
The Zimbabwean economy, long characterised by its dual structure of formal and informal sectors, faces a monumental challenge in formalising its operations. With Finance Minister Prof. Mthuli Ncube spearheading efforts, the government aims to revitalise the struggling formal economy while addressing the dominance of the informal sector.
By Brighton Musonza
Yet, the task is daunting, complicated by a myriad of factors such as dollarisation, smuggling, lack of trust in banking institutions, and the proliferation of unregulated economic activities like gold panning.
The Struggles of the Formal Economy
Zimbabwe’s formal economy, including major retailers like OK Zimbabwe and TM Pick n Pay, has seen a decline in competitiveness. Manufacturers increasingly bypass formal wholesalers and retailers to supply goods directly to informal traders, driven by high operational costs and tax burdens within the formal sector. This direct supply chain to the informal market undermines formal businesses and leads to significant tax evasion.
Adding to this is the phenomenon of product bunching in formal retail chains, where essential goods are bundled with less desirable products to increase sales. While this may temporarily boost revenue, it exacerbates consumer dissatisfaction and pushes buyers toward informal markets, where goods are often cheaper and sold individually.
Dollarisation and the Local Currency
The resurgence of dollarisation continues to undermine confidence in the Zimbabwean dollar. Despite government efforts to promote the local currency, the US dollar dominates transactions, particularly in informal markets. Vendors and tuckshops, which now account for a substantial portion of the retail economy, prefer the US dollar due to its stability and ease of cross-border trade.
This dollar dominance fuels a cycle of distrust in the local currency, making it nearly impossible for the government to stabilise its value. Compounding this is the black market, where smuggled goods, including alcoholic beverages, dairy products, and detergents, thrive, further reducing demand for locally produced goods.
The Informal Sector’s Grip on the Economy
Informal activities, from tuckshops and street vending to gold panning and smuggling, now dominate Zimbabwe’s economy, accounting for over 70% of economic activities. Tuckshops and vendors, often unregistered and untaxed, provide an essential service to low-income earners. However, their prevalence undermines formal retailers and results in significant revenue losses for the government.
Diaspora remittances, another cornerstone of the informal economy, contribute significantly to household incomes but largely bypass formal banking channels. With limited trust in banks, many Zimbabweans rely on informal money transfer systems, exacerbating the liquidity challenges in the formal sector.
Government Measures and Challenges
To counter these challenges, the Ministry of Finance has introduced several measures under the 2024 Mid-Term Budget and the 2025 National Budget, including:
- Tax Enforcement: A 5% withholding tax on non-registered Micro and Small Enterprises (MSMEs) supplying goods to formal wholesalers and manufacturers.
- VAT Registration Threshold: Reduction of the minimum Value Added Tax registration threshold from US$40,000 to US$25,000.
- Crackdown on Smuggled Goods: Mandatory proof of customs duty payment for goods such as alcohol, dairy, and detergents.
- Mandated Use of POS Systems: All MSMEs are now required to use Point-of-Sale (POS) machines linked to Zimbabwe Revenue Authority (ZIMRA) systems.
- Targeted Financial Support: The Reserve Bank’s Targeted Finance Facility provides working capital for SMEs and the retail sector.
While these measures are commendable, their success hinges on addressing systemic issues such as poor governance, inadequate infrastructure, and the high cost of doing business. For example, mandating the use of POS systems in an economy with frequent power outages and limited internet connectivity poses significant challenges. Without addressing these structural barriers, formalisation efforts risk alienating informal traders rather than integrating them into the formal economy.
Comparing Formal Retailers: OK Zimbabwe vs TM Pick n Pay
Formal retail giants like OK Zimbabwe and TM Pick n Pay are grappling with the effects of economic informalisation. Both have invested heavily in expanding their networks and adopting innovative marketing strategies. However, their reliance on product bunching and limited adaptation to the cash-dominated economy has put them at a disadvantage against informal traders who offer flexible pricing and instant transactions.
TM Pick n Pay, benefiting from its South African parent company’s resources, has managed to maintain a competitive edge through efficient supply chains and promotions. Meanwhile, OK Zimbabwe has focused on local procurement and customer loyalty programmes. Yet, both face declining market shares as informal markets flourish.
The Role of Gold Panning and Smuggling
Gold panning and smuggling further complicate formalisation efforts. Gold, Zimbabwe’s largest export, often bypasses formal channels due to high royalties and corruption, ending up on the black market. This deprives the country of foreign exchange earnings and exacerbates the liquidity crisis.
The Way Forward
To address these multifaceted challenges, Zimbabwe needs a comprehensive strategy that goes beyond regulatory enforcement. Key recommendations include:
- Infrastructure Investment: Improve electricity supply and internet connectivity to facilitate the use of POS systems and other formalisation tools.
- Incentivising Formalisation: Provide tax breaks and affordable credit facilities for MSMEs transitioning to the formal sector.
- Strengthening Governance: Enhance transparency in revenue collection and allocation to rebuild public trust in formal institutions.
- Diaspora Engagement: Develop formal remittance channels with competitive rates to attract diaspora funds into the banking system.
- Combating Smuggling: Strengthen border controls and interagency collaboration to curb the inflow of smuggled goods.
Conclusion
The battle to formalise Zimbabwe’s economy is far from over. While the measures introduced by Prof. Mthuli Ncube are a step in the right direction, their success will depend on addressing underlying structural and governance issues. By fostering an enabling environment for formal businesses and incentivising compliance, Zimbabwe can gradually shift its economic trajectory toward sustainable growth and stability. However, without a concerted effort to tackle the root causes of informalisation, the economy risks remaining trapped in its current cycle of informality and stagnation.