When Michael Sata, the political veteran whose combative style earned him the sobriquet “King Cobra,” won Zambia’s elections 18 months ago, his victory sparked high expectations among many of his compatriots — and ripples of unease among investors.
The populist promised to use the nation’s mineral wealth more effectively to benefit the six out of 10 Zambians who live below the poverty line in Africa’s biggest copper producer.
“The attraction of Zambia was economic liberalization, privatization, no forex controls. 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,” said a Zambian businessman.
Others are more sanguine about Sata’s rule. His supporters point to Zambia’s heavily oversubscribed debut $750 million eurobond in September as an example of international confidence in the administration.
Either way, the pace of change has been fast. Since Sata assumed office, the currency has been rebased, companies have been banned from trading or paying salaries in U.S. dollars, and banks are being required to substantially raise their minimum capital requirements.
The government has also retaken control of Zamtel, the country’s fixed-line operator, and Zambia Railways, while a deal for FirstRand, a South African bank, to acquire Zambia’s Finance Bank was reversed. Several foreign businessmen have also been controversially deported with little or no explanation.
Yet it is the government’s plan to monitor foreign currency flows that looks set to be the biggest test of investor commitment to Zambia. From Thursday, all exporters will be required to repatriate the proceeds of exports with a value in excess of $10,000 within 60 days. If they then want to shift funds offshore, they will have to provide evidence for the planned use of the money, such as dividend payments or equipment purchase.
The government says the regulations are designed to help it crack down on tax avoidance and transfer pricing, which it says cost the treasury up to $2 billion a year. The new rules will particularly affect the mining sector, including groups such as Glencore, Vedanta, First Quantum and Vale.
Miles Sampa, the deputy finance minister, says only “bogus” investors have anything to fear. He also rules out further nationalizations and defends the deportations, saying those targeted were “breaking the law.”
“Somebody asked whether we are capitalists or communists. I said: Who is a capitalist? The Americans are bailing out banks, and the Chinese themselves are now going a capitalist way,” he said. “So we just look at any issue as its needs to be dealt with.”
Still, critics say the latest regulations smack of foreign-exchange controls, which could dissuade investors. “It is using a sledgehammer to kill a fly,” said a Zambian financial expert. “It has been designed on the assumption that everybody is a criminal rather than a law-abiding citizen.”
The new regulations could place an onerous administrative burden on companies, one bank executive says, which could damage the broader economy.
“The concept of what they are trying to do shouldn’t be alarming to investors. I think what is slightly concerning is the route to do it doesn’t seem to have been particularly well thought out,” the executive said. “My concern is that it has an unexpected impact on the productive sector of the economy.”
The mood among those Sata promised to champion is also mixed. The government has raised the minimum wage from a negligible figure to the equivalent of $121 a month and increased some public-sector salaries by as much as 100 percent.
In Kanyama, one of Lusaka’s poorest districts and a Sata stronghold, Esther Banda praises her president, describing improvements to roads, health clinics and schools. “He’s still doing things he promised, but the country is big,” she says.
Others, however, are less convinced, complaining of corruption and the lack of jobs. “The things he promised we are not seeing,” said Martin Katema. “He said in 90 days we are going to have money, but nothing has changed.”