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Government Policy Destroying The Formal Economy – 263chat.com

CIMAS Leaderboard

By Victor Bhoroma

Policy missteps and inconsistency has turned the Zimbabwean economy on its head against the formal sector, posing a threat to business continuity, domestic resource mobilization and formal employment. In the last 2 months, the government has ceased payments to government contractors and suppliers in order to arrest the depreciation of the Zimbabwean Dollar and reduce inflation. On its part, the Reserve Bank of Zimbabwe (RBZ) has been aggressively mopping up excess money created by local banks to suppress broad money expansion. This has resulted in a liquidity crunch in the formal market with shortage of electronic money, physical cash, and foreign currency at the same time. Consumer demand in the formal sector has also dipped as a response to the interventions. The positive impact is that the free-market exchange rate has stabilized, and prices are going down. The ultimate objective is to force the convergency of the manipulated formal exchange rate and the free-market exchange rate. However, the questions remain on how long the government can survive without paying its suppliers especially as the nation heads towards the harmonized elections that should take place before August 2023. The government survives on providing subsidies to various sectors of the economy to appeal to the electorate, hence the propensity to fund these subsidies via money printing remains high.

The formal sector and the informal sector have become two distinct economies in Zimbabwe with the earlier vulnerable to inconsistent fiscal and monetary policies while the latter has no intended regard for both. The informal sector contribution to Gross Domestic Product (GDP) is estimated to be below 50% according to national statistics.

According to the World Bank, Zimbabwe’s economy grew by 5.8% to US$19.2 billion in 2021 after contracting by 6.1% in 2019 and 6.2% in 2020. The existence of the dual economy makes it difficult for the government to control the economy through fiscal or monetary policy as the informal sector is predominantly cash based and fully dollarized.

Informalization within formal businesses

The need to survive and bypass stringent policies has seen corporates creating ways to informalize most of their operations. This includes evading various tax heads, not banking cash proceeds, buying foreign currency off the street, not paying council levies, using the informal exchange rates in forward pricing, paying employees in hard currency, not filing tax returns, externalizing foreign currency, smuggling imports, and falsifying export data.

Informal Sector Boom

It is estimated that US$2.5 billion is circulating outside the formal banking system in Zimbabwe with households, businesses and foreign investors preferring to store their hard-earned foreign currency close to their pockets. Sustained policy missteps continue to chase away foreign currency from formal economy. Estimates show that that over 65% of the Zimbabwean economy is now informal, while 85-90% of Zimbabweans are engaged in informal economic activities at a personal, household or enterprise level. The 2022 Labour Force Survey published by Zimstat points that 3.3 million people are employed locally, with over 2.8 million deriving their living from the informal sector as opposed to 495 000 in formal employment. The informal sector is wired into the local and regional supply chains, thus creating a trading platform where millions of dollars exchange hands daily.

Export Retention

The current export retention scheme allows most exporters to retain 60% of the export proceeds and surrender 40% to the central bank. If the 60% is not utilized within 4 months, the central bank will confiscate another 25% to take the total surrender requirement to 65%. On local foreign currency sales, the bank retains 20% of all sales deposited with local banks. Ordinarily, these measures would not be a challenge if the foreign exchange rate was market determined. With key exporters paying taxes and electricity in foreign currency, foreign exchange regulations are a punitive tax to business viability. Considering the above, most exporters are now calling for the review of the retention threshold to 80%.  

Heavy Tax Burden

The complex tax regime, multiple tax heads to various government entities and frequent renewals are helping to destroy the formal economy. The tax complexity has to do with a limited automation (excessive paperwork), archaic laws, payment in different currencies, need to travel to Harare or major cities to file tax returns and the involved of numerous government agencies. For businesses that deposit their sales proceeds in local Foreign Currency Accounts (FCA), the central bank converts 20% of the deposit to local currency and an Intermediated Money Transfer (IMT) Tax of 4% applies to payments made from that FCA account. Due to the above, large businesses are finding ways to transact in cash and not banking all sales proceeds. There is an urgent need to remove barriers to formalization through simplifying the tax registration process and providing incentives to fiscalization by making the cost of fiscalization tax deductible or partnering commercial banks to spread the cost of fiscalization over time. This means that tax payments and filing tax returns should be done efficiently online without physically visiting the tax agency. For the few tax compliant businesses, the tax agency must process tax rebates efficiently and give holidays where it is necessary.

High informalization unsustainable

Zimbabwe’s informal sector bears a mark of economic resilience, however high levels of informalization are also unsustainable for any country as it leads to limited tax mobilization on the part of treasury which leads to poor public service delivery (poor road infrastructure, power cuts, lack of basic health care, poor service delivery in education, housing, water, and other public amenities) and limited capacity to repay public debt (increase in arrears).  While the informal sector is growing, it cannot be excluded from consuming public services despite not contributing to tax payments. Additionally, high levels of informalization lead to a limited credit market and savings growth in the economy, limited growth in the financial and insurance sector (decline in banking sector lending and geographical presence). Informalization also nurtures and aids corruption, and criminal activities in the economy. Thus, levels of information must be managed to below 40% of the economy to ensure sustainable economic growth.  

Need for reforms

To ensure currency stability, the central bank must end all quasi-fiscal operations which will enable it to sustainably freeze money printing and institute a market determined exchange rate through allowing commercial banks to be match makers. Commercial banks should be allowed to adjust exchange rates according to demand and supply mechanisms as is the case in most countries. On constitutionalism, the central bank must not be allowed to contract any foreign debt without parliamentary approval as this brings conflict of interest on how to settle that debt while allowing the exchange rate to be market determined. However, sustained stability can only be guaranteed by giving the central bank independence from political influence in terms of money printing. History has proved that the government has no hesitation to print money to fund its expenditure and meet political objectives at the expense of the economy or the taxpayer (citizens and business).

Zimbabwe has not had a consistent currency or consistent foreign exchange policy for several decades. The country’s central bank quasi-fiscal operations and deficit financing of the fiscus have necessitated astronomic levels of money printing at whatever cost to the nation. The economy collapsed in 1999-2000, 2006-2008 and 2019-2020 due to hyperinflation. At the core of the problem is the government’s desire to control the central bank monetary policy and print money whenever tax revenues fall short of targeted government expenditure.

Between 2015 and 2022, the country promulgated hundreds of statutory instruments (temporary measures) aligned to monetary policy and produced a plethora of exchange control regulations or statements. Some statutory instruments contradicted each other while some just fizzled out before parliamentary ratification. Stable and consistent monetary policy is a fundamental piece to the economic stability puzzle, without which the country will not develop regardless of how colorful economic blueprints can be. The preference to trade in hard currency and in cash points to lack of trust in the government’s unsound policies over the years.  The collapse of the formal sector needs to be addressed via deliberate policy alignment between the central bank, treasury and various government agencies that play a part in levying and regulating the market. It is key to point that millions of employees that derive a living from the informal sector lack job and social security, suffer from income inconsistency, lack of health insurance, depressed savings and live from hand to mouth. All these conditions are closely associated with poverty. The government cannot institute policies that destroy formal employment, inflame skills flight, promote informality such as tuck-shop retailing, street trade in legal or illegal goods, hard dollarization, decline in banking sector lending and choke the credit market while expecting the economy to grow. Government policy should simply serve to create a conducive business environment and regulate market failure in the interest of curbing unfair or illegal business practice. Destruction of the formal sector cannot yield sustainable economic growth and will take years to undo.

Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email vbhoroma@gmail.com or Twitter @VictorBhoroma1.

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Australia begins drilling in the US sanctioned Zimbabwe, and that’s one hell of a move – TFI Global News

It seems that EU or the US allies are fast losing their influence in geopolitics. The new geopolitical realities are most certainly not in favour of the Western capitalists sitting in Washington and Brussels.

After its sanctions against Russia hardly worked, let alone yielding the desired results, it backfired so bad throwing the rich and prosperous Europe into an unprecedented energy crisis. Ever since then, European leaders are scouring the world to secure alternative energy sources.

Australia’s bold move to deepen ties with Zimbabwe

Now, Australia is deepening ties with Africa, Zimbabwe to be specific, despite US sanctions on the African nation for more than 2 decades now. Who would have thought that Zimbabwe will find a breather for its economy in Australia?

According to reports, Australian firm Invictus Energy Ltd (IVZ.AX) has started drilling one of two exploration wells for oil and gas in the northern part of Zimbabwe, the company said on Monday. With this Zimbabwe is anticipating the drilling of its first oil and gas well in the north of the country, close to the border with Mozambique, will bring in the much required relief from the unnecessary sanctions that are imposed upon it by the West.

(Source: NewZWire)

Invictus said in a statement that the drilling of the first well, Mukuyu-1 has begun and will last between 50 and 60 days. The company further said, Mukuyu will cost $16 million and is one of the largest oil and gas exploration prospects to be drilled globally in 2022, estimated at 20 trillion cubic feet and 845 million barrels of conventional gas condensate, or about 4.3 billion barrels of oil equivalent.

The new oil and gas well will be 3.5km deep to be drilled by the Australian firm Invictus Energy in partnership with the government of Zimbabwe. The company said that Mukuyu-1 will be followed by the 1.5 km deep well, Baobab-1, which will be completed in 30-40 days.

A win-win for both Australia and Zimbabwe

Australia is not a part of the NATO or the European Union.  In a situation where even the US after promising all assistance to Europe, left it to fend for itself in the aftermath of the Russia-Ukraine war and consequent energy crisis in Europe, it has been abundantly established that every country is looking for fulfilling its own national interest. Australia not being a member of the either abovementioned makes it free from all kind of obligations these so called brotherhoods impose upon its members when it comes to blindly imposing sanctions etc. The short-sightedness is proving fatal for the EU, USA and their blind followers around the world, especially the ones in Europe.

Europe after mindlessly imposing sanctions on Russia, has been struggling to cope with an unprecedented energy crisis. It depended on Russia’s natural gas for years to run factories, generate electricity and heat homes. However, after Russia chocked off the supplies, Europe has been forced into a desperate scramble for new supplies and alternative sources, as high energy prices are already threatening to cause a recession.

Now Europe has started to almost beg its way into Africa to exploit its vast reserves of untapped natural resources. Too bad for Europe, that this time it can’t dictate its terms to Africa, like it has been doing till now, as beggars cannot be choosers.

To save itself from the disaster that waits, it has been looking for new energy sources. So at a time, when Europe or even the US can explore new ways of safeguarding national interest faced with the challenge of Russia-Ukraine war, why should Australia stay behind?

Australia is acting in its own national interest and beginning drilling in US sanctioned Zimbabwe is a bold move. Zimbabwe is a resource rich country with mines of gold, diamond, platinum, palladium and many other minerals. Mineral exports account for about 16% of Harare’s GDP. However, two-decade-old US sanctions have devastated Zimbabwe’s economy and its people are suffering.

Read More: Here’s why USA’s “Operation Zimbabwe” against Russia is a dead duck from the start

Finally Zimbabwe sees a glimmer of hope by deepening ties with Australia.

Now the time has come, when like many other African nations, Zimbabwe too hopes to join the league of oil producing economies. If all goes well, this will be a significant economic breakthrough for the country that could potentially change its fortunes forever. The project could improve Zimbabwe’s power supplies and economy and it has been hailed as a ‘game-changer’. Zimbabwe’s President, Emmerson Mnangagwa has expressed his excitement for the potential oil and gas discovery and maintained that it presents “huge, unique and competitive investment opportunities”.

Zimbabwe needs trade and investment to grow its economy and with this project, Zimbabwe only stands to gain massively. It is a win-win for both Australia and Zimbabwe. Australia is clearly sending across the message that it is high time Europe realise, it needs to do away with its mentality of believing that the world’s problems are not its problems, however its problems are the world’s problems.

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‘Drop Dangarembga charges,’ says Americans – Bulawayo24 News

UNITED States-based rights group PEN America has called on Zimbabwean authorities to drop charges against world acclaimed writer and filmmaker Tsitsi Dangarembga.

The Harare-based writer will know her fate Thursday in case where she is charged with inciting public violence.

“Tsitsi Dangarembga was arrested for exercising her right to peaceful protest,” said Liesl Gerntholtz, director of the PEN/Barbey Freedom to Write Centre.

“Her arrest and the long drawn out trial against her is clearly intended to send a frightening message to anyone in Zimbabwe who wants to exercise their right to free expression and criticize their government.

“If she is convicted on these spurious charges, it will further stifle free expression and human rights in Zimbabwe. We urge the authorities to immediately drop the charges and to respect and uphold the right to free expression and association.”

Dangarembga was arrested alongside journalist Julie Barnes in July 2020 for joining a peaceful demonstration criticizing the Zimbabwean government’s efforts to handle corruption and the struggling economy.

Both were charged with breaking COVID-19 lockdown measures to hold an illegal gathering and inciting violence in the Anti-Corruption Court – the only court that does not report to the Justice Ministry, but directly to the president’s office.

The trial has been delayed over the course of the last two years, and Dangarembga appeared in court nearly 30 times.

She is recognized internationally for her work; her latest novel, This Mournable Body, was short-listed for the Booker Prize in 2020. Her debut novel, Nervous Conditions (1988), was the first to be published in English by a Black woman from Zimbabwe, and was named by the BBC as one of the top 100 books that have shaped the world.

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economy

PEN America Calls for Spurious Charges to be Dropped Against Writer, Playwright, and Filmmaker Tsitsi Dangarembgaon in Zimbabwe – PEN America

Acclaimed Author, Short-listed for Booker Prize, Was Arrested at Peaceful Protest Criticizing Government on Corruption

 (NEW YORK) – Ahead of the verdict slated to be handed down on Sept. 29 against writer, playwright, and filmmaker Tsitsi Dangarembga spurious charges of inciting public violence in 2020, PEN America today called on Zimbabwean authorities to immediately vacate the charges. If convicted, Dangarembga faces several years in prison.

Dangarembga is recognized internationally for her work; her latest novel, This Mournable Body, was short-listed for the Booker Prize in 2020. Her debut novel, Nervous Conditions (1988), was the first to be published in English by a Black woman from Zimbabwe, and was named by the BBC as one of the top 100 books that have shaped the world.

“Tsitsi Dangarembga was arrested for exercising her right to peaceful protest. Her arrest and the long drawn out trial against her is clearly intended to send a frightening message to anyone in Zimbabwe who wants to exercise their right to free expression and criticize their government,” said Liesl Gerntholtz, director of the PEN/Barbey Freedom to Write Center. “If she is convicted on these spurious charges, it will further stifle free expression and human rights in Zimbabwe. We urge the authorities to immediately drop the charges and to respect and uphold the right to free expression and association.”

She was arrested alongside journalist Julie Barnes in July 2020 for joining a peaceful demonstration criticizing the Zimbabwean government’s efforts to handle corruption and the struggling economy. Both were charged with breaking COVID-19 lockdown measures to hold an illegal gathering and inciting violence in the Anti-Corruption Court—the only court that does not report to the Justice Ministry, but directly to the president’s office. The trial has been delayed over the course of the last two years, and Dangarembga appeared in court nearly 30 times.

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