
THE dollarisation of Zimbabwe’s economy, initially adopted as a lifeline to stabilise runaway inflation in 2009, has inadvertently transformed the country into a largely informal economic system. While dollarisation helped restore some semblance of price stability, it has also spawned unintended consequences that are undermining industrial productivity, fiscal capacity, and overall economic development.
By Prof. Tendai Moyo, Department of Economics
The Rise of Informalisation
Zimbabwe’s informal sector has burgeoned in recent years, accounting for an estimated 60-70% of economic activity. This shift is not merely a reflection of entrepreneurial ingenuity but a symptom of structural economic weaknesses. As formal businesses face high operating costs, uncompetitive exchange rates, and regulatory hurdles, many have opted to downsize or close entirely, leaving informal enterprises as the dominant players in the economy.
One significant driver of informalisation is dollarisation itself. While it facilitated trade and financial transactions by eliminating hyperinflation, it also entrenched a reliance on cash transactions in the informal sector. Vendors, small-scale traders, and tuckshops have become key distribution channels for goods, bypassing formal retail networks.
De-Industrialisation and Import Dependence
Dollarisation has exacerbated the de-industrialisation of Zimbabwe’s economy. The influx of cheap imports, particularly from South Africa and China, has decimated local manufacturing. With no competitive exchange rate to shield domestic producers, locally manufactured goods are priced out of the market.
The informal sector’s preference for imported products, often sourced directly by traders through informal channels, has further eroded local production capacity. Tuckshops in urban and peri-urban areas stock a mix of imported goods and local produce, catering to consumers who pay in US dollars. However, this informal distribution network undermines economies of scale and formal supply chains, making local goods even less competitive.
Chaotic Street Vending and Fiscal Impacts
The streets of Zimbabwe’s urban centres are dominated by chaotic vendors selling everything from fresh produce to electronics. While this provides a lifeline for unemployed citizens, it has also created a highly fragmented and inefficient market structure. The informal economy operates outside formal regulatory frameworks, leading to:
- Depressed income tax collections: With the majority of transactions occurring informally, income tax contributions to fiscal receipts are minimal. The Zimbabwe Revenue Authority (ZIMRA) struggles to capture revenue from a shadow economy that lacks documentation.
- Low local authority revenue: Informal vendors do not pay local authority rates, depriving municipalities of funds needed to develop, repair, and maintain critical urban infrastructure. Consequently, roads, sewage systems, and public facilities remain in a state of disrepair.
Low Productivity and Loss of Export Markets
Informalisation has stifled economic productivity. With a majority of economic actors operating at subsistence levels, the economy lacks the structural capacity to produce goods at competitive scales. Formal sectors, which drive innovation, efficiency, and export-oriented growth, have dwindled.
Zimbabwe has also lost access to export markets due to exchange rate misalignments and inconsistent production. Informal producers, unable to meet quality and volume requirements, are excluded from lucrative international markets. This diminishes foreign currency inflows and exacerbates the country’s reliance on remittances and aid.
The Informal Sector’s Dual Role
While the informal economy provides employment for millions, it is also a double-edged sword:
- Economic survival: For many, the informal sector offers the only means of livelihood amid soaring unemployment, estimated at over 90% in some areas.
- Economic stagnation: The lack of formalisation restricts access to credit, investment, and technology, perpetuating low productivity and inefficiency.
Unpacking the Structural Impacts
- Decline in Urban Development: Municipal budgets have shrunk due to reduced rate collections from businesses and individuals operating informally. Basic urban services, including waste management and road maintenance, are underfunded, leading to deteriorating living conditions.
- Collapse of Formal Employment: With most people engaged in informal activities, formal job creation has stagnated. This depresses aggregate demand, limiting broader economic growth.
- Inconsistent Monetary Policy: Dollarisation limits the government’s ability to implement effective monetary policy. Without a local currency to control, authorities cannot devalue the currency to boost exports or manage liquidity in the economy.
A Vicious Cycle of Informalisation
Dollarisation and informalisation reinforce each other in a vicious cycle:
- High costs of formalisation: Businesses avoid formal registration due to excessive taxes, licensing fees, and bureaucratic delays, further shrinking the formal tax base.
- Eroded trust in institutions: The government’s inability to provide basic services undermines public confidence, pushing more economic activity into informal spaces.
Policy Recommendations
- Tax Reforms: Simplify tax structures and reduce the burden on small businesses to encourage formalisation. Introduce tax incentives for companies that employ more workers and contribute to local production.
- Support for Local Industry: Provide subsidies or protective tariffs for local manufacturers to regain competitiveness against imports. Encourage public-private partnerships to revive industries critical to economic resilience.
- Infrastructure Development: Direct investment toward urban infrastructure, prioritising roads, water supply, and waste management to improve living conditions and support formal businesses.
- Regulate Informal Vendors: Introduce streamlined licensing for street vendors, coupled with designated trading zones, to improve order and revenue collection.
- Diversify the Economy: Reduce dependence on imports by investing in sectors like agriculture, mining, and renewable energy to create sustainable growth avenues.
- Reintroduce a Managed Local Currency: To regain control over monetary policy, Zimbabwe could consider reintroducing a managed local currency alongside the US dollar.
Conclusion
The informalisation of Zimbabwe’s economy is both a symptom and a cause of the country’s economic woes. While dollarisation provided temporary relief from hyperinflation, it has inadvertently entrenched systemic inefficiencies and widened socio-economic disparities.
The solution lies in a multifaceted approach that balances the immediate needs of an informal economy with long-term strategies for industrialisation, formalisation, and sustainable growth. Without such interventions, Zimbabwe risks remaining trapped in a cycle of stagnation, dependency, and underdevelopment.