Vision 2030 possible, but informality a threat

Zimbabwe has the potential to achieve steady and rapid growth, and converge toward upper middle-income country (UMIC) status if it builds on its highly educated workforce, abundant natural resources, and recent advances in economic policy, the World Bank has said in its latest Zimbabwe Country Economic Memorandum (CEM) report released this week in Washington DC.

The CEM report, which until now was last done in 1985, provides a comprehensive analysis of the country’s economic development prospects and policy agenda as well as identifying policy reforms for key economic sectors.

President Mnangagwa’s Government has an ambitious plan to achieve upper middle-income country status by 2030. The vision is clearly articulated in Government’s devolution-focused development policy whose implementation is fully expressed in the National Development Strategy (NDS1:2021-2025), a key building bloc towards attainment of the desired upper middle-income economy.

The journey towards Vision 2030 is, however, facing threats from considerable macroeconomic instability and distortions that have led to high inflation and multiple exchange rates in the country, the World Bank said.

Despite making progress in stabilising the economy and reforming the business environment, significant structural, institutional, and economic challenges still remain.

“These consequences, coupled with a high-cost regulatory environment, external shocks and productive resource misallocation, have reduced economic growth to below its potential, lowered incomes, and increased poverty,” the global lender said in an executive summary of the CEM report.

This year, Zimbabwe’s economy is expected to grow by 4,6 percent. The World Bank said while productivity is the ultimate driver of economic growth and living standards, Zimbabwe has a low total factor productivity(TFP).

For Zimbabwe to achieve high and sustained growth to converge with UMIC status, it will require TFP growth rates of 8–9 percent per year.

Achieving this will require the country to leverage its well skilled workforce as the country’s labour force has remained depressed over the past two decades, according to the global lender.

Speaking at the launch Marjorie Mpundu, World Bank country manager Zimbabwe, said without significant and sustained policy reform, economic growth will remain depressed.

“Our simulations show that productivity in Zimbabwe will need to grow by 8-9 percent per year. Basically we need to double that. This is a significant challenge that requires more drastic changes in the policy environment,” she said.

Zimbabwe’s labour productivity level over the past decade ranks second to last among 17 lower middle-income countries (LMIC) economies in Sub Saharan Africa (SSA).

This comes as the economy has experienced lower employment growth rates than its peers across most sectors, the World Bank.

The Covid-19 pandemic further widened

Zimbabwe’s productivity gap with its peers and the country now ranks last out of SSA LMICs.

The World Bank said strict lockdown rules, needed to curb the spread of the pandemic, coupled with supply disruptions, meant that most firms suffered a severe reduction in labour productivity growth.

“This decline in productivity growth was more adverse for firms in Zimbabwe than for firms in Zambia and Mozambique.”

Recent gains in the industry and services productivity growth have been offset by low productivity growth in the informal sector.

Zimbabwe is on a par with its peers in SSA in terms of manufacturing sector productivity, and productivity is even above regional peers in sub sectors such as food and chemicals.

However, the further expansion of informality in industry and services in recent years has offset these gains and served to pull down overall productivity.

According to the CEM report, cross-country evidence suggests that competition from informal firms can lower formal firms’ productivity by 24 percent compared with firms that do not face such competition.

Creating more and better jobs in the formal sector will require policies that tackle obstacles to both formal and informal productivity growth, said the World Bank.

It said macroeconomic instability, limited investment in infrastructure, inefficient public services, and the misallocation of productive resources have been the key drivers of low productivity, informality, and poor trade performance.

“High informality is a further drag on productivity levels, as informal firms have lower productivity levels than formal firms.”

The informal sector has been the largest employer in Zimbabwe over the past four decades, suppressing productivity growth and long-term development.

The CEM report noted that labour productivity in a median informal firm is one-tenth that of a formal firm of similar size, suggesting a relatively high productivity gap of nearly 90 percent.

The global lender said lack of sustained growth and a business environment with heavy regulatory burdens have contributed to the persistent and pervasive informality.

Limited economic development and an unfriendly business climate have incentivised firms and workers to move to the informal sector, while reducing the benefits of joining the formal sector.

To economically progress, tackling informality needs to be at the forefront of Zimbabwe’s development strategy to enhance productivity, achieve high and sustained growth, and attain UMIC status, said the World Bank.

To enhance productivity for the informal sector, the World Bank suggested the need to ensure better access to finance for formal firms and seed funds and training provided to informal firms.

Speaking at the launch of the report, Finance and Economic Development Minister Professor Mthuli Ncube, said taxes collected from the informal sector will be channelled towards development of infrastructure and landing facilities for the same sector.

“The location taxes to the collected amount is being set aside to build infrastructure for the SMEs and landing for the sale so basically we are taking taxes from the informal sector and ploughing back those taxes into that sector by investing into critical infrastructure,” he said.

The World Bank said policies must also seek for better access to information, training, markets, public goods and services; tax mediation services and individualised training; and policies to close the digital gender divide.

Further, the World Bank called for simplification of business start-up formalities including lowering of the tax burden, compliance costs, and red tape to reduce the costs of joining the formal sector; promoting digitalization to lower government administrative costs; and improving governance and the provision of public sector services.

The six key pathways proposed by the CEM to boost productivity and quality jobs include ensuring and sustaining macroeconomic stability; removing distortions and misallocation of resources; enhancing the productivity of the informal sector and linkages with the formal sector; encouraging the formalisation of informal firms; supporting export diversification and participation in global value chains; and taking greater advantage of regional trade integration.-ebusinessweekly