Perils of uncontrolled informalisation
THE placement of Metro Peech and Browne under corporate rescue on August 31 2023 under the Insolvency Act was just a tip of the iceberg to a wider problem affecting the Zimbabwean economy.
Metro Peech and Browne is one of Zimbabwe’s biggest wholesalers and retailers with 19 branches nationwide.
However, this is notwithstanding the investment miscalculations and governance inefficiencies that saw the demise of the firm.
Foreign exchange related losses, high levels of inflation, decline in consumer spending and currency uncertainties have become a permanent feature in annual reports for most stock exchange listed companies in the past five years.
The continuous depreciation of the local currency and surge in the cost of doing business has piled more pressure on the volatile formal business climate in Zimbabwe. With the demise of formal retailers, so rises the informal sector.
Economic shift
Zimbabwe’s economy has shifted from being agrarian based to a wholesale and retail economy. Statistics by Zimbabwe Statistical Office (Zimstat) show that Gross Domestic Product (GDP) contributions, according to the economic sector show the dominance of the wholesale and retail sector with its percentage share growing from just under 14% in 2015 to 25% in 2022.
This means that on paper, the sector is pushing at least US$8 billion in transactions per year. However, a huge chunk of these transactions are happening in hard currency and through informal channels.
Therefore, transactions done informally now dwarf those done in the formal sector. The last three years have seen a massive surge in informal retailing in urban, periurban and rural areas of the country.
Economic estimates point that the level of informalisation in the economy now exceeds 75%, while Zimstat highlighted that nearly three million Zimbabweans derive their living from the informal sector as opposed to less than 450 000 in formal employment (declining daily).
Besides the monetary related causes above; informalisation is also triggered by low tax morale, high levels of unemployment, over-regulation, limited automation in tax collection and extreme poverty levels among households.
However, it is unsustainable for the government to give a blind eye to policy concerns raised by the formal retailers as they are just a mouthpiece of the entire business sector.
Similarly, the government can never praise or admire the informal sector practices as informalisation is a double-edged sword that kills the state, the economy and curtails development for small businesses themselves.
Widening of fiscal deficit
The Treasury has been unable to fund basic public services for the growing population with access to basic health care in a deplorable state from staffing, remuneration, equipment and infrastructure maintenance.
The same can be said on access to clean water, electricity, roads, public education, police, prisons, defence and other public amenities critical to human survival.
For the past 10 years, treasury announces budget deficits of at least 6%, which have to be funded by issuing treasury bills and out of statute abuse of the central bank overdraft window.
Since 2018, Treasury has appealed to Parliament for condonation for unauthorised expenditure amounting to over US$3 billion (after revaluation).
Similarly, money printing by the central bank to fund parallel government projects has been the main cause of local currency depreciation and inflation. Zimbabwe’s total Public and Publicly Guaranteed (PPG) debt (external and domestic) including Reserve Banks of Zimbabwe debt was estimated at ZW$10,97 trillion (US$17,6 billion), as at end September 2022.
With real tax revenues declining due to informalisation (against the growing population needs), the fiscal deficits will continue to widen and there will be no room for Zimbabwe to pay for its debt or access new lines of credit in the medium to long term.
Illicit financial flows
It is estimated that Zimbabwe loses over US$1,5 billion every year through Illicit Financial Flows (IFFS) that could potentially benefit the country in terms of tax revenues, foreign exchange supplies and downstream payments in various value chains.
Illicit flows take various forms from minerals and merchandise smuggling, tax evasion, foreign currency externalisation (in hard currency), overstating foreign supplies and tax evasion by businesses.
With the growth of the informal sector, smuggling at the country’s border posts (especially Beitbridge and Chirundu) has become big business as the market for smuggled merchandise has been left to flourish with government blessings.
Tax authorities and the government highlighted that Zimbabwe could be losing at least US$1 billion in potential taxes at its borders due to lax customs and security.
Deindustrialisation
Zimbabwe’s industry has strong linkages to key sectors such as agriculture and mining where raw materials are produced.
The informalisation is gradually eliminating any hope for industrialisation locally as value chains are decimated by informal middlemen, who source commodities from South Africa and China while undercutting local producers, who pay taxes and support thousands of jobs.
Zimbabwe’s manufacturers cannot compete with manufacturers from key trading partners, such as South Africa, China, India and Singapore due to local market dynamics, which include limited market size, poor infrastructure, economic instability, power cuts, high cost of haulage and capital among others.
The surge in inflation has also increased the cost of production locally. As such, local producers are also finding it hard to compete on price locally or in regional markets and the composition of imported raw materials that goes into local production has increased astronomically.
Manufacturers import close to 80% of raw materials they use to produce fast moving consumer goods.
The figure is virtually 100% for industrial consumables, such as packaging material, industrial chemicals, steel and aluminium, machinery and other intermediate goods, which Zimbabwe used to produce before 2000.
With open cheque informalisation, there is no hope of competing on value-added exports in the AFCFTA on the same footing with other African countries.
Decay in public infrastructure
The state of public infrastructure in the country is now distressing due to several years of neglect and underinvestment over the years. The country’s infrastructure gap in railway, roads, energy, sports facilities, border posts, public health care, water and sanitation is now huge.
A 2019 report by the African Development Bank (AFDB) pointed out that Zimbabwe needed over US$34 billion in the next 10 years to upgrade its infrastructure so as to achieve sustainable levels of economic growth.
This means that the country needed to invest US$3,4 billion each year up to 2030 in order to keep up pace with developments on the continent, especially with fast developing peers in the Sadc region.
Investment in power generation to reduce continuous power cuts, urban water and sanitation, highways, urban roads and health care infrastructure have become so critical.
However, the Treasury cannot finance any meaningful capital projects as tax revenues cannot sufficiently cover public projects to generate economic growth in the country.
Access to foreign credit has also been sanctioned due to arrears, non-payment of debt and other political considerations. Hence, only domestic resources are available for infrastructure development or growth.
Accelerated informalisation is corrosive to maintenance of public infrastructure as informal players cannot be excluded from consuming public infrastructure, using or abusing it. The tax collector bears the burden to invest and maintain it to ensure economic growth.
Collapse in social security
Informal sector work lacks job security, income consistency and insurance. The collapse of the formal sector hampers any efforts to improve social security, boost savings and pensions in the economy.
The pensions and insurance sector forms a key cog to investment in modern economies with billions of funds reinvested in various sectors of the economy.
Over and above the negative aspects mentioned already, high levels of informalisation lead to a limited credit market growth in the economy. Thus limited growth in the financial and insurance sector (decline in banking sector asset base and geographical presence).
Zimbabwe has 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 monetary and fiscal policy inconsistency as businesses must conform to frequently changing requirements on taxation.
Given a conducive policy environment, the millions that exchange hands outside formal banking channels would help curb foreign currency shortages, contribute to banking sector stability, tax revenues, and bring economic stability.
Between 2015 and 2022, the country promulgated hundreds of statutory instruments aligned to monetary policy and produced a plethora of exchange control regulations or statements.
Informalisation is an existential threat to formal businesses that produce or trade in the same line of business while abiding by the state laws.
The current government policies do not protect the formal players that voluntarily pay taxes and contribute to the fiscus. Informalisation also 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.
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