What to Look Forward to in 2017
There is no shortage of doom and gloom analyses of Zambia’s recent economic short comings. Dooms day pundits were effortlessly chanting illconsidered mantras of depressed copper prices, exchange rate nightmares, prolonged black outs and empty fuel pumps all before a general election that sent jitter amongst cautious investors. Counterintuitively, the level of interest in investing in Zambia continues to rise.
As business advisors in this industry for close to a decade, this year marks a new high for enquiries to prepare business plans, support acquisitions, disposals and develop market research studies. Whilst the narrative of negative economic performance is predominant, Zambia’s harsh economic climate will affect consumers and producers positively. Examined from this perspective, three good things will happen in 2017, and with the right government interventions, this can happen even faster.
Granted, large established businesses in Zambia will be convinced by the negative expectations of poor economic performance, and will make the decision to exit the market. Local lamenters will cry, “How can they leave? Investor confidence in Zambia is falling”, and the answer to that from the unemotional shareholders will be, “if our business interests do not meet performance targets, we must sell.”
Therein lies the opportunity for more robust players to enter the Zambian market, to acquire such mature businesses and restructure them. This will result in improved services at more competitive rates, a process that has already begun and will accelerate in 2017. The writing is on the wall in the manufacturing sector with the exit of Phelps Dodge, one of the founding shareholders of ZAMEFA, and the arrival of the UK’s largest life insurer Prudential.
The catch is that multinational companies tend to have one size fits all policies across Africa, without doing research and looking into what local consumers really want, for instance, being inundated with offers to transfer money to relatives in distant rural areas, or make calls at midnight, is hardly relevant to an urban based family that sleeps all night. If MNC’s continue to market products and services in this way it will be a costly and fruitless exercise, regardless of the strength of the investor, in name or pocket. Consumers are now more cautious about their expenditure, not that they are unable to spend their hard earned wealth, but rather investors in such times will need to research and innovate more in order to tap into their pockets.
In this new business climate, foreign direct investment will increase. Yes increase. Interest rates in more advanced economies are hovering around 1%, while commodity prices remain depressed. These two factors alone mean that if you have access to international capital and invest it in a business that has Kwacha costs and US$ revenues, you are on the path to becoming the next Dangote. Zambia’s agricultural potential falls into this bracket with investments in cotton, maize, soya, tobacco and other cash crops in a position to grow rapidly. As that unfolds, we can expect foreign direct investment, particularly into the agricultural sector, to rise sharply.
As the cost of imports rises, our local manufacturers will hold the advantage, partially offsetting Zambia’s negative balance of payments position. Cash strapped consumers will be forced to try out and consume more local products. If our manufacturers can source more local materials, they will have greater control over their costs and demand for their goods will rise. Increased sales will allow them to invest their proceeds into growing production capacity, and exporting their cheaper products. Walking through the supermarkets today, we see trollies brimming with local brands, Amazon chips, Boom Bubble plus detergent, Thirsty orange squash, Rivonia tomato sauce, but where are the replacements for diapers, toothpaste, spaghetti, instant coffee… the list goes on for too long?
Now that we know what to expect, there are few tools the government can use to get us there quicker.
Zambia would do well to reduce corporation taxes for exporters. Reduced tax rates for local manufacturers would free up more capital to reinvest in growth, further improving our BOP position. Government should investigate the level at which foregone tax revenues is cheaper than paying interest on loans to cover the BOP deficit.
If the government took the bold step to zero rate import duties and VAT on all capital equipment, even for a limited period of time, it would have a lasting impact on Zambia’s production capacity. To a limited degree, these measures are already in place and have worked in the past however, the VAT measures in particular do not benefit small businesses operating under the mandatory VAT registration threshold. As things stand, an entrepreneur starting a fledging business pays 16% more for their capital equipment than a well-established VAT registered business.
Government should also give consideration to suspending the policy of collecting withholding taxes on consulting services, the core technical expertise driving the economy such as services provided by engineers, architects, agronomists, lawyers and accountants just to name a few. This ultimately reduces the cost of doing business in Zambia, and will attract more investment.
Withholding taxes are fully recoverable so in theory they do not interfere with business operations, however, in practice they take up to three months to claim. The knock on effect is that these key business intermediaries borrow to cover their working capital needs and that cost is passed on to their clients. If the measure was suspended until adequate IT infrastructure was put in place to facilitate immediate claims, it would be possible to achieve its objectives without increasing the cost of doing business.
Next year will be yet another opportunity for Zambia to stand out as a leading investment destination, giving attractive rates of return, creating employment, generating foreign exchange and much needed tax revenues. In your next reading of Zambia’s economic prospects, remember the opportunities that lie ahead, now more than ever.
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