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Sunday, 14 November 2010

12 reasons why profit margins are low in Zambia

By Ruth Henson

There are several factors that contribute to low profit margins for Zambian businesses :

1. Inconsistent government policies. Nobody knows what government policy will be for any reasonable period of time. Government can and does change the rules whenever it is politically expedient to do so. This can have unforeseen disastrous effects on businesses.

2. Excessive taxation. Every kwacha earned in Zambia is taxed over and over. Earn a salary and pay tax on it. Spend it and get taxed again. Pay your Zesco bill and pay excise tax which is then vatable. Anything imported is charged duty and then VAT even on the duty. Fuel has tax upon tax upon tax which then feeds into the cost of everything else.  All this tax would make sense if it was fairly shared but those who can afford good accountants pay less, mines pay less, new investors pay less. The formally employed carry a disproportionate share. Again sharing on the expenditure side is disproportionate. Taxes pay for politicians children to go to expensive private schools and the children of the poor have to pay to go to school because government funding is insufficient to run the school.

3. Unfavourable exchange rates. Exchange rates favour importers not producers. Producers create employment. Importers export jobs to other countries but the un-employed cannot move to where the jobs are.

4. Excessive licence requirements and fees. An average tourist business in Livingstone needs 40 or 50 licences all of which have to be renewed and paid for annually. This is too many and overloads the business.

5. Excessive dependency ratios. The average working Zambian has too many dependents. This is partly due to high birth rates and partly due to lack of education and unemployment. On average one salary supports 15 people. This severely limits nutrition, education and health because all require money.

6. No uniformity between the formal and informal sectors. The informal sector has no licences or taxation, no minimum wage, no NAPSA or workers compensation but they compete with and undercut the formal sector.

7. Very low levels of employment. Low employment levels result in very low levels of market. People without jobs do not spend much money.

8. Excessive variations in product prices. Market prices of products can vary by 50% or more. Prices can vary from profit to loss in a fairly short space of time. This is especially true of agricultural products.

9. Excessive variations in input prices. Input prices can change without warning by huge margins. This can be due to exchange rate fluctuations or inconsistent government policy or seasonal fluctuations.

10.Very high interest rates. Interest rates are more than double inflation rates, at least for borrowers. Savings interest rates are pathetic. This is one reason why banking is one of the few profitable businesses in Zambia.

11. Poor economies of scale due to very limited market. Optimum operational scales cannot be reached for many businesses because the market is too small.

12. Huge distances to cover to reach a large number of customers. To reach a significant number of customers in Zambia requires transporting a small number of products over a large distance. This adds significantly to the distribution costs.

8 comments:

  1. Ruth,

    Interesting points:

    On exchange rates – the BOZ argument is that government should pursue stability of exchange rate rather than a lower level. I have always questioned this policy, partly because with copper prices strengthening all it will do is make the Kwacha more and stronger which hurts the sectors we want to help (e.g. agriculture). In fact it even leads to more subsidies since the farmers will not be able to diversify as quickly as we would want.

    There appears a disconnect between our exchange rate policy and the government general industrial policy (if we have one!)

    I was intrigued by your point on “excessive licence requirements”. The government has been selling this as one of their major reforms. They believe they are doing well in reducing excess requirements, which currently are a cash cow for bureaucrats! Perhaps the reforms are a mirage?

    On ‘interest rates’ – I wanted to ask, there was a proposal a while back for a Credit Management Database for Farmers. Whatever happened to that? I thought you might know!

    Now its an interesting question on why borrowing is costly in Zambia. The reason for the poor access to and high cost of finance for small and micro firms appears to be poor financial intermediation rather than low domestic savings or bad international finance. Domestic saving in Zambia is actually higher, as proportion of GDP, than the Sub Saharan Africa average. Foreign Investment and aid all flood the banking system with cash.

    The problem seems to be poor financial intermediation which is limited both by the small size of the banking sector, its volatility, and an inadequate supporting financial infrastructure (e.g. lack of functioning credit bureau, absence of verifiable identity registers, etc). But then again our people live in villages. How one goes about giving someone like that a post code or track their movement is a geographer’s nightmare!

    ReplyDelete
  2. Ruth,

    All of your article could be encapsulated in one sentence:

    The government refuses to tax or collect dividends from the mines.

    They elect to take (I estimate) $200 million a year in bribes, instead of collecting at least $1 billion a year in taxes, which they could do under the present system, even without a windfall tax. They are leaving about $700 million from income tax on the table, and are not collecting about $300 million in dividends owed to ZCCM-IH.

    Think of all the infrastructure and jobs that could create, and all the people who could have a decent income - and therefore have disposable income to buy goods and services.

    Also, there is this tendency to create this two-tier society, a cheap and accessable one for the 'rich', and an expensive and exclusionary one for the poor. For instance, I'm sure everyone remembers when The Post tried to sell a subscription based model which they called Membership, almost as if subscribing to a newspaper allowed you to join a club. Also, see here for the two-tier banking system created by Barclays Bank.

    On the issue of neoliberalism - here is an example of an alternative to the neoliberal/elite ownership model that is pushed by the IMF/World Bank and the Washington Consensus.

    Economic Rebellion of Argentina - Democracy NOW!

    ReplyDelete
  3. Points:

    5. Excessive dependency ratios. The average working Zambian has too many dependents. This is partly due to high birth rates and partly due to lack of education and unemployment. On average one salary supports 15 people. This severely limits nutrition, education and health because all require money.

    and...

    7. Very low levels of employment. Low employment levels result in very low levels of market. People without jobs do not spend much money.

    Are obviously related. It isn't that there are too many people, but that there are too few jobs. And without the money from taxation for a liveable social security safety net, it means that the unemployed, children and pensioners are dependent on relatives with incomes. If employment levels were closer to 90% than 50%, there would be far fewer dependents. And if there was a function social safety network of old age pensions, childcare, unemployment benefits, free education and healthcare, the number of dependents would be even lower still.

    The following points are also connected:

    8. Excessive variations in product prices.
    9. Excessive variations in input prices.
    11. Poor economies of scale due to very limited market.


    Just like in the stockmarket, with low volume or low levels of production and demand, any change in demand or supply is going to lead to price spikes and drops.

    12. Huge distances to cover to reach a large number of customers. To reach a significant number of customers in Zambia requires transporting a small number of products over a large distance. This adds significantly to the distribution costs.

    It also highlights the absence of local production, which comes from high lending rates by the bank and low employment levels as income creates demand. As well as lack of investment in infrastructure.

    But it all boils down to the same things - about $2.5 billion in untaxed and unshared profits from the mining industry go missing from the Zambian economy every year.

    Also, the fact that copper is exported in raw form means that value addition occurs in economies outside of Zambia's border - more jobs and income are lost. Zambia should not only receive at least $1 billion a year in government revenues, they should also manufacture copper into wires, motherboards, and other products.

    ReplyDelete
  4. Ruth,

    4. Excessive licence requirements and fees. An average tourist business in Livingstone needs 40 or 50 licences all of which have to be renewed and paid for annually. This is too many and overloads the business.

    Cho,

    I was intrigued by your point on “excessive licence requirements”. The government has been selling this as one of their major reforms. They believe they are doing well in reducing excess requirements, which currently are a cash cow for bureaucrats! Perhaps the reforms are a mirage?

    On the cash cow for bureaucrats theme - you know I long ago suggested that at least 50% of national revenues should go directly to local government - together with a demand for basic services - healthcare, education, policing/security and administrative issues (no more collecting licenses in the capital, but at the local council office).
    If that happened, the councils present budgets would double or triple, which would mean they could significantly drop or eliminate income from license fees.

    On a general note, if we put the interests of people first and see them as potential producers and employees as well as consumers, instead of seeing business as the answer and people as some kind of drag on efficiency, we can agree on the way forward.

    ReplyDelete
  5. 10.Very high interest rates. Interest rates are more than double inflation rates, at least for borrowers. Savings interest rates are pathetic. This is one reason why banking is one of the few profitable businesses in Zambia.

    I am still intrigued by why this is the case. I have never seen a point by point breakdown of what constitutes lending rates in Zambia.

    The BOZ and Caleb Fundanga have touched on this issue. High levels of government borrowing on the domestic markets (what was their alternative source of income again...), and all kinds of peculiar constraints like people not living in streets with names and houses with numbers comes to mind.

    BoZ urges banks to reduce costs
    By Mutale Kapekele
    Fri 12 Nov. 2010, 04:01 CAT

    CUTS sees high lending rates as drawback
    By Kabanda Chulu
    Mon 08 Nov. 2010, 03:59 CAT

    Musokotwane bemoans disparity in interest on loans, savings
    By Mutale Kapekele
    Wed 03 Nov. 2010, 04:00 CAT

    Gono threatens action over interest rates
    by Cris Chinaka
    31/07/2010 00:00:00


    Chilipamushi accuses banks of running cartel

    By Kabanda Chulu in Kitwe
    Tue 27 July 2010, 04:02 CAT

    Banks’ high interest rates have stifled business growth - ZFE
    By Namatama Mundia
    Sun 04 July 2010, 04:00 CAT

    ReplyDelete
  6. According to the Farmers Gazette the Profit of all banks in Zambia exceeds the turnover of all agriculture. One would say there is something drastically wrong with the economic environment. What is wrong and how to fix it is something I would like to see discussed by Political Parties seeking my vote. So far I am disappointed by the almost total lack of issue discussion in politics.

    ReplyDelete
  7. R. Henson,

    According to the Farmers Gazette the Profit of all banks in Zambia exceeds the turnover of all agriculture.

    StanChart on track for record profit growth
    By LusakaTimes
    Wednesday, November 17, 2010, 16:10

    Standard Chartered bank managing director Mizinga Melu at State House with First Lady Thandiwe Banda

    Standard Chartered Bank Zambia has said its on course to record its highest net profit growth in the 104 years of its existence in Zambia before the end of the year.

    ReplyDelete
  8. The fact that the banking system in Zambia is fundamentally flawed causes a big mix of issues that may go unresolved if the financial system does not undergo drastic restructuring.

    The banking system needs to facilitate the movement of money from the agricultural sector and mining sector to small business owners and zambian owned industries in the form of well portioned loans with affordable interest rates. This obviously doesn't happen and coupled with the numerous hurdles that one must undergo to start (Legally) a business, it completely removes all incentives for innovation.

    We need a well structured constitution that does not put all the power on a few positions and that demands accountability for all motions passed into law.

    When will the government begin to support zambian businesses and not south african and western interests?

    ReplyDelete

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