eBusiness Weekly
Taking Stock Misheck Ugaro
In a discussion with one banking executive one day, his candid question to me was where do you foresee growth coming from for a bank. My straight answer to him was “Bank the SMEs. Capture all those informal sector traders. They are a great source of deposits.” He was shocked by that statement to say the least and looked at me with incredulous eyes and said nothing more!
Zimbabwe is a dual economy country. Any growth policies instituted should adequately cater for both economic sectors. In particular, Zimbabwe should adopt SME promotional measures as the basis for future growth. The policy measures by the authorities (both fiscal and monetary) are generally operative and effective in the formal sector whose activities are recorded and are largely ineffective on the unrecorded segment of the economy.
This segment is a significant contributor to incomes and a recent IMF report estimates the informal sector in Zimbabwe at 60 percent of GDP. It is therefore possible that the Zimbabwean economy is grossly understated. The challenge that is faced by the country is to accurately record all the economic activities occurring. ZIMSTATS faces difficulties in adequately capturing the full extent of economic activity in the country. Various authors have posited factors that lead to the emergency of a parallel/informal sector and these are arguably all prevalent in Zimbabwe. These include but not limited to:
- High Unemployment
When the formal sector fails to absorb as many people as those that seek for jobs, it follows that many will seek for survival in the alternative economy. Zimbabwe has an estimated unemployment rate of above 90 percent. The argument here is this relates to only the recordable economy.
This can fairly be termed an overstatement of the unemployment rate of the country because all those absorbed in the small enterprises are unrecorded and do not pay any income taxes because these are informal activities. These include agriculture, cross border traders, vehicle repairs and services, sports and culture, small scale iron and metal works foundries, furniture manufacturing, building and construction etc). There is no doubt though of the significant incomes that these generate and sustain high standards of living by players.
A formal study of the actual income levels for players in the sector may reveal very significant data and this is a challenge for institutional intervention by organisations such as ZIMSTATS and any other interested research bodies. The debate is on the definition of whether SME only relates to small operations that are formalised.
The correct view should be that SMEs are all emerging and small operations on both sides of the economy that include those recorded and those not. This was the source of my banking executive colleague’s shock at my suggestion that he considers banking the informal market as a strategic source of deposit growth.
- Tax burden
A high tax burden acts as an incentive for economic agents to enter and remain in the second economy. While the recent budget statement generally reduces taxes, the perception is that these are still too high and in particular industrialists consider the one percent point cut in tax from 25 percent to 24 percent as insignificant in real terms especially given the high inflation environment.
- Ease of entrance and exit
Players can enter and exit this sector with much ease as and when it is suitable and convenient.
- Foreign exchange controls
Foreign exchange controls and shortages provide an avenue for illegal transfers. For Zimbabwe, shortages have resulted in a black market of foreign currency. This is an undoubtedly thriving business openly evident on the street corners of all the cities and a significant number of people are gainfully employed thus, even though this is non-productive and only rent seeking behaviours.
- High inflation
Many economic agents are forced to go into the alternative market due to the impact of high inflation, which increases the effective tax burden on tax payers. The country’s month on month inflation rate has hovered above the 30 percent several times this year from February 2019 even though the forecast is that it will dip into single digit levels going into the first quarter of 2020. The inflation expectations of the market, however, still remain high.
- High rate of return
The alternative economy provides high tax free returns, which are an attraction.
All the factors above are prevalent in Zimbabwe and several economic commentators have alluded to these as the main causes of the growth of a parallel economy in any country.
Zimbabwe has such a dualised economy and recent reports by the IMF sets the size of the informal sector of Zimbabwe at 60 percent of GDP. It is therefore necessary for the authorities to start enhancing the statistical collation of the full economy in order to accurately measure the full extent of economic activity.
The country has dual economies running side by side and judging by the IMF report, the informal sector is actually employing more than half the nation’s labour force.
Strategies have to be developed that capture all economic activity in the country. The strategies should be aimed at addressing some the factors listed above in order to remove the incentive for players to informalise.
The growth of the Zimbabwean economy going forward is heavily staked on the promotion of the SME sector, which at present is largely informal.
Measures should be put in place to adequately capture these activities and formalise them in a painless manner and pursue a growth strategy based on the promotion of platforms with designated value chains which allow small player participation. With adequately designed supportive trade financing structures, this is the sector which can carry the revival hopes of the country.
Misheck Ugaro [email protected] Misheck is an economist, a former expatriate banker based in several SADC countries and currently works as a Corporate Advisory Services Consultant. He is a member and past Vice President of the Zimbabwe Economics Society
