Dr Gift Mugano
The long decade of economic decline (1998 – 2008) and the new era which saw the introduction of multiple currencies resulted in the emergency of the informal sector. Both periods, that is, the 1998 – 2008 and the dollarised environment brought into fore hardships for business to thrive. In the Zimbabwe dollar era, galloping inflation made it very difficult for companies to do business. The multiple currency regime, characterised by the dominant use of the United States dollar made it even more difficult for business to thrive.
Under the multiple currency regimes, Zimbabwe has become an attractive country for foreign firms’ exports as work hard to get the most precious currency from Zimbabwe. This has seen worsening liquidity crunch which has become a new menace after galloping inflation.
Because of liquidity crunch, Zimbabwe witnesses incessant company closures. This in itself has made it difficult for the Ministry of Finance to collect sufficient revenue to fund national programmes. Our national budget has remained flat around $3,5 billion with 83 percent of it going into salaries.
There are numerous calls to cut the wage bill to the region of 40 percent of the total budget in order to spur economic growth. The issue of rationalising civil service has been a thorn issue of late with the International Monetary Fund leading the pack on this issue. I always put my position very clear that we must only retrench ghost workers.
Anything outside that is not good for the country. Effective institutions are critical for economic development. If we retrench for the sake of retrenching to align our wage bill to the desired level we will end up being catch up in a web of deteriorating service delivery which will certainly threaten economic recovery.
My argument has been always that our problem is not the wage bill but the fact that we have an undesirably very small budget for the country. We must be occupied on how we can expand our tax base. Luckily, honourable Minister Nyoni’s Ministry of Small and Medium Enterprises and Co-operative Development is leading a very important process of formalising the informal sector.
This process seeks to make sure that 5,7 million people who work in the micro small and medium enterprises (MSME) sector in Zimbabwe are formalised with respect registration, financial inclusion and access to finance, labour formality, marketing and marketing linkages and operating space.
Over 50 percent of MSMEs operate from homes and undesignated areas. This situation has made it difficult to expand their business/grow. As a result, MSME owners usually work long hours but have low levels of income. The formalisation drive, through public private partnership, is expected to create decent work space for MSMEs which will help them grow.
Imagine a situation where car mechanics are given decent place by local authorities where they can service motor vehicles. From this example, individuals and companies can safely bring their cars than a situation where one has to go a car service under a tree or in Mbare, Magaba. The provision of decent working space will certainly increase revenue for MSMEs which will help them find good reason to pay taxes.
Marketing and market linkages, the current procurement system has to be revisited to help MSMEs participate in the supply of goods and services to established firms. We need to reverse a situation where most commodities which can be obtained locally are being imported.
Since, business linkages is one area which is being addressed in the formalisation strategy one hopes that there will be provisions in law aimed at strengthening cooperation between established businesses and MSMEs. The models used by Delta Beverages, Nestle, Seed Co and Irvines in working with the farmers and retailers in the production and distribution of their products are great models which can be formally employed by Government and participating companies must be rewarded by tax incentives while non-participating companies receive punitive taxes.
Business linkages will help small businesses growth thereby expanding the tax base. In the same vein, it will help Zimbabwe localise the foreign currency and improve liquidity thereby increasing the tax base. Labour Informality is one way of avoiding labour laws and their associated costs (social insurance etc). In many countries including Zimbabwe businesses face major hurdles in taking on their first “formal” employees.
In addition, overly rigid labour laws often hurt the people they are meant to protect, keeping employees in the informal economy and inhibiting economic growth that could create new jobs.
Empirical evidence shows that labour informality take the form pattern. Formalisation of labour seeks to reserve this situation thereby create new order where workers are paid minimum wages, pay for social security (institutional savings) and payment of statutory obligations like pay as you earn.
With respect to financial inclusion, the Finscope study showed that 43percent of MSME owners are financially excluded, i.e. they do not use any financial products/services, neither formal nor informal, to manage their business finances,however, they might borrow from family and friends, and/or save at home.
Only 18 percent are served by formal institutions, including products/services from commercial banks and other formal non-bank institutions. Informal financial mechanisms (e.g. savings groups) push out the boundaries of financial inclusion as every second MSME owner uses informal mechanisms to manage their business finances.
Seventy-two percent of MSME owners save, mainly at home. Only 15 percent borrow money, mainly from family and friends. Since the economy is now largely informal, and knowing that there is a positive causal relationship between savings and economic growth, it becomes apparently clear that Zimbabwe need to bank the informal sector.
Reserve Bank of Zimbabwe recently launched a financial inclusion strategy which is part of the formalisation strategy. This is an excellent move. The work being done by the Ministry of Small and Medium Enterprises and Co-operative Development particularly in areas of registration and business linkages will help MSMEs to have access to financial service for two reasons.
First, one of the reasons why MSMEs cannot open bank account is because of lack of registration. Hence, if a small business is now registered with the registrar and has tax clearance it now has the pre-requisites required for opening bank accounts. Second, business linkages will certainly force small businesses to open bank account as established businesses naturally would want to pay through the banks. Business linkages will also boost MSMEs incomes which is a fundamental requirement for the generation of savings.
The ministry in the formalisation stride is also working in addressing regulatory and administrative barriers related to the general registration of business activity and licensing for operators in specific sectors. The main registration obstacles are excessive costs and time spent dealing with bureaucracy. In Zimbabwe entrepreneurs travel to the capital(s) or other distant towns to conduct these procedures. This deters them from registering their businesses.
A study by FinScope shows that about $7,4 billion is circulating in the informal sector. Interestingly, the majority of the MSMEs do not pay tax. Generally, there was a lack of understanding of the tax system, on how it works, and a lack of faith in the system since they could not see any tangible benefits.
A study done by Probe Marketing shows that MSMEs are of the view that there is injustice on the tax rates as they are too high and they felt that there was multiple taxation going on.
Further, Probe Marketing has shown that, MSMEs currently faces financial requirements barrier consist of regressive fees that penalise smaller firms, complex tax regulations and poor tax and tariff administration. Based on the findings by Probe, informal enterprises shy away from joining tax regimes for the following reasons among others:
They are worried about tax levels;
They do not understand how to comply with tax requirements;
They fear the behaviour of revenue officials towards them; and
They do not believe they will receive services in return for payment of taxes and levies. For example, money paid for refuse collection does not match improvements.
The formalisation strategy seeks to help MSMEs register themselves with various regulatory authorities including the Zimbabwe Revenue Authority (ZIMRA) and registrar of companies.
The process of formalisation with specific focus on registration and ensuring legal compliance with payment of taxes is something the Ministry of Small and Medium Enterprises and Cooperative Development is looking to build national consensus to have a shared understanding and moral obligation to pay taxes rather than seeing it as punitive requirement.
If the issues around operating space, business linkages, labour formality, financial inclusion and access to finance, the MSMEs will certainly see good reason to pay tax.
I believe honourable Minister Nyoni’s drive to formalise the informal sector is a panacea to the Minister of Finance Patrick Chinamasa’s fiscal space. I am confident that the ministry will come up with measures that will not only formalise the informal sector for the sake of formalising it but to help it grow and see business opportunities and PAY TAX!
Dr Mugano is an author and an expert on Trade and Competitiveness. He is a Research Associate at Nelson Mandela Metropolitan University and a Committee Member of the Informal Sector Formalisation Strategy: Email: [email protected], cell: +263 772 541 209