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DRC – Government seeks larger stake in mining boom

The government of the Democratic Republic of the Congo (DRC) is seeking to increase revenue from the expansion of its mining industry. The government plans to raise its free stake in new mining projects from 5% to 15%, considerably lower than the 35% figure that has been mentioned in recent months. In addition, proposed changes to the mining code include tripling the royalty on copper and cobalt to 6%, and cutting the amount of time that contract stability is guaranteed from 10 years to five years. The government will host a workshop on November 15 with companies and civil society members to discuss the proposed changes, with the draft code potentially being sent to Parliament for approval in March 2014.

Furthermore, the Congolese prime minister recently stated that, within the next three years, the government plans to tax mining companies in local currency in an attempt to decrease dollarisation in the economy. Hyper-inflation in the 1990s, when consumer prices rose by almost 10,000%, prompted the government to collect taxes in dollars. The prime minister continued to state that the Congolese franc has remained relatively stable against the dollar in recent years, and concluded that “we [the government] don’t have any justification for people to pay taxes in US dollars.”

Why do we care? In 2012, the DRC was the world’s eighth largest producer of copper and the world’s largest cobalt producer. According to the director of the tax department at Freeport-McMoran’s Tenke Fungurume mining project, the new code could reduce the projects profitability by over 66%. While concerns raised by mining companies regarding profitability may be valid, the larger problem will be the murky nature of the DRC’s mining sector, which creates uncertainty as to whether increased revenue will actually reach government coffers, and whether taxes will be collected fairly and effectively.

The DRC suffers from high levels of dollarisation. Over 50% of financial transactions are conducted using US dollars, while over 90% of bank deposits are denominated in dollars. This severely constrains the effectiveness of monetary policy and increases the country’s vulnerability to external shocks. At times of heightened risk when demand for the local currency falls, companies with non-collateralised credit operating in sectors that have liabilities in dollars but receive revenue in franc could run into problematic liquidity situations. Reducing the high level of dollarisation in the economy will take considerable time, and will require a significant improvement in central bank credibility.

 

Analyst: Jacques Nel

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