• Wed. Jun 12th, 2024

Is overregulation going to kill the underground economy?


Jan 5, 2024

By ETimes

Treasury has developed a number of initiatives through Zimbabwe Revenue Authority (Zimra) in an attempt to compel the usage of Zimbabwean dollar in the market, given that stores are required to take ZWL and most of the informal trade is in US dollars.

Informal trading is not just found in low-income neighbourhoods. There are plenty of pavement vendors and flea markets in the heart of Harare.

Manufacturers are now limited to selling their products to wholesalers that possess tax clearance certificates and are registered for Value-Added Tax (VAT).

In exchange, the wholesalers would only sell to authorised and registered shops; individuals may only purchase items valued at a maximum of $1,000 USD or the equivalent in Zimbabwean dollars within a 30-day period.

The measures also target small businesses and individuals running flea markets, tuckshops, street vendors and hawkers among others.

The restrictions also target individuals and small enterprises that operate tuckshops, street vendors, hawkers, and flea markets, among other industries.

As the southern African country’s economy continues to deteriorate, industry has rapidly degenerated, giving rise to informal trade.

Informal business has become a threat to formal businesses.

Powerspeed recently said the business environment is significantly skewed in favour of informal business, which is abhorrent to competitiveness.

“Our ability to procure products from the best global sources enables us to deliver excellent quality and price to our customers,” chairman Simba Makoni said in the company’s 2022 annual report.

“We are relying on this strategy to increase our market share, despite the business environment being heavily tilted in favour of informal business.”

Below are reactions to the measures to protect value chain integrity and transparency and to counter unfair competition by informal traders:

Tinashe Murapata, also known as Baba Nyenyedzi, an economic blogger, indicated that the short-sighted actions do not align with global trends that have disrupted distribution channels since the 1970s.

“Sadly, what I thought was merely moral suasion has turned out to be legalized rationing of goods in the economy.

“The minister is turning back the hands of time. Just in time management practices, online shopping and globalisation are such that the manufacturer can sell directly to consumers through mostly online sales. Internationally, that can be as much as 50% of goods, bypassing the entire distribution chain and consequently reducing the price to the final consumer.

“VAT is charged by the manufacturer. Consumer prices have come down because the cost of storage for finished goods has reduced substantially over time. The manufacturer does not need to wait for the wholesaler to order, nor does the wholesaler wait for the retailer,” wrote on his X handle, formerly Twitter.

He stated that goods would be rationed as a result of the minister’s “misstep”.

“A manufacturer cannot afford the storage costs and bank financing. So manufacturers will lean towards fast sellers and cut slow sellers,” Murapata said.

“Depending on their financial position they may not even produce enough. Consequently, this is a bonanza for informal traders that will import goods and fill in the gap of shortages from the manufacturer.”

Finance and economics research firm Econometer weighed on the noble intentions of ZIMRA, revealing that it holds potential downside risks.

“It will create fictitious wholesalers since the requirement is a mere license – in the process consolidating Zimbabwe’s economy as a haven for traders and middlemen.

“Perishable products such as bread, vegetables do not require interventions of a middleman (wholesalers), which means the measures must be adjusted to avoid loss of confidence in the policy by the intended ‘beneficiaries’

“Consumer spending in Zim is currently weak; the luxury of dictating who a manufacturer can sell to might be ill-timed,” it said.

The research firm noted that the reinforcement of value chains and the limitation of informality can only result from market forces, not from official initiatives.

“Create a business case for value chains to flourish; do not police the process.

“The obtaining of a tax and currency environment and other regulatory burdens promote informality and weaken value chains; address those first. Zimra interventions can only worsen the environment for manufacturers to do business.

“Zimbabwe has become a small-scale economy; avoid elevating wholesalers to such a height of relevance; in addition, manufacturers are dominantly ‘assembling’ and not producing, as evidenced by the recent unhealthy import bill,” reads the X thread.

“It can create artificial shortages as manufacturers protest the move or the shortages can arise from the incapacity of wholesalers to satisfy the market given their scant existence, as their geographical foothold can confirm,” Econometer added.

Kuda Mugova, an economic analyst, thinks that the authorities did not take the feedback they were receiving seriously or that these policies were discussed enough.

“It Will promote another layer of middlemen and an increased level of imports which will kill local industries.

“Monetary problems are being solved through overregulation. This will not kill the underground economy. Remove the 10% pricing limit and reduce the currency premium (currently at over 70%) and your problems are gone.

“Monetary problems are being solved through overregulation. This will not kill the underground economy,” he wrote on his X handle.

Many Zimbabweans continue to rely on the revenues of informal trading due to low wages. They hire others to market the items, which creates jobs, and they import clothing, electronics, automobiles, and automotive parts. However, they are not given legal recognition and are subject to intimidation and detention by law enforcement and municipal authorities – HARARE

By ETimes

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