ZAMBIA SEPTEMBER 2008 ECONOMIC ROUNDUP

UNCLAS LUSAKA 001004 DEPARTMENT FOR AF/S AND EEB/CBA - DENNIS WINSTEAD COMMERCE FOR 4510/ITA/IEP/ANESA/OA SIPDIS E.O. 12958: N/A TAGS: ETRD EMIN ENRG EINV ECON ZA SUBJECT: ZAMBIA SEPTEMBER 2008 ECONOMIC ROUNDUP REF: LUSAKA 302 ¶1. SUMMARY -- Inflation Continues to Rise -- Money Markets Face Challenges -- Zambian Airways Liable for Unpaid Fees -- GRZ Defers Payment Of Windfall Mining Tax -- Zambia-Zimbabwe Power Interconnector Disconnected -- International Gateway License Fee Goes Up Inflation Continues to Rise ¶2. Year-on-year inflation in September rose to 14.2 percent, driven by high fuel and food prices. According to new Zambian Government (GRZ) estimates, the annual inflation rate for CY 2008 will be 12.7 percent. Although the GRZ will not meet its 2008 target of single-digit inflation, a visiting delegation from the International Monetary Fund thought it likely that the GRZ could contain inflation to nine percent in 2009. Money Markets Face Challenges ¶3. Trading in government bonds declined in September, with investors under-subscribing in two mid-September treasury bill auctions. Dwindling enthusiasm may be due in part to political uncertainty in advance of the October 30 presidential by-election, particularly given the popularity of opposition leader Michael Sata, who in the past has made strong anti-investor statements. A stock broker told Emboff that she anticipates renewed international portfolio investment after the election. Zambia's high inflation rate may also account for some of the decline, given that bond yields--at 14.85 and 16.49 percent on two- and five-year bonds respectively--only provide for a modest (real) return. Zambian Airways Liable for Unpaid Fees ¶4. Despite efforts by Minister of Finance to defer Zambian Airways' debt payments to the National Airports Corporation Limited (NACL), the Ministry of Communications and Transport determined that the partly American-owned Zambian Airways should begin honoring this debt immediately. Ministry of Transport officials argued that Zambian Airways, which owes NACL USD 1.9 million in unpaid passenger service charges, ground handling, aircraft landing, and parking fees, should not receive preferential treatment. Until the debt is liquidated, NACL is requiring Zambian Airways to pay its airport fees on a daily (cash) basis. GRZ Defers Payment of Windfall Mining Tax ¶5. The GRZ has deferred collection of the windfall mining tax as it continues to assess the new taxation regime's impact on the mining sector. Mining companies with development agreements (that prohibit tax increases) are prepared to take legal action unless the dispute can be resolved harmoniously. One mining executive told Emboff that his company is making tax payments to an escrow account in the interim. In September, the Zambia Chamber of Mines and other stakeholders re-opened dialogue with the GRZ. Secretary to the Treasury Evans Chibiliti told the Parliamentary Committee on Estimates that the GRZ will continue to defer the windfall tax until it concludes its discussions with mining sector representatives. Zambia-Zimbabwe Power Interconnector Disconnected ¶6. Zambia's state-owned power company ZESCO disconnected from the Southern African Power Pool in early September after several days of power disruption that ZESCO officials attributed to "external factors." With domestic power generation capacity (currently at 1200 MW, due to ongoing rehabilitation projects) below domestic demand (estimated at 1500 MW),the utility company has increased its load shedding in most parts of the country. This is the second time this year that ZESCO has shut down its connection to Zimbabwe. International Gateway License Fee Goes Up ¶7. Minister of Communications and Transport Dora Siliya told parliamentarians that the GRZ increased its international telecommunication gateway license fees (from USD 12 million to USD 19 million) for security reasons. Despite calls for liberalization, telecom providers must continue to route their international calls through the state-owned Zambia Telecommunications Limited (Zamtel). The GRZ allegedly monitors all international calls made through Zamtel. Private sector representatives have repeatedly emphasized that Zambia's inefficient and expensive communications technology services constrain foreign investment. KOPLOVSKY