Managing informality in the Zim economy

Informalisation is an existential threat to formal businesses that produce or trade in the same line of business.

ZIMBABWE’s economy is experiencing a major structural shift from an agriculture-based economy, which traditionally had very strong linkages to the manufacturing sector, to an economy dominated by wholesale and retail trade.

The last three years have seen a massive surge in retailing with the dominance of the informal trade in urban, peri-urban and rural areas of the country.

The 2022 Labour Force Survey published by the Zimbabwe National Statistics Agency (Zimstat) points that of the 3,122 million people employed in the economy, close to 2,8 million derive their living from the informal sector as opposed to less than 500000 in formal employment.

Zimbabwe’s total labour force in 2022 was 3 861073 and the total number of those employed was 3 122352 (Up from 3035,419 in 2021). Additionally, a significant portion of those formally employed are engaged in informal trading activities to support their formal income.

Dual economy

The formal sector and the informal sector have become two distinct economies in Zimbabwe with the earlier vulnerable to a complex tax regime and inconsistent monetary policies while the latter has no regard for both.

The informal sector (predominantly dollarised) contribution to Gross Domestic Product (GDP) is estimated to be below 50%, which translates to about US$11 billion if the 2022 GDP figures are considered.

Zimstat recently pointed out that 77% of domestic expenditure is done in foreign currency, which also means that billions of transactions are done in hard currency.

However, the hard currency trade is not proportionate to what the Zimbabwe Revenue Authority (Zimra) records for tax collection purposes or the deposits in local commercial banks. The huge disparity shows that the central bank has limited control on the informal economy transactions and its monetary policy is only limited to the few compliant formal players.

What is fueling informalisation?

The level of informalisation in the country is now estimated to be between 65% and 70% due to several push and pull factors such as high inflation in local currency which pushes traders to a stable currency and poor remuneration in the formal sector.

The punitive foreign exchange regulations, which compel businesses to surrender hard-earned foreign earnings at manipulated exchange rates are also doing a disservice to the nation. Often, businesspeople have found it extremely difficult to impossible to move capital or dividends in and out of the country through formal banking channels.

Thus, the solution to them is never bank sales proceeds or disclose correct level of earnings. Zimbabwe now has weak economic and government institutions and high levels of corruption that give room to rent-seeking behaviour.

There is also low tax morale, high levels of unemployment, overregulation, limited automation in tax collection and increase in poverty levels that aid informalisation. It has been observed that developing countries with a large agricultural sector also tend to have high levels of informalisation as trade in agricultural commodities between farmers and merchants are typically cash transactions. 

Complex tax regime

Zimbabwe still commands a very complex tax regime punctuated by multiple tax heads to various government departments (especially state entities and parastatals) and frequent renewal of licences and permits.

Tax compliance is also complicated by fiscal policy inconsistency as businesses must conform to frequently changing requirements on taxation. According to the survey conducted by the Zimbabwe National Chamber of Commerce (ZNCC) in 2019, a business operating locally will have to make at least 51 payments for various tax heads for it to be considered tax compliant.

The local taxation complexity has to do with a limited automation (manual paperwork), archaic laws, payment in different currencies, need to travel to major cities to make tax contributions and the multifaceted government departments involvement.

Thus, the level of informalisation is higher in rural areas where digitalisation and formal banking channels are limited.

Equally, Zimbabwe’s monetary policy is far from being consistent, in the last 15 years the local currency (notes, coins or electronic) has assumed at least five different names while on the other hand, there is no free-market price discovery in foreign currency trading.

Thus, there is no incentive to trade currencies in the financial system unless compelled by the law. The central bank issues a plethora of circulars and regulations which are sometimes contradictory. The high levels of money printing andresultant inflation leads to low confidence in the local currency, loss of savings and income for households which inflames informalisation.

Poverty and informality link

Informality is a factor of vulnerability, with millions of employees in the informal sector lacking job and social security, income consistency, health insurance, savings and living from hand to mouth. All these conditions are closely associated with poverty.

According to Zimstat, extreme poverty in Zimbabwe has been rising over the past four years, growing from 29% in 2018 to 34% in 2019, 49% in 2020 and 43% in 2021. This means that approximately 2,2 million Zimbabweans have sunk into poverty since January 2018.

Zimbabwe’s poverty levels are nearing even distribution between the rural and urban areas. Therefore, the decimation of industry and collapse of the formal sector is leading to the accelerated urbanisation of poverty.

High informalisation unsustainable

Zimbabwe’s informal sector bears a mark of economic resilience, however, high levels of informalisation are unsustainable for any country as it leads to limited tax mobilisation on the part of government.

This leads to poor public service delivery (core responsibility of the government). This is evident in the rate of decay in public infrastructure, such as hospitals and clinics, railway, roads, accommodation, water and sewer reticulation amenities, power generation infrastructure, education and specialty training colleges, sports facilities and other facilities.

The state of governance and service delivery has virtually collapsed in some instances. Similarly, the government has limited capacity to repay its public debt and arrears which amount to at least US$18 billion. 

While the informal sector is growing, it cannot be excluded from consuming all the public services above despite not contributing to tax payments. Over and above the negative aspects mentioned already, high levels of informalisation lead to a limited credit market and savings growth in the economy, limited growth in the financial and insurance sector (decline in banking sector lending and geographical presence).

Informalisation is an existential threat to formal businesses that produce or trade in the same line of business. The current government policies do not protect the formal players that voluntarily pay taxes and contribute to the fiscus.

Informalisationalso nurtures and aids corruption, illicit trade and criminal activities in the economy. Thus, it is of paramount importance to reduce Zimbabwe’s informalisation levels to below 40% of the economy to ensure sustainable economic growth.

Tax registration and fiscalisation

There is an urgent need to remove barriers to formalisation through simplifying the tax registration process and providing incentives to fiscalisation. Treasury must make the cost of fiscalisation tax deductible, significantly lower the cost of fiscal machines, or alternatively partner commercial banks to spread the cost of fiscal machines over a long period.

This means that tax payments and filing tax returns should be done efficiently online without visiting the tax agency.

For the few tax compliant businesses, tax rebates must be processed efficiently with limited human intervention and tax holidays should be awarded where it is necessary.

As is the case in most countries, all businesses should have legally traceable banking accounts that match their sales proceeds. Thus, tax evasion should be ruthlessly criminalised and penalties levied to discourage informalisation.

However, this must be matched with efficient public service delivery and transparency in tax utilisation where public service delivery is prioritised before political wastefulness.

Effective revenue collection

Zimra’s systems should not be limited to real time tracking of transactions in the economy but analysis of historic data of who is supplying what (locally produced or imported), to who, at what price, in which currency, from where and on which terms (chain tracking of transactions).

This means that there is need to invest millions of dollars in automation (modern computer servers and processors), continuous data capturing and analysis. The investment can be done through loan facilities from the banking sector since such projects are self-funded from the extra tax revenues.

Effective tax collection empowers the state, reduces need to borrow from the central or external financiers and critically for Zimbabwe, it limits the need to print money to fund government projects.

For sustainable economic growth, supply side incentives to re-industrialise the Zimbabwean economy and diversify the economy (to more value addition and beneficiation of raw exports, and services) are key to formalising the local economy.

As the population grows and economic instability persists, deliberate policies must be implemented to reduce informalisation and eliminate all policy-related barriers to formalisation.

Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe — [email protected] or Twitter @VictorBhoroma1

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