Reuters’ political risks to Watch in Zambia

By Chris Mfula

LUSAKA, July 11 (Reuters) – A new law in Zambia limiting the use of dollars in everyday transactions has unsettled investors and could result in job losses and social friction in Africa’s top copper producer.

Investors were already rattled by the government’s doubling of the royalties it charges mining companies on base metals, and fear alterations to mining policy and the reversal of privatisation deals struck by the former president.

The government of President Michael Sata, in place since September, has angered political foes with probes into corruption and may find it difficult to push laws through parliament against an increasingly united opposition.

 

ANTI-DOLLAR LAW

Zambia introduced a law on May 18 requiring domestic transactions to be quoted or paid for in kwacha, with penalties of up to 10 years in jail for offenders.

The kwacha climbed more than 8 percent this week to its highest level in more than a year as the law spurred demand for the local unit.

But the Chamber of Mines, which represents foreign miners, says the law will raise operating costs and result in the loss of some jobs in an economy where unemployment is already a serious problem.

The opposition says the new law is unconstitutional and has threatened to challenge its legality in court.

What to watch:

– Job losses for miners

– Legal challenge against new law

 

CORRUPTION

Sata appointed a new anti-graft chief, and last month a court convicted a former government minister of siphoning off 2.1 billion kwacha ($444,000) and burying the cash on his farm.

Police have also arrested the son of former President Rupiah Banda on suspicion of receiving bribes from an Italian construction company.

The crackdown has sparked accusations of an anti-Banda witch-hunt, and could have the effect of uniting the two main opposition parties.

Companies that struck deals with the Banda government may see their contracts come under scrutiny as investigations grow.

What to watch:

– Arrests of more opposition figures

 

PARLIAMENT

Zambia’s single-chamber parliament has 158 MPs – 150 elected and eight nominated by the president.

Sata’s Patriotic Front (PF) party has 64 elected and eight nominated MPs, fewer than the combined opposition.

The government has tried and failed to get the courts to strip Banda’s Movement for Multi-party Democracy (MMD) of its party status, further straining relations between the parties and making it more difficult to push legislation through parliament.

The MMD ruled Zambia for two decades until last year when populist Sata and his PF won elections in a rare peaceful transition of power in Africa.

What to watch:

– Continued attempts to deregister MMD

– Opposition efforts to frustrate PF in parliament

 

FISCAL DISCIPLINE

The 2012 budget included big increases in social spending and farming subsidies, to be paid for by a rise in mineral royalties and a debut Eurobond.

Sata has also created new districts, whose financing may put pressure on the budget.

Although higher royalties should raise revenue in the short term, Zambia may be forced to adjust mining tax rates if copper prices fall.

If worsening conditions make it difficult for Sata to make good on promises to give Zambians more disposable income, analysts say he may squeeze foreign investors.

Sata has approached the World Bank for help, saying foreign aid is not enough to build the infrastructure needed to underpin growth.

Zambia selected Barclays and Deutsche Bank in May as book runners for a debut $500 million, 10-year Eurobond.

What to watch:

– Huge spending outside the national budget

 

ECONOMIC NATIONALISM

Despite some investor nervousness, Sata is unlikely to go down the path of radical resource nationalism, analysts say.

Finance Minister Chikwanda has repeatedly said Zambia will maintain existing mining policies and will not re-impose a minerals windfall tax.

Zambia has attracted huge amounts of foreign investment, mainly in mining, from emerging economies such as China, but many Chinese companies have been hit by strikes over poor pay and conditions since the change of government.

In March, amid concern about copper exporters misreporting quantities leaving the country, Zambia introduced guidelines to enable state agencies to verify the weight and content of mineral exports.

What to watch:

– Punishment of mining firms flouting new guidelines ($1 = 4730 Zambian kwacha) (Editing by Ed Cropley and Tim Pearce)

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