Informalisation threatens formal business viability

Informalisation threatens formal business viability

WHEN Zimbabwe attained its independence, the informal sector as a percentage of the overall economy was very small. A research by Zimbabwe's Economic Policy Analysis  and Research Unit estimated the informal sector at under 10% in 1980, but that number had almost tripled by the mid-90s.

Right now, estimates put the informalisation figures above 60% and it is now a major problem for some of the formal businesses.

Major formal businesses in Zimbabwe claim that they have found a new route to the market. This entails most producers reducing the number of products they channel via formal retailers and, in some cases, completely eliminating those middlemen.

It is now common practice in Zimbabwe that some locally manufactured products can now only be found at the tuckshops and not in the formal retail outlets.

Although these groceries are termed tuckshops, on average they are not by any means small enough to justify the name. It is only after you spend the day downtown and ask a few questions that you realise that, in fact, some of their daily turnovers compete with those of formal and traditional supermarkets. Immediately the question one then asks is, why then is this the new route to the market? The answer lies in the cash transactions that these tuckshops conduct mainly in foreign currency. Since the de-dollarisation exercises started, Zimbabwe has been vulnerable to all the evils of inflation.

 Under an inflationary environment, producers would prioritise foreign currency sales and cash transactions are preferred to the credit terms that most formal retailers use.

This has been exacerbated by the disparity between the purchasing power of the foreign currency at the tuckshops and in the formal retail outlets.

The managed official exchange rate has seen some products effectively costing double in the formal retail for someone who wants to transact in foreign currency.

With the law very clear about the price to be paid by anyone who deviates from the allowable official exchange rate margins, the formal market has been forced to comply and, in the process, lost a huge customer base.

The scrapping of import duty and Value Added Tax (VAT) for some basic commodities earlier in the year did not make the situation better for the formal business.

In fact, it only opened them up to all sorts of competition as the cost to import these basic commodities was reduced. Those who justify the new route to the market will tell you that the retailers were initially greedy, they chose to keep all the foreign currency from sales and paid producers with local currency.

Whether these allegations are true or not, it is now very clear that those businesses down the value chain in Zimbabwe now prefer to do business with the informal sector as opposed to their fellow formal businesses.

If you read through the integrated reports of listed producers, you will realise that they now report large forex sales using near-cash channels.

 These near-cash channels, in most cases, are not subjected to rentals and corporate tax like the formal retailers. To confirm this, listed retail outlets like OK Zimbabwe, which runs the biggest retail chain in the country complained in their 2022 financials about the uneven playing field posed by this informalisation. To be fair to local manufacturers, the informalisation is not only in the fast-moving consumer goods sector, it is almost across the board.

The clothing industry is another one that has been hit seriously by the competition provided by this informalisation. Traditionally the competition was in the form of second-hand clothes, but now it has improved to the new clothes. Listed clothes retailers like Truworths Limited have since started closing some of their branches in strategic areas like the CBD.

The evils of this wave of formalisation is now even being felt in the real estate and property market. Property owners are actually realising that they can also squeeze higher and foreign currency returns by reconfiguring their buildings to suit the needs of smaller retailers.

This gentrification process has seen buildings in the CBD replacing some of their long-term tenants with partitioned spaces for smaller retailers.

The mining sector is not spared by the informalisation cycle.

According to official numbers by the Reserve Bank of Zimbabwe (RBZ), two-thirds of gold production last year came from the small-scale and artisanal miners. These are usually informal in nature whilst the primary and formal businesses produced the remaining third.

Analyst’s comment

The temptation to conclude that formal businesses especially the retailers failed to adapt and change is very high. Whether that is the case or not, does not matter anymore to business. The consequences of this informalisation are felt by all the economic agents. The multiplier effect of formal business comes through the employment they create and their contribution to the national tax pot.

With most of the informalised market paying minimal tax or nothing at all, economic development becomes very difficult. The next alternative, which is not an alternative really, will be the printing of money, and countries like ours have suffered from the evils of that already.

Albeit a lot of indications are that the Zimbabwean economy has grown since the dollarisation era, the annual tax collections continue to play between US$3billion and US$4 billion depending on the exchange rate used to convert. As long as the informal sector does not contribute to tax the number will not grow.

To curtail the informalisation in the country, the monetary front has to be solved as I opine that it is partially responsible for the mess.

The fact that economic agents do not have confidence in the local banking institutions and local currency should be dealt with before we can significantly reduce the informal sector in Zimbabwe.

The “new route to the market” is attracted by the currency of choice and that should never be an advantage that one retailer has over another economic agent due to national policy.

  • Hozheri is an investment analyst with an interest in sharing opinions on capital markets performance, the economy and international trade, among other areas. He holds a B. Com in Finance and is progressing well with the CFA programme. — 0784 707 653 and Rufaro Hozheri is his username for all social media platforms.

Related Topics