize cash outflow.
It must be mentioned that a cut down in labour will have ripple effects to other industries linked to mining. This is so because many businesses surrounding mining investments depend on the consumer spending of income emanating from mining companies.
Persistence spread of the coronavirus will negatively affect production and this will further exacerbate the collection of mineral royalty.
Nevertheless, CTPD wishes to commend Government on the fiscal relief package that has been given to the mining industry communicated through a press briefing by the Minister of Finance. These measures include suspension of import duty on concentrates and export duty on precious metals.
However, recognizing the fact that the mining industry is Zambia’s largest foreign exchange earner, the government needs to widen the incentives by temporarily suspending import duty and VAT on important capital assets that drive production in the mining industry.
The government should also increase capital allowances to 100 percent. These fiscal measures should be applied to help sustain production levels of mining houses amid the COVID-19 crisis.
Other fiscal measures the government can undertake to ameliorate the transmission effect of plummeted mineral commodity prices on the economy include:
- Adjusting the money supply;
- Taking corrective measures such as the promotion of non-traditional exports; and
- Diversification within and outside the mining sector instead of being over-reliant on
copper.
To prevent the further spread of the virus, Government needs to establish monitoring mechanisms through the Mines Safety Department (MSD) to ensure that mining companies are following the laid down health and safety protocols issued by the Ministry of Health.