Zimbabwe has world’s second largest informal economy

A vendor waits for clients while selling bags on the streets of Harare, Tuesday, December, 20, 2016. In Zimbabwe Christmas in most likely to be postponed at least in the merry making sense which most people associate the Christian Holiday with.With the economy imploding , many who cannot afford the bare basics will be happy for a meal for the day, never mind Christmas.(AP Photo/Tsvangirayi Mukwazhi)

Experts say innovative measures and policies are critical in getting the best out of Zimbabwe’s growing informal economy.

Latest International Monetary Fund (IMF) figures show that Zimbabwe has the second largest informal economy as a percentage of its total economy in the world at 60, 6 percent.

According to an IMF working paper titled “Shadow economies around the world: What did we learn over the last 20 years?” the leading country in this respect is Bolivia at 62, 3 percent.

Basically, the informal economy (known by different names such as the shadow or hidden economy), includes all economic activities which are concealed from official authorities for monetary, regulatory, and institutional reasons. But this is not necessarily a bad thing, according to some international economists.

Analysts at Akribos Research Services say the informal sector can also drive consumption of local products.

But the main disadvantage is that it limits governments’ revenue collections given that informal businesses do not pay direct taxes and other social security contributions.

The growth of the informal sector in Zimbabwe has largely been a result of the limited levels of formal employment. In this respect, those without salaried jobs typically engages in small businesses in order to generate steady streams of income.

According to analysts, in order to accrue benefits from the informal sector, the Zimbabwean Government has come up with innovative strategies. These include the Intermediate Money Transfer Tax (or 2 percent tax) introduced by Finance and Economic Development Minister Professor Mthuli Ncube earlier this month.

They also suggest the establishment of a National Venture Capital Fund to capacitate SMEs and Road-side Businesses (RSBs) in order to channel them into the formal economy.

Meanwhile, the Zimbabwe Revenue Authority (Zimra) recently said it was making presentations to Treasury to review the tax structure for small and micro enterprises. Zimra Commissioner-General, Ms Faith Mazani said the revenue collector’s work in progress included segmenting taxpayers in relation to their capacity and business models. These groups include large client taxpayers, medium client taxpayers, small client taxpayers and micro taxpayers. The segmentation will ensure efficiency in revenue administration.

Restructuring of the tax models for small and micro-businesses could see the former paying a turnover-based tax, while micro-businesses could pay a fixed amount.

A supportive tax system is one of the measures that are currently being considered by Government to co-opt SMEs into the mainstream economy.

Analysts argue that it is also important for the SME sector to be properly measured in terms of its nature and size.

Baseline data helps in coming up with effective policy frameworks. Action plans are only as good as their data foundations.