HARARE – Central Government has no reason to support the informal sector at the expense of formal businesses, whose contribution to the economy is enormous, but rather focus on creating an enabling environment where it can harness maximum revenues from a wider tax base, according to economists.
This follows remarks by Finance, Economic Development and Investment Promotion Ministry secretary, George Guvamatanga, who has in the past belittled the combined impact of tuck-shops on formal retailers, instead hinting that most businesses are being run by managers who lack adequate knowledge on how to navigate new economic dynamics.
He quizzed the rationale behind big retailers who complain that they are not able to compete because they have been taken out of business by tuckshops, which are largely informal.
Major retail players from diverse sections of the economy, like food, clothing, textiles, and footwear, have fallen victim to the sprawling informal sector players, resulting in reduced margins and profitability.
Economists are of the view that the Government has occasionally been promoting the existence of the non-tax-paying informal sector, as it has in some instances instituted Statutory Instruments that allow individuals and corporations to import merchandise duty-free, which erodes the competitiveness of local products.
“There is no rationale for the Government to support the informal sector, but the Government should be able to collect maximum revenues by creating an enabling operating environment. Therefore, the Government has to encourage formalisation of all businesses in the country and tax compliance because an informal sector will be a huge burden to the economy,” economist Victor Bhoroma told Business Weekly.
He said comments by the Finance Ministry’s secretary are consistent with Government views that businesses are profiteers and anti-government policy at times.
“But based on the country’s tax regime and business environment, they don’t see anything wrong. The words represent common standing by the Government that businesses are cry babies,” he noted.
According to the Retailers Association of Zimbabwe (RAZ), a body that represents major retailers such as OK Zimbabwe and Pick n Pay, the sector players used to contribute more than 20 percent to Government revenue through value-added tax (VAT) and other forms of remittances, which has since declined due to reduced volumes within formal retailers.
Metro Peech recently folded operations, while entities like Choppies are apparently struggling, as witnessed by the recent closure of the Harare Street branch in the capital due to rental issues.
Choppies, in its recent financials, said Zimbabwean consumers have significantly shifted to shopping at smaller stores from formal retailers because smaller outlets are able to operate with lower overhead costs.
According to Bhoroma, most retailers are struggling and most of their challenges are issues of currency and competition from the informal market.
“Formal retailers operate in a very different model compared to the informal sector. The informal sector can operate a multi-million-dollar business from a garage, employ two or three employees, and still be able to operate efficiently.
“But these formal retailers cannot be able to copy the model. The two models are very different, and the formal operates in the eye of the Government, city and town bylaws, and paying taxes, while the other does not follow the by-laws of the city and does not follow any tax dictates of ZIMRA,” he said.
He added that the formal sector cannot go informal or informalise some of its operations, but what is needed is an efficient exchange rate system and protection of the formal players because there are value chains that feed these retailers, which employ many jobs.
“The tax payments made by formal retailers are huge, and most of these retailers’ tax contributions are so huge; hence, what the Government needs to do is look at their issues seriously and be able to consider the plight of those employed; otherwise, there isn’t much room for these retailers to informalise their operations, which will amount to tax evasion,” said Bhoroma.
Earlier in the year, Finance Minister Professor Mthuli Ncube, indicated that Government was losing circa 25 percent of the revenue collections due to increased informalisation.
However, Bhoroma said what is needed is the right policy mix, especially on foreign exchange control, remittances, and how shareholders abroad can be able to repatriate their dividends from Zimbabwe.
“This should be catered for by a stable financial services sector, which is key because we need positive interest rates and allow investments.
“Formal retailers operate on very thin margins, so interest rates are very key. When they pay rentals, they do so in hard currency, which means they also need to generate these revenues in a stable currency.
“Therefore, the Government should provide leeway to be able to sell at their own determined foreign exchange rate, and the Government will be able to collect as much tax revenue, which will also contribute to the pricing of most goods that we see and the value chain,” said Bhoroma.
He noted that it is not for the formal retailers to adapt but for the Government to look at the policies that are contributing to the decline in business in formal retailers, while the informal market needs to be formalised.
In the same context, manufacturers continue to supply goods to unofficial traders in search of the US dollar despite concerns from the Government that they should follow proper supply and distribution channels.
Dr Sithembiso Nyoni, the new Minister of Industry and Commerce, warned last week that manufacturers were cutting out wholesalers and causing market chaos.
An economist and former member of the Reserve Bank of Zimbabwe monetary policy committee, Eddie Cross, said Guvamatanga’s statement criticising OK Zimbabwe’s management and performance was not only inaccurate but an insult to a group of companies that have served Zimbabwe well for many years and continue to show a high level of competence and commitment to their clients.
He said anyone with any knowledge of marketing and the retail environment just needs to tour the lower end of the Harare CBD and Mbare to see for themselves the staggering volume of business being conducted in the informal sector.
“One major cool drink manufacturer stated that 70 percent of their sales are now in this sector and 30 percent through conventional formal sector retailers.
“The price differentials between the two sectors are staggering in many cases—certainly, on average, over 30 percent.
“The reasons are: no tax, no import duties paid, no VAT, and very little overhead,” he said.
Cross added that smuggling is rampant, as is the sale of products often stolen in neighbouring countries and sold here because USD is freely available. “Money laundering may also be a reason,” he said.
Cross indicated that the Secretary’s statement shows a disappointing level of understanding of the crisis the formal sector faces today in Zimbabwe.
“Not only are we heavily taxed and pay our taxes when due, but we also have high overheads because our clients demand high standards,” he said.
He added; “The sector operates in a dollarised economy where we cannot compete with imports that flood our markets, and most are smuggled—import duties collected at our border posts are not even representative of car imports, let alone everything else.
“The result is that the key engines of job creation—industry and agriculture—are losing ground,” said Cross.
He added that despite all the promises, the local currency remains unstable and inflation is on the rise again.
Economist, Dr Prosper Chitambara, said the environment makes it difficult for formal businesses to compete with the informal sector because the cost structures are very different.
He said the strategy of the formal businesses should be to manage costs and also come up with these smaller retail outlets targeting the informal sector.
“The Government needs to continue to improve the business environment as a way of also encouraging informal traders to formalise and reducing the cost of doing business in general. Whether it’s in taxation, regulatory frameworks, or rates by councils, there is a need for a comprehensive reform agenda,” he said.
Another economist, Vince Musewe, said formal retailers have had to face challenges around USD rates, fueling inflation and having to sell in Zimbabwe dollars, which resulted in the continuous adjustment of prices upward, making them uncompetitive.
On the other hand, he said the consumer market has become very price-sensitive.
“Tuckshops have the advantage of low overheads and sell in USD, and in fact, manufacturers sell directly to them because it’s a USD cash basis for them.
“Despite this, Zimbabwe must reinvent itself. The market structure has changed so that the informal sector is more liquid, more dynamic and more creative.
“The retail sector must reinvent itself to gain consumers back, while it is also important to regulate informal markets. A win-win approach is best for consumers and the economy at large,” he said.
Harare-based economist, Zvikomborero Sibanda, noted that the economy is now almost 70 percent informal, and over the years, economic tightening tax regimes have been driving the growth of the informal economy.
He said the retailer’s issues are valid, but they have to consider that the economy is largely informal and most people are working within that sector.
“The world is evolving; technology is on the move along with the evolving economy. The formal retailers should be innovative to remain relevant in the market,” he said.
He said the government should be innovative to ensure these tuck-shops contribute to government revenues through taxes.
However, Secretary Guvamatanga said the Government supports “law-abiding entrepreneurs who comply with government structures available”.
“It’s not this one versus the other, we are not saying tuck-shops should close and remain with big businesses, or the reverse. The tuck shops are necessary, but they have to be formal, and legal, bring their things legally, and pay the necessary taxes.
“In most other countries, they are in competitive advantage because they would ordinarily fall below the taxable threshold and that is why they are always cheaper.”
Secretary Guvamatanga said his comments that big retailers should innovate were not misplaced because in South Africa Shoprite has container shops in areas traded by informal traders. – Business Weekly