Informal sector perspective on expensive economy

Zim informal sector

Zimbabwe’s economy has become highly expensive and negatively impacting the informal sector.

High tax rates, inflation rates, foreign exchange discrepancies and highly exclusionary economic measures have discouraged formalisation and undermined the consumption power of the poor majority.

An estimated 85-90% of the country’s working sector has fallen prey to the reactive nature of Zimbabwe’s economic measures.

The juxtaposed free market practices and stringent policies on business and taxation affect development and formalisation of the informal sector.

The downward spiral of social safety nets, adversely affected by Covid-19, rapid inflation and anti-poor tax increases continue to increase statistics of non-formal populations living in poverty and extreme poverty.

Moreover, informal trading has witnessed an increase of no less than 18% since the onset of Covid-19 with wholesale and retail trade, sales, and repair services accounting for almost 50% of the informal sector.

The country’s hidden economy consists mostly of cross border traders, flea market operators and vegetable market vendors.

Average income in formal micro-, small- and medium-sized enterprises in Zimbabwe range between US$130 and US$250, while informal employees and vendors earn enough to live on as little as US$1 a day.

Average household requires around US$206 per month. This implies the importance of increasing formal employment, through heightening formal sector employment opportunities or formalising the informal sector, which allows for cushioning against poverty datum lines for families.

Despite the larger portion of Zimbabwe’s population living below poverty datum lines, at least 38% suffer from extreme poverty but due to definite expenses such as indirect taxes and continuous inflated prices destitution and lowered social safety hedges suffuse the informal sector.

At least 21,6% of tax revenues are collected from indirect taxes through VAT and IMTT. These heavy and unsustainable obligations impede on the attainment of Sustainable Development Goals 1,8,10, and 17 which speak to eradicating poverty, ensuring sustainable economic growth, reducing social and economic imbalances, and strengthening of domestic resources mobilisation and fair tax and revenue collection respectively.

Furthermore, unsustainable taxes discourage formalisation which places additional tax obligations on businesses.

The current inflation rate of 256% also impedes formalisation and growth within the informal sector.

Sources of capital such as savings and loans currently sitting at 40% and 200% interest rates are overtaken by inflation resulting in small businesses avoiding saving their funds and banks avoiding lending to businesses.

This adversely affects business growth, product and service costs and prices as well as profit margins while simultaneously exacerbating lack of confidence in local banking systems.

Majority of consumers of small businesses are unemployed and, in most cases, poor and increased interest rates currently witnessed further plunges in their purchasing power.

Alternatives for the informal sector have been reduced to two main options, that is, cut back on costs and product or service provision or focus on growth.

However, to sustain in this environment, most traders in the sector focus on the latter, resulting in higher chances of illegal business dealings, fraud and other criminal activities to compensate for deteriorating incomes.

The current foreign exchange misalignment between the auction system rate and the free market rate of up to 40% difference bears negative consequences to trading markets.

Resultantly, arbitrage has increased within the auction system while supply of undervalued USD from the same system has propelled black market activities.

The emergence of illegal foreign currency trading since introduction of the local trading bond notes in November 2016 has witnessed a wider operational base and lucrativity as yet another domain within the informal sector.

Devaluation of the local trading instrument discourages fair costing and pricing which disadvantages citizens whose incomes are mainly in local currency.

The central bank’s inadequate funding to meet the high demand of the auction system worsens the current crises as the exports markets are frustrated from shortages and long backlogs and resultantly losing confidence in the system and bidding less.

Majority of trading, being either informal or illegal, dissipates foreign income from taxes and formal forex revenues while discouraging many businesses within the informal sector from participating in the system due to lack of sufficient legal documents, knowledge and information.

The sector being dominated by illiteracy, lack of skills and entrepreneurial capacity is therefore excluded from the auction process, thus keeping the greenback hoarded and stored under mattresses.  There is, therefore, a need for strategies on closing the exchange rate gaps in order to optimise the auction system.

While the main thrust of the gold coin is of value preservation of both foreign and local currency, the price of the coin at US$)1839 is highly unattainable for informal traders and even if the central bank introduces smaller units of gold coins, as alluded to in the Mid-Term Monetary Policy Statement, issues such as enhancing confidence in the banking system still need to be addressed.

Inflationary value instability and shortage of the foreign currency in banks may defeat preservation intent.

The gold coin is also not immune to arbitrage as at auction system the prices is highly undervalued which propels the parallel market as purchase of the coin may attract the devaluing of local currency as well as exacerbate impact of policy loopholes of the buying and selling of the gold coins and further strengthening illegal forex trading activities.

Tighter measures ought to be put in place to curb arbitrage and encourage purchasing in USD while providing for stricter yet inclusive legal requirements.

A strict reduction in printing and supply of local currency is required to control inflation.

Devaluing the local currency forces the informal sector to provide products and services in USD or exaggerated ZWL prices. Consumers, especially civil servants with low and mainly local currency incomes are pushed further into poverty as a result of depressed consumption capacity.

The informal sector influences the transmission of economic shock and as such makes monetary policies less effective as only formal businesses are bound by financial and legal obligations and regulations as well as access to financing.

Therefore, money supply plays a crucial role in the formalisation of the informal sector as well as inclusiveness of sources of credits and funds.

The provision of conducive and safe working environments by the government for informal traders and small businesses has been hampered by the expensive economy which is burdened by high external debt, low productivity, and public budgets.

As a result, the sector cannot access affordable safe business infrastructure. Money markets and macro-economic downturns lessen provision of social services such as education, healthcare and safe water to informal traders making the financial obligations more than their earnings as their children are pushed out of education prematurely, forced to seek private medical care or other unsafe and unregulated medical alternatives in the event of disease outbreaks caused by the polluted business environment.

Zimbabwe’s expensive economy has hit the informal sector hardest as tax obligations discourage formalisation, high interests have encouraged illegal business activities, and economic measures are highly exclusionary.

The government should take measures to provide fair tax systems, realistic money markets, and prioritise social safety nets for the sector.

  • Jaravaza is a Policy Analyst and she writes in her personal capacity. These weekly New Horizon articles published in the Zimbabwe Independent are coordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society (ZES) and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). —  [email protected] and mobile No. +263 772 382 852.


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