Zambia’s New Banking, Investment Regulations ‘Using A Sledge Hammer To Kill A Fly,’ Critic Says

Zambia’s New Banking, Investment Regulations ‘Using A Sledge Hammer To Kill A Fly,’ Critic Says

Some investors doing business in Zambia worry that new rules effective this week and others already imposed will hurt the investor-friendly image of what has been described as one of Africa’s fastest-growing economies.

The new regulations governing banking and investment in Zambia include rules to combat tax avoidance, according to a report in the Financial Times.

Zambia’s President Michael Sata, nicknamed King Cobra for his combative style, was elected 18 months ago on the promise he would use the country’s mineral wealth to benefit the six out of 10 Zambians living in poverty.

He raised the minimum wage to about $120 a month and doubled some salaries in the public sector.

Since Sata took office, the currency has been rebased, companies can no longer trade or pay salaries in U.S. dollars, and banks have had to raise their minimum capital requirements significantly, the report says.

Zamtel and Zambia Railways have been nationalized, a deal with South African bank FirstRand to buy Zambia’s Finance Bank was nixed, according to the report, and “several foreign businessmen have also been controversially deported with little or no explanation.”

Zambia, Africa’s biggest copper producer, is expected to grow 7.8 percent this year and 8 percent in 2014.

Sata’s supporters point to government statistics that say foreign investment in Zambia  rose from $1.3 billion in 2011 to $1.7 billion in 2012. Supporters say Zambia’s $750 million eurobond, secured in September, is an example of international confidence in Sata’s administration, the report says.

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Others say Zambia’s attraction was economic liberalization and privatization and that’s showing signs of reversal. “When people see the government interfering and other things, the reversal of some of the privatizations, we are not sure the economic environment is being sustained,” an unnamed businessman was quoted as saying in the article.

Starting this week, all Zambian exporters must “repatriate” proceeds of exports exceeding $10,000 within 60 days. If they want to move funds offshore, they must show evidence for the planned use of the money, such as dividend payments or equipment purchase, the report says.

The government says the regulations will help cut down tax evasion and transfer pricing, which it says cost Zambia up to $2 billion a year. The new rules will particularly affect mining including companies such as Glencore, ENRC, Vedanta, First Quantum and Vale, according to the report.

Miles Sampa, Zambia’s deputy finance minister, defended the deportations, ruled out more nationalizations and said in the report the laws were only targeting those who broke rules. Only “bogus” investors had anything to fear, he said.

Critics say the new regulations feel like foreign exchange controls and could dampen investment. They could overburden companies and have unintended consequences on the whole economy. “It is using a sledge hammer to kill a fly,” an unnamed Zambian financial expert said in the report. “It has been designed on the assumption that everybody is a criminal rather than a law-abiding citizen.”