Zambia and the gap between rhetoric and reality in Africa

By Diana Game (Business Day)

IN 2008, after months of delays, the Zambian government finally gave in to public pressure to capture a greater share of profits from the commodity boom by introducing a windfall tax on minerals, raising mining royalties and hiking corporate taxes.

The measures, which came into effect in the April 2008 national budget, raised the effective tax rate from about 30% to 47%. The move raised a howl of protest from mining companies, which said it violated investment agreements with the government.

Months later, the global economic crisis kicked in, commodity prices plunged and Zambia’s foreign currency revenues started drying up as investors fled, expansion plans were put on hold and exports dropped.

The windfall revenues raised were used mostly to prop up a devaluing local currency, hard hit by these whirlwind events.

A year after introducing them, the government, panicked by the rapid decline of exports and investment, scrapped most of these taxes and even introduced new measures to relieve the mines’ high operating costs. Zambia was left not only financially worse off after the dust of the global crisis settled, breaking agreements with foreign miners had also tarnished its reputation as an attractive investment destination.

With the increase in copper prices during last year , pressure is mounting again for the mining tax issue to be revisited. The government is resisting — but 2011 is an election year and could mean knee-jerk policy reactions.

The Zambian story reflects some of things that are wrong with resource- rich countries in Africa generally . One is the issue of investment agreements. Many of Zambia’s mining contracts were negotiated from a low base after the nationalisation of the mines destroyed the mining sector and the government sought investors to take over its poorly functioning assets at a time of low prices. Investors negotiated good deals for themselves and no accommodation was made for price swings.

Zambia also failed to use the revenues it did generate during five years of high commodity prices to diversify the rest of the economy sufficiently to accommodate any major downturn in its key revenue-generating sector.

The global financial crisis is not the main reason for the problems that they are experiencing.

The primary cause of their woes is long-term structural weaknesses in economic policy and management, a situation compounded in many resource-rich countries by an inability to use windfalls for development — or a reluctance to do so. This makes them unable to withstand even the smallest of economic shocks.

The emotional debate about resources and investment so beloved by politicians usually centres on the need for Africans to own Africa’s resources. Yet, despite the noble rhetoric, “the people” hardly get a look in even where resource wealth is captured.

In most countries, the state insists on having a stake in mining enterprises and oil exploration and production through joint ventures with operators. In some cases, a majority stake for the state is mandatory.

So what happens to all that money? Mostly, it seems to disappear down any number of black holes, including bloated personal bank accounts, recurrent funding gaps, official pet projects, debt payments and innumerable other unproductive pursuits. Party coffers are a favourite, especially as in many countries, including ours, the line between party and state is distinctly blurred.

State officials in countries such as Angola, Africa’s biggest oil producer, bemoaned the fact that severe budget cuts on the back of sharply reduced growth last year would curtail their plans to address poverty . Such statements are sheer political expedience.

Africa’s resource-rich countries continue to sit at the bottom of human development indicators, with little by way of social investment during the boom times preceding the crisis.

In any case, poverty reduction is usually left to the donors and nongovernmental organisations to sort out.

It may be convenient for African politicians that the global crisis was not of Africa’s making. But that does not remove the fact that the severe contraction of western economies served not just to highlight how badly prepared countries are for external shocks, it showed how little of Africa’s wealth is being harvested for and invested in the continent’s future.

Diana Games is CE of Africa @ Work, a research and consulting company.

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