The Informal economy,,,Zim’s lifeline or liability?

Estimates suggest that over 60 percent of economic activity occurs in the informal sector, leading to revenue losses and weak social protections. The dual challenge is that while the informal sector provides employment and sustains livelihoods, it also undermines tax compliance and economic planning.

The informal sector in Zimbabwe has expanded in response to persistent economic crises, including hyperinflation, currency volatility, and restrictive business policies. Many Zimbabweans have turned to informal trading as a means of survival due to limited formal job opportunities. However, this shift has broader economic implications.

From street vendors to small-scale manufacturers, informal businesses contribute to domestic consumption and provide essential goods and services. Yet, they operate outside regulatory frameworks, limiting their access to financial support and formal markets. Consequently, this creates a paradox where the informal sector supports the economy while simultaneously limiting its overall growth potential.

The structuralist view of informality suggests that excessive regulatory burdens force businesses into the shadow economy. In Zimbabwe, high taxes, complex business registration processes, and the controversial Intermediate Money Transfer Tax (IMTT) have driven many entrepreneurs to operate outside formal channels.

Additionally, unstable monetary policies, frequent shifts in exchange rates, and unpredictable inflation make it difficult for small businesses to plan long-term.

Conversely, the legalist perspective argues that informality persists due to a lack of property rights and weak institutions, discouraging investment in formal enterprises.

Locally, small-scale traders often lack access to legal ownership of land or business premises, preventing them from securing financing or expanding operations. Without institutional support, businesses remain trapped in informality.

Addressing informality requires a two-pronged approach. First, simplifying tax compliance and business registration can encourage SMEs to formalise.

The World Bank suggests digitising tax administration and introducing mobile-friendly platforms to enhance compliance. Reducing bureaucratic red tape would also allow businesses to transition into the formal economy with minimal friction.

Second, reducing monetary distortions, such as exchange rate premiums and punitive controls, can incentivise businesses to re-enter the formal sector. Zimbabwe’s past monetary policies, including abrupt changes to currency regulations, have created uncertainty that discourages formal business operations. Stabilising monetary policy and ensuring consistent regulatory frameworks are essential steps toward encouraging formalisation.

Formalising the informal economy is not just about taxation, it is about creating an environment where businesses can thrive and contribute to national development. Zimbabwe must view its informal sector not as a burden but as a potential driver of inclusive economic growth.

The Government should consider introducing business development programs and financial literacy training to help informal enterprises scale up and transition into the formal sector.

This could include workshops on bookkeeping, tax compliance, and digital finance management.

Moreover, partnerships between Government institutions and private sector players can foster an entrepreneurial ecosystem that nurtures growth.

Additionally, strengthening microfinance institutions and expanding access to credit can facilitate the growth of informal businesses.

Traditional banks often perceive informal entrepreneurs as high-risk borrowers, limiting their access to credit.

Introducing alternative financing options, such as Government-backed microloans and community savings schemes, can provide much-needed capital to small businesses.

Digital financial services, such as mobile banking and e-wallets, can play a crucial role in integrating informal businesses into the formal economy.

Platforms such as EcoCash and OneMoney have demonstrated how mobile transactions can bridge financial gaps.

Encouraging informal traders to use digital payment systems not only enhances financial transparency but also creates a data trail that can support creditworthiness assessments for small businesses.

To further integrate digital finance, policymakers should incentivise fintech innovation and streamline regulations for mobile banking. Lowering transaction fees and offering digital literacy programs could increase adoption rates among informal traders.

Rather than imposing punitive measures on informal businesses, the government should adopt a gradual approach to tax compliance. Offering incentives for formalisation, such as reduced initial tax rates or temporary exemptions for newly registered businesses, could encourage participation in the formal economy.

Additionally, tax holidays or tiered taxation structures for small businesses can make compliance more appealing.

Countries such as Rwanda and Ghana have successfully introduced tax reforms tailored to SMEs, allowing them to transition into the formal economy without facing immediate financial strain. Zimbabwe can draw lessons from these models to develop an inclusive tax policy.

Policies should also focus on improving infrastructure in informal business hubs. Many informal traders operate in suboptimal conditions with limited access to utilities such as water, electricity, and sanitation. Establishing well-structured marketplaces with adequate facilities can improve working conditions and encourage traders to formalise.

Furthermore, urban planning should incorporate designated spaces for informal traders, reducing the risk of eviction and creating stability for micro-enterprises.

Implementing smart zoning policies that integrate informal businesses into urban economies can help bridge the gap between the formal and informal sectors.

Strengthening property rights is essential for encouraging entrepreneurs to invest in formal business structures.

When businesses have legally recognised premises, they are more likely to access financing, comply with regulations, and expand their operations. Land tenure reforms that provide secure property rights to informal traders can foster business growth and economic expansion.

Additionally, institutional support in the form of mentorship programs, cooperative societies, and SME development agencies can create a supportive environment for informal businesses to flourish. Establishing one-stop business registration centers can simplify the formalisation process and reduce bureaucratic bottlenecks.

Conclusion: Rethinking Zimbabwe’s Informal Economy

Zimbabwe’s informal economy is both a hidden strength and a symptom of policy failure. While it provides employment and economic resilience, its unchecked expansion highlights the inefficiencies in the country’s economic policies.

Rather than viewing informality as a problem, policymakers should recognize it as an opportunity to create a more inclusive and dynamic economy.

Through targeted policies that promote financial inclusion, streamline regulatory processes, and support small businesses, Zimbabwe can harness the potential of its informal sector.

The transition to a formal economy should be gradual, incentivised, and accompanied by infrastructure improvements and institutional reforms.

By embracing a more holistic approach, Zimbabwe can turn its informal economy from a challenge into a catalyst for sustainable economic growth.

Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn-ebsinessweekl