Zambia's Plans for Higher Mineral Royalties

Zambia's new government unveiled an expansive 2012 budget on Friday, with big increases in social spending and farming subsidies to be paid for by a rise in mineral royalties and a debut $500 million Eurobond.

In the first budget since September's election upset, Finance Minister Alexander Chikwanda put flesh on the bones of new President Michael Sata's promises to spread the benefits of strong growth in Africa's biggest copper producer.

Overall spending would rise to 27.7 trillion kwacha ($5.5 billion), or 26.5 percent of gross domestic product (GDP), from 21 percent in 2011, Chikwanda said.

Domestic borrowing for the year would amount to 1.3 percent of GDP and foreign financing would be 3.0 percent, giving an overall deficit of 4.3 percent of GDP, Chikwanda said. Foreign aid would amount to less than 2 percent of GDP.

Analysts said the budget certainly qualified as pro-poor, although the extra spending did not mean the southern African nation was loading up on debt.

Even though the budget outlined slightly more spending than had been anticipated, it's still taking place against a backdrop of increased revenue collection, and an effort to raise more meaningful receipts from previously undertaxed sectors, said Razia Khan, head of Africa research at Standard Chartered in London.

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.

Most of the extra spending would go on 45 percent and 27 percent increases for health and education respectively, and a 38 percent boost for a farming subsidy programme that has underpinned nearly a decade of 6 percent-plus annual growth.

The Patriotic Front (PF) won the 2011 election because it listened to the needs of the people at all levels, Chikwanda said in his budget speech. Now that we are in government, we have not and will never distance ourselves from the people.

BALLISTIC

PF leader Sata, a gruff populist who spent 10 years as opposition leader in the southern African nation, has caused slight nervousness among foreign investors, not least for his vitriolic criticism of Chinese mining firms.

However, he toned down his rhetoric in the latter stages of campaigning, and since coming to office has been at pains to build a working relationship with a sector that accounts for more than 70 percent of all foreign exchange earnings.

However, Chikwanda's budget puts pressure on the mining firms with a doubling of copper royalties to 6 percent -- a hike that looks certain to provoke a furious industry reaction.

They're going to go ballistic, said Peter Major, a mining analyst at Cadiz Corporate Solutions. As we've all learned in life, the way to get what you want is to go ballistic, and the sooner the better. This is not going to be touchy-feely.

Chikwanda also said Lusaka would resurrect the previous administration's plans to tap international capital markets to raise infrastructure funds, with the launch of a debut $500 million 10-year Eurobond during the year.

However, he made clear that Zambia, a nation of 13 million people, would not get sucked into unsustainable debt.

As we spend more on our socio-economic infrastructure, our ability to meet our debt obligations should not be ignored, he said. In this regard, the government will target concessional borrowing as the first option.

He also assuaged fears of looser monetary policy, saying the Bank of Zambia would continue to target single-digit inflation through its control of money-supply growth -- a move that should support the kwacha currency.

Investors will be encouraged by this, and we expect the kwacha -- impacted by global volatility in recent days -- to benefit as a result, Khan said.