Reversing informalisation of Zim economic system will take years, says World Bank

Reversing informalisation may take years, and only a broad set of policy reforms can help Zimbabwe turn tide, a new World Bank report says.

The World Bank’s Zimbabwe Public Finance Review estimates that Zimbabwe lost US$4.5 billion from its exchange rate and monetary policies between 2020 and 2023.

Over that period, Zimbabwe lost taxes worth an estimated US$1.15 billion due to policies that drove the informalisation of the economy.

“These estimates suggest that, in the absence of such monetary and exchange rate distortions, tax revenue in 2023 could have been as high as US$6.6 billion or 18.9% of GDP,” the report says.

The Challenge
Once an economy shifts towards informality, bringing businesses back into the formal sector is a slow and difficult process, says the Bank.

“Informality is an extremely persistent phenomenon, such that it can take years to re-formalise the private sector and regain tax collection,” the World Bank says.

“While an initial shock can significantly increase the share of private sector operating in informality, it can take years to bring this share back to the formal sector. In turn, re-formalising the private sector often takes many years to show robust effects on tax collection.”

What to do?

The World Bank says Zimbabwe must narrow the parallel exchange rate premium – the gap between the formal and informal exchange rates – and end punitive exchange rate controls.

Zimbabwe also needs to reform the “cumbersome tax compliance for SMEs that contribute to informalisation”.

By implementing reforms, Zimbabwe could increase tax revenue collection by 3.4% of GDP annually over the medium term.

How the IMTT is fueling informalisation
The Intermediate Money Transfer Tax (IMTT) targets formal transactions, pushing businesses and individuals to cash-based informal transactions.

The World Bank suggests that making the IMTT tax-deductible for companies could encourage a shift back to formalisation.

Dollarisation: Double-edged sword
Another result of macroeconomic instability is the increasing use of US dollars in local transactions.

The World Bank report says foreign currency deposits rose from 4% in January 2019 to nearly 80% by January 2024. Tax collection has also dramatically shifted toward US dollars—while 89% of taxes were collected in ZWL in early 2020, this had dropped to just 37% by the end of 2023, or 30% when using parallel market exchange rates).

This shift to US dollar transactions helped cushion Zimbabwe from a crisis similar to the 2006–2008 hyperinflation period. However, it has also raised challenges for tax collection and economic planning.

NewZwire