Ethiopia’s minister of mines and energy, Samuel Urkato Kurke, said on 5 February that reforms to mining laws were being undertaken and would be finalized within the next two months. New mining investment will probably benefit from duty-free privileges and tax exemptions, whereas underperforming exploration contracts face cancellation.
- Ethiopian Minister of Mines and Energy Samuel Urkato Kurke on 5 February said that his ministry was reviewing mining contracts and taxes to help meet the government’s objective of improving the performance of export-focused sectors.
- A key item likely to be finalized this year is a reduction in the royalty rate for precious metals (currently at 7%) in line with the rates of regional neighbors, probably nearer to 4%. The corporate tax rate for miners has already been lowered from 35% to 25%.
- Likely facing the greatest risk of cancelation are large-scale mining contracts for exploration activities that were signed before 2015 by state-directed conglomerates affiliated with the Tigrayan People’s Liberation Front. However, projects involving foreign partners and that are located outside of Oromia region or have invested heavily in value-added infrastructure are likely to be less affected.
Ethiopian Minister of Mines and Energy Samuel Urkato Kurke said that his ministry was reviewing mining laws in line with the government’s objective to improve the performance of export-focused sectors. He said that changes were likely to be finalized within the next two months and would include new unspecified tax incentives and duty-free privileges. At present, royalties for precious minerals, which include Ethiopia’s highest-value mineral export, gold, are set at 7% and corporate income tax at a flat rate of 25%, which was lowered from 35% in 2016, while corporate tax for petroleum operations was reduced from 30% to 25% the same year. Tax revenues from mining are divided 60% to the Ministry of Finance and 40% to the regional governments. Miners already benefit from a five-year (from production) customs duty and tax exemption on imported equipment, machinery, and vehicles. The government is guaranteed a 5% minimum equity stake in all mining projects.
The review commenced after Prime Minister Abiy Ahmed on 12 January established a new committee within the Ethiopian Investment Commission (EIC), which is tasked with consulting the Council of Ministers (the cabinet) on broad changes to the legal regime. The reforms are intended to encourage greater inward investment and thereby boost export performance, which has remained below the government’s annual target. Ethiopia’s total net exports by value were USD9.7 billion in 2018, and IHS Markit forecasts moderate growth to USD10.9 billion in 2019. A reduced import bill is likely to see the current-account deficit narrow marginally from 6.6% of GDP in 2018 to 4.6% of GDP in 2019, but balance-of-payments issues, reflected in foreign-currency scarcity and delayed payments of up to six months, are likely to persist during 2019.
Kurke also said his ministry will review the exploration contracts of foreign and domestic operators that have failed to progress. Exploration licenses, unlike non-renewable reconnaissance licenses, involve geological works. Amendments in 2013 to the Mining Proclamation clarified that an exploration license can be renewed after three years, but only twice for a maximum total five-year period before production must commence. The licensing authority currently reserves the right to determine whether 25% of the total license area must be relinquished upon renewal, as stipulated by directives that are not specified in the current law. Consequently, the review is likely to focus on exploration contracts signed before 2015 under former minister Sinknesh Ejigu (October 2010 to 2014).
Currently, the Mohammed International Development Research and Organization Companies’ (MIDROC) gold mine at Lega Demgi (located in Guji Zone, Oromia region) is the only large-scale open-pit mine operating in Ethiopia, producing around 120,000 ounces of gold every year. The remaining 80,000 ounces are mined from alluvial deposits by artisanal and small-scale miners. After Prime Minister Ahmed was appointed in April 2018, the Ministry of Mines and Energy (MoME) on 9 May 2018 refused to renew MIDROC’s operating license for Lega Dembi, following 10 days of protest in opposition to alleged environmental damage. The mine has since closed and operations will not resume until the completion of a third-party environmental impact assessment.
MIDROC’s concession is located within Oromia region, which is a stronghold of grassroots support for Ahmed’s Oromo Democratic Party (ODP), one of four members comprising the ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF). Ahmed’s appointment and the growing influence of his ODP party within the EPRDF has reduced resistance to reforming state-directed and -owned conglomerates that have historically dominated the Ethiopian economy, especially those affiliated to the previously dominant Tigrayan People’s Liberation Front (TPLF) and the Ethiopian National Defense Forces.
Outlook and implications
The MoME’s review will probably seek to enhance Ethiopia’s competitiveness in the mining sector by reducing the overall tax burden for new mining operators relative to regional neighbors such as Kenya and Tanzania. A reduction in the royalty rate for precious metals (currently at 7%) in line with the rates of regional neighbors is also likely, probably nearer to 4%. Separately, the review will probably increase calls from elements of the EPRDF for an increase in the revenue share to regional governments (currently at 40%) ahead of the legislative elections currently scheduled for 2020.
Likely facing the greatest risk of cancellation because of the MoME’s review are large-scale mining contracts for exploration activities (especially if located in Oromia region) that were signed before 2015 by state-directed conglomerates and subsidiaries affiliated with the TPLF (especially party members that were allies of the late-prime minister Meles Zenawi). Cancellation is, however, less likely for mining projects involving foreign private partners, particularly those that have invested heavily in value-added infrastructure such as mineral processing facilities. This move would undermine the government’s drive to create an attractive environment for foreign investment and would probably be strongly opposed within the Council of Ministers and across the EPRDF’s four member parties within the House of People’s Representatives (parliament), where they control nearly all seats.
If Ahmed’s administration were to broaden its privatization drive to include the state-directed Endowment Fund for the Rehabilitation of Tigray (EFFORT), which has significant investments in the gold mining sector, then this would indicate that the cancellation of TPLF-affiliated mining contracts was unlikely. Conversely, in the less likely event that the ongoing anti-corruption campaign were expanded in scope to prosecute former EFFORT board members, then evidence from these investigations would probably be used as the basis to cancel associated exploration contracts. In any case, the granting of a production license is likely to be delayed as miners try to finalize guarantees to foreign-exchange access, which is regulated by the Ministry of Finance. If the contracts of state-directed conglomerates were to be scrutinized but not cancelled outright, then this would indicate that such entities would continue to benefit from political favoritism in credit provision from Ethiopia’s two largest state-owned banks – Commercial Bank of Ethiopia and Development Bank of Ethiopia – and be prioritized for hard-currency payments on high-value imports during the extraction phase.