The Zimbabwe Independent

Informal sector perspectiv­e on expensive economy

- Vanessa Jaravaza policy analyst

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). — kadenge.zes@gmail.com and mobile No. +263 772 382 852.

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