Supporting transition of informal sector to formal sector critical action for a broader revenue base

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The Coronavirus pandemic is just one of the multiple shocks that have hit the continent in recent years – including the Ebola epidemic in Guinea, Liberia, and Sierra Leone in 2014, the fall armyworm invasion since 2017 and the locust infestation in eastern Africa in 2020.

Beyond the lockdown strategies, governments across Africa also adopted macro-level policies – including fiscal, monetary, exchange rate, and balance of payment policies – to mitigate the socioeconomic impacts of the pandemic and the health-related restrictions.

To increase these public investments, experts say African governments must find sustainable ways to broaden their revenue base and increase the efficiency of revenue collection. One critical action will be supporting informal sector actors to transition into the formal sector.

In  Zimbabwe – the informal workforce, which comprises 85% of the total workforce, is struggling to recover from Covid-19 induced lockdowns which first started in March last year. Players in the informal sector, which continues to fight for recognition, saw its workers often treated like criminals by local authorities.

Since the collapse of industry due to the hyperinflation crisis of the 2000s, the informal sector has formed the backbone of the economy. Despite that there is a lack of political will in our country to support an informal economy.

Therefore enabling their access to technologies and financial facilities will help them to raise their productivity and business growth and increase employment, all of which will add to the available revenue needed for investment for the future.

Research has noted that traders are often forced to engage in informal trade because of barriers to entering the formal sector, including difficulty in getting access to traveling documents or trading licenses, excessively long waiting times at borders, overcharging by customs officials and inadequate knowledge of official procedures.

In a bid to broaden up its revenue base the treasury introduced a 2% tax on all electronic transactions in 2018. Previously Deputy Reserve Bank Governor Kupukile Mlambo said it has also managed to bring in the informal sector which normally does not pay taxes. But now these people in the informal sector have been affected by the current macroeconomic distortions which have literally depleted their disposable incomes.

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Usually informal players do not have to deal with the plethora of regulation and fees that formal players have to bear. With the Zimbabwean dollar using its buying most informal players are now preferring and charging their goods and services in hard currency so as to remain viable. However they are still accepting the local currency but a premium rate higher than that of the auction rate which forces consumers to pay using the US dollar. So the government needs to lure the informal sector to register and formalise so as to harness the foreign currency which is circulating in the informal economy as taxing them especially at this time will not work.

Last week RBZ said it will start to sell foreign currency to registered bureaux de change (BDC) for on-selling to their customers. This follows an earlier resolution by the Monetary Policy Committee directing bureaux de change to actively participate in the foreign exchange market to meet the foreign currency needs of small-scale enterprises and individuals.

The bureaux de change is required to comply with the agreed terms of engagement which include supporting small transactions up to a maximum value of US$500 per transaction. This will help to jumpstart the informal sector with its players who are still nursing the wounds of the previous lockdown.

Also the banking system needs to build and restore trust with depositors as informal players are reluctant to hold large amounts of US dollars in the banks for fear that they could not access them or worse, be converted in an instant to local currency. This is evidently seen by recent media reports on house break-ins highlight just how much foreign currency certain households are prepared to hold ‘under the mattresses’.

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