A Costly Mistake: Government Uses Stick, Not Carrot, on Informal Businesses

The Zimbabwean government, led by Finance Minister Mthuli Ncube, is set to announce measures aimed at formalising the informal sector to ensure compliance with legal requirements, including tax obligations.

Said Mthuli,

So, the informal sector is really squeezing out the formal sector and as Government, we are going to embark on an accelerated programme to make sure that the informal sector complies with whatever requirements they should comply with — be it licensing requirements, be it payment of taxes, be it selling goods at properly designated areas; for example, where they ought to sell

The word is that retailers are facing pressure from the unregulated informal sector, which offers lower prices due to non-compliance with statutory obligations and a few other reasons, prompting the government to act.

The Zimbabwe Revenue Authority (ZIMRA) has seized goods worth approximately US$2.4 million in operations targeting smuggling and other funny business practices, including the confiscation of vehicles and illicit goods.

The government is committed to supporting formal retailers to withstand competition from the informal sector while ensuring that informal traders comply with necessary regulations.

What the solution should be?

The Zimbabwe National Chamber of Commerce (ZNCC) advocates for policy changes to address disparities between formal and informal sectors, including reducing government restrictions and barriers to trade in goods and streamlining tax burdens.

See that’s the thing, ZNCC argues what the rest of us believe. The solution is to make compliance attractive, not to make noncompliance toxic per se. Said ZNCC,

Others are tackling informality by creating incentives for formalisation and enforcing fair market practices, and improving access to affordable financing for businesses to sustain operations and support growth.

In a normal economy, the benefits of formalising are so great that businesses rush to do so. The carrot usually works better in cases like these.

The stick is unlikely to succeed in an economy where the tax regime is so harsh that it would cause many, if not most, informal businesses to go under.

We all know that one of the biggest challenges killing formal retailers like OK is their obligation to abide by the formal exchange rate.

Additionally, they take too long to pay suppliers, often taking months to settle obligations. This is unacceptable because, in an inflationary economy, it means suppliers incur losses on some of these contracts.

This is why suppliers are choosing to supply the informal sector, where they receive cash on delivery. Which is why some shelves are empty in the formal retailer supermarkets.

It is unfortunate that the government believes the solution is to chase after the informal sector and enforce compliance rather than reducing the compliance burden. Let the cat and mouse games commence.

Unfortunately, it is us, the consumers who are set to pay more for goods with these government stings. We can’t really afford this and so it’s going to be a disaster. Protecting OK is going to hurt small businesses AND the public.