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.
Sunday, 14 November 2010
12 reasons why profit margins are low in Zambia
By Ruth Henson