THE World Bank has called on Zimbabwe to address the growing challenge of the informal economy by eliminating macroeconomic regulatory hurdles for small and medium enterprises (SMEs) and reforming the intermediate money transfer tax (IMTT) to foster a more conducive business environment.
According to the World Bank, this has potential fiscal gains for the country.
Estimates by the global lender suggest that formalisation has potential medium-term gains like increased tax revenue collection.
Informality is a deeply entrenched issue that can persist for years. To re-formalise or re-establish formal private sector operations and recover lost tax revenue becomes a lengthy and challenging process.
The Zimbabwe National Chamber of Commerce (ZNCC) suggests that the informal sector accounts for 64,1 percent to 64,3 percent of the country’s gross domestic product (GDP).
Locally, calls for formalisation from businesses continue to grow louder as the formal sector increasingly feels the pinch of the emergent informal economy.
Major retail players from diverse sections of the economy, like food, clothing, textile and footwear, have fallen victim to the sprawling informal sector. They have since urged the Government to bring the situation under control.
Informalisation is undoubtedly bleeding the fiscus, and the situation is fast deteriorating. The Minister of Finance, Economic Development and Investment Promotion, Professor Mthuli Ncube, has long alluded that the Government is losing approximately 25 percent of the revenue collections.
According to the Retailers Association of Zimbabwe (RAZ), major retailers such as OK and Pick n Pay previously accounted for over 20 percent of Government revenue through value-added tax (VAT) and other payments.
However, this contribution has significantly declined as the informal sector has expanded, now dominating the local economy.
The informalisation scourge is cross-cutting; even formal hardware shops are battling it out with enterprises that are rampantly importing non-duty-paying stock from beyond the country’s borders.
Textile companies have also not been spared.
The textile industry has also sounded the alarm, citing the devastating impact of informalisation on formal businesses.
Companies in the sector are struggling to compete with counterfeit and cheap imports, which are being sold at prices lower than local production costs, severely undermining their viability.
Analysts are of the view that the growing informalisation is rebuffing the Government’s drive to promote the use of the local currency, given that almost 100 percent of the informal players are trading in USDs.
“World Bank recommends the Zimbabwean Government to reverse the trend of informalisation by removing macroeconomic obstacles, high compliance burdens for SMEs and reforming the IMTT.
“Informality is an extremely persistent phenomenon, such that it can take years to re-formalise the private sector and regain tax collection,” said the World Bank.
Analysts contend the Government’s introduction of statutory instruments that permit duty-free imports in the past have effectively turned the country into a dumping ground for cheap goods.
This approach has undermined the development of local industries, hindering their growth potential.
Recently, the Confederation of Zimbabwe Retailers president, Mr Denford Mutashu, said the widespread growth of informal economic activities, especially in the retail and wholesale sectors, presents a substantial risk to the long-term viability and survival of formal businesses.
“The proliferation of informality in the economy, particularly in the retail and wholesale sector, poses a significant threat to the sustainability of formal businesses. This informality has several negative consequences, including tax evasion, illicit financial flows and the undermining of the local currency.
“Unregulated financial activities in the informal sector facilitate money laundering, while the widespread use of foreign currencies in informal markets further erodes public confidence in the local currency,” he said.
RAZ representative Mr Themba Ndebele lamented the rapidly informalising economy, stating that it was severely draining the country’s resources, resulting in substantial losses of revenue from unpaid levies.
“People are simplifying things when talking about informalisation; we simplify it and talk about selling vegetables and bananas, that is not the issue and one day it is going to consume all of us, because the country is now having a lot of imported manufactured products coming from outside without duty payable, which is a loss of Government revenue.
“The informalisation that the country is going through at the moment is unprecedented, and it has serious implications on the fiscus,” said Mr Ndebele.
Zimbabwe has one of the largest informal retail and distribution sectors in Africa and ranks fifth globally, trailing behind countries like Bolivia and Chile.
However, the Governement has unveiled a series of measures to formalise the informal sector. – Sunday Mail
