2019 Mid-Term Budget Review: Whither the informal sector? 

Source: 2019 Mid-Term Budget Review: Whither the informal sector? | The Herald August 5, 2019

Beaven Dhliwayo Features Writer
The Government of Zimbabwe, through its Budget, should channel more funds towards the formalisation of the informal sector which is vital for the revival of the economy.

A recent study conducted by the International Monetary Fund (IMF) has shown that Zimbabwe has the second largest informal sector in the world.

The working paper titled, “Shadow Economies Around the World: What Did We Learn Over the Last 20 Years?” says more than 60 percent of the Zimbabwean economy is informal, second only to Bolivia’s 62,3 percent.

This should be contrasted to the most formal economies — Switzerland and Austria — at 7,2 percent and 8,9 percent respectively.

Formalisation of the informal sector should not be ignored and should be one of Government’s top priorities.

At a Mid-Term Budget Review Dialogue organised by the Zimbabwe Council of Churches (ZCC) in the capital last Friday, it came out that the Budget ruined hopes of seeing informal sector players evolving into big businesses.

A vendor who participated in the dialogue and preferred anonymity said the policy pronouncements via the National Budget have dealt a heavy blow to the drive to formalise the informal sector.

“A cocktail of taxes and payments Finance and Economic Development Minister Prof Mthuli Ncube pronounced in the Mid-Term Budget Review will only push the informal sector into retreat,” said the vendor.

“The Budget is not addressing the issue of the informal sector. Although the Budget attempts to give remedial diagnosis of the problems the generality of Zimbabweans are facing it is not clear on its way forward in regards to the formalisation of the informal sector.

“Taxes are hurting and have contributed to the overall erosion of people’s incomes hence the need to reduce the burden of the tax. Thus, we require lessening of the tax burden so that we can grow our businesses,” said the vendor.

In his Mid-Term Budget Review, the Treasury boss announced that a tax will be levied on the transfer of money from mobile money transfer agents to recipients.”

The basis of his argument is that the majority of illegal foreign currency transactions are being conducted through the mobile money platform, thus dodging payment of tax and sustaining parallel market activities.

“Given the changes in the macroeconomic conditions, I propose to review the tax-free threshold from the current ZWL$10 to ZW$20 and the maximum tax payable per transaction by corporates from the current ZWL$10 000 to ZW$15 000 for transactions with a value exceeding ZWL$750 000,” said Prof Ncube.

“Furthermore, I propose to exempt additional transactions from the Intermediate Money Transfer Tax (IMTT) to eliminate double taxation.

“The current legislation obliges financial institutions to deduct Intermediated Money Transfer Tax on the transfer of money by any means other than by cheque in the following circumstances, between two persons; or from one person to two or more persons; or from two or more persons to one person.

“However, cash-in and cash-out transactions conducted through mobile money transfer platforms do not fall within the above criterion, hence the tax is not deductible.

“Consequently, the majority of illegal foreign currency transactions are being conducted through this platform, thereby evading payment of tax and sustaining parallel market activities. I, therefore, propose to levy a tax on the transfer of money from mobile money transfer agents to recipients.”

Businesses, both formal and informal, are doing their transactions using mobile money platforms, especially EcoCash which has a large subscriber base.

Although Prof Ncube’s argument is true to a certain extent, it is not every EcoCash merchant agents who are involved in illegal foreign currency transactions.

It is fact that informal players are merchant holders and most, if not all of their customers, are paying using the EcoCash platform.

To nail everyone for the sins of a few criminal elements will ruin the growth of the informal sector which is poised to improve the country’s economy if clear strategies are put in place to formalise and empower it.

In various forums, the informal sector has been applauded for absorbing the glut of unemployed people in the economy.

Indeed, the informal sector should be praised for being the saving grace for many people who would otherwise have no way of earning a living in a country where the unemployment rate is estimated to be around 80 percent.

The Treasury boss should use the Second Republic’s thrust of devolution, as it will work well also for the informal sector.

Chapter 14 of the Constitution provides for devolution of governmental power and services so that they are as close to the people as possible.

Furthermore, it seeks to give more voice to local people on the development of their areas.

Over the years, policies in the country have supported a very lean and elite formal sector while neglecting the informal economy which provides livelihoods for the majority of the population.

As a result, most provinces have been grossly underdeveloped.

It is thus imperative that if this serious situation is to be addressed, the provincial governments must become champions of formalising the informal sector and giving it support.

Zimbabwe’s informal sector, if well supported, can be the engine to drive economic growth in the local communities under devolution.

The centralisation of economic planning and implementation has been the cause of much economic underdevelopment and subsequent stunted human development across the country.

Thanks to President Mnangagwa’s vision of prioritising devolution and decentralisation in the running of national affairs as a strategy to revitalise the economy and to improve the people’s standards of living.

The statistics of poverty in Zimbabwe are damning evidence of economic neglect and bad policies of the old dispensation.

Over five million people in the country are living in extreme poverty, according to a report by World Poverty Clock.

In coming up with its statistics, the World Poverty Clock uses publicly available data on income distribution, production and consumption, provided by various international organisations, most notably the UN, World Bank, and the International Monetary Fund.

Meanwhile, there are other expectations which came out from the ZCC Mid-Term Budget Review dialogue.

Stakeholders agreed that Government should continue increasing the salaries of civil service workers to improve their welfare and cushion them from the current economic hardships.

There is also need to expand tax threshold to levels consistent with the inflation levels in the economy and significantly expand the tax bands in line with developments in the economy.

Participants also pointed out that Government should allocate funding to the Grain Marketing Board (GMB) to ensure prompt payment of farmers as this will help farmers to finance their 2019/2020 agricultural season.

Also it was stressed that Prof Ncube must take note of policy inconsistencies and unilateralism to guarantee change and restore investor confidence.

It was noted that there is need to reduce duty on solar equipment and incentivise innovations in alternative power sources, especially for solar investments.

Treasury should also adjust the two percent IMTT to improve the purchasing power of households.

On the transport sector, participants said there should be improvement in the running of ZUPCO, serious consideration of capital investment to improve railway infrastructure, increased allocation of funds to acquire a new fleet and ease transport pressures and improve the availability of fuel to improve transport availability.

There was also a consensus of an increased health financing to improve public health service provision, allocation of critical and essential drugs, hospital equipment and transport, as well as the functioning of the referral health system.

Serious consideration for the improvement of working conditions for medical personnel, especially critical health professionals also came out of the meeting.

In regards to education, stakeholders said Treasury should increase the allocation for procurement of resource material for the new curriculum, while equipping rural schools with better facilities to reduce rural-urban education inequalities.

On social protection, it was agreed that provision of adequate and meaningful social safety nets to vulnerable groups and the revision of pensions is critical.

Additionally, it was noted that Government must strengthen measures towards the implementation of the Auditor-General’s Report to improve efficiency in the use of the resources for the betterment of the lives of ordinary Zimbabweans.