Zambia’s decision to double royalties on copper miners in the continent’s largest producer will not cripple the industry at the current strong prices but could cause problems if the commodity cycle reverses, said the World Bank.
Mining firms have sounded the alarm after the new government of President Michael Sata said it would raise base metal royalties to 6 percent from 3 percent, with the chamber of mines saying some companies might be forced to scale back.
“Overall, at the current market prices the government’s royalty increase is unlikely to cause serious economic hardship to the mining sector,” Kundhavi Kadiresan, the World Bank’s country director in Zambia, said in a statement, Reuters reports.
“However, the situation could change if commodity prices go down significantly. At that time, the government could come under pressure to review royalty rates,” she said.
Kadiresan added a frequent adjustment of royalty rates would make Zambia less attractive as an investment destination.
The aim behind the royalty hike is to raise more revenue and Kadiresan said this would be accomplished in the short term but the government needed to improve its capacity to collect profits-based taxes.
Royalties are easier to administer and are effectively a tax on sales revenue, not profit.
The benefits of Africa’s vast mineral wealth are often not widely spread and there has long been a perception that mining firms in Zambia, one of the world’s poorest countries, have not been paying what they should.
The previous government was also trying to increase tax revenue from mines and auditing several mining houses.
Foreign mining firms in Zambia include Brazil’s Vale , Canada’s First Quantum Minerals and Barrick Gold and London-listed Vedanta Resources and commodity giant Glencore.