ZAMBIA FEBRUARY 2008 ECONOMIC ROUNDUP

UNCLAS SECTION 01 OF 02 LUSAKA 000302

SIPDIS

DEPARTMENT FOR AF/S AND EB/CBA - DENNIS WINSTEAD
COMMERCE FOR 4510/ITA/IEP/ANESA/OA

SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV BEXP EAIR ZA
SUBJECT: ZAMBIA FEBRUARY 2008 ECONOMIC ROUNDUP

REF: LUSAKA 139
LUSAKA 115


1. SUMMARY
-- Government Seeks Financing for Large Oil Deal
-- Chinese Expand Commercial Relationship
-- Electricity Rates to Mining Companies Increase
-- Officials Question Safety of Chinese Coal Mine
-- Mining Companies and GRZ Bicker Over New Tax Regime
-- Kafue Gorge Power Station Experience Power Failure
-- Inflation Rises Slightly

--------------
Government Seeks Financing For Large Oil Deal
--------------


2. The GRZ is seeking another financier for its USD 1.2 billion
crude oil contract with Independent Petroleum Group (IPG). In
November 2007, the Kuwait-based IPG won a tender to supply Zambia
with 1.5 million tons of crude oil over the next two years (Ref A).
Although the GRZ decided in mid-January to finance the deal through
Stanbic Bank, a subsidiary of South Africa's Standard Bank, both
parties failed to reach agreement on the lending conditions. Energy
Ministry Permanent Secretary Peter Mumba blamed Stanbic for the
failure, calling its terms "unfair to the government." A senior
government official told one reporter that Stanbic had demanded GRZ
collateral to back the loan. It is unclear whether the Zambia
National Tender Board will solicit new tenders, or award a contract
based on previous submissions. According to press reports, the
first crude oil shipment of 90,000 tons has already arrived in Dar
es Salaam and is pending payment.

--------------
Chinese Expand Commercial Relationship
--------------


3. A Chinese business delegation led by Vice Minister for Commerce
Gao Hucheng was in Lusaka February 24-26 to follow up on commitments
made during Chinese President Hu Jintao's visit to Zambia in 2007.
The delegation expressed particular interest in the mining and
agriculture sectors. The delegation also targeted products that
enjoy duty free access under the Chinese Special Preferential Tariff
Treatment Scheme. Among the products covered under the scheme are
fresh and dry vegetables, processed foods, fish, poultry, woven
fabrics, asbestos, motor vehicle parts, and glass, metal, and
leather products. Mr. Gao announced USD 12 million in new grants
for projects, including the construction of a hospital and
agricultural demonstration center. The delegation signed contracts
to purchase over USD 200 million in Zambian goods and announced
their intentions to expand this commercial relationship by another
USD 300 million. China is the third largest investor in Zambia
after South Africa and Great Britain and in 2006, according to
COMESA data, Zambia exported goods to China valued at USD 380
million and imported goods valued at USD 81 million.

-------------- -
Electricity Rates to Mining Companies Increase
-------------- -


4. Copperbelt Energy Corporation (CEC),the primary power
distributor to the mining sector, reached an agreement with mining
companies on new electricity rates. CEC chairman Hanson Sindowe
told Reuters on February 27 that the mining companies had agreed to
a 35 percent rate increase. The new rates, which still require
approval from the parastatal electricity company ZESCO, will be
retroactively effective beginning January 1, 2008. Sindowe declined
to reveal the actual electricity rates, pointing out that the mining
companies pay different rates based on their individual agreements
with CEC. Background: To attract mining investment in the late
1990s, the Zambian government gave generous concessions, including
discounted electricity rates, to numerous mining companies.
According to some reports, the GRZ gave Konkola Copper Mine the most
concessional rate because its mine is one of the wettest in the
world, and therefore highly energy intensive. For every ton of
mineral ore it extracts, KCM must pump out 50 tons of water, causing
it to incur operational costs that are much higher than those of its
competitors. End background.

-------------- -
Officials Question Safety of Chinese Coal Mine
-------------- -


5. After several miners sustained critical injuries at the Chinese-
owned Collum coal mine in Sinazongwe, Southern Province, local
authorities appealed to the Ministry of Mines to close the mines
until the company implements adequate safety measures. According to
press reports, district officials are often unable to perform safety
checks due to difficulties in communicating with Chinese managers,
who do not speak English. In 2006, the Ministry briefly closed the

LUSAKA 00000302 002 OF 002


Chinese mine following a visit by the Southern Province Deputy
Minister, who was shocked with working conditions.

-------------- --------------
Mining Companies and GRZ Bicker Over New Tax Regime
-------------- --------------


6. The GRZ's 2008 National Budget proposal included significant tax
increases to the mining sector (Ref B),such as a windfall tax, a
royalty rate of three percent, a variable profit tax of 15 percent,
and a corporate tax of 30 percent. Chamber of Mines General Manager
Frederick Bantubonse told journalists on March 1 that mining
companies submitted a counter proposal and requested the opportunity
to meet with government officials to negotiate the new rates.
President Mwanawasa rejected the counter proposal and publicly
warned the companies that "if they cannot show how we have made
errors, they will be wasting my time and Government's time in asking
to hold discussions with my Government." A Chamber of Mines
delegation appeared before the Parliamentary Committee on Estimates
and recommended a higher threshold for variable profit tax, a
royalty rate of one percent that would rise over time to three
percent, and a corporate tax of 25 percent (its current level).
Several of the longer-established mining companies continue to
assert that the new tax rates, if uniformly applied, will breach
development agreements that the GRZ signed in the late 1990s to
attract mining investment. Some companies have also suggested that
they will take the matter to court if necessary.

-------------- --------------
Kafue Gorge Power Station Experiences Power Failure
-------------- --------------


7. A turbine bearing failure at Kafue Gorge Power Station
contributed to increased electricity shortages and additional load
shedding in mid-February. Although ZESCO has repaired the generator
at Kafue Gorge, its total electricity generation capacity is still
deficient by approximately 450 megawatts, due to ongoing renovation
work at the major hydropower facilities.

--------------
Inflation Rises Slightly
--------------


8. According to the Central Statistical Office's Consumer Price
Index, Zambia's year-on-year inflation rate for February rose to 9.5
percent, from 9.3 percent in January. Bank of Zambia officials
attributed the upward movement primarily to increases in food
prices, but also pointed to higher "recreation" and education costs.



MARTINEZ