Highly informal countries must use the coronavirus pandemic and the subsequent lockdowns as an opportunity to accelerate the formalisation of their economies, a research paper by management consulting firm McKinsey suggest.
Zimbabwe is also a highly informal economy, with the 2019 Labour Force and Child Labour Survey indicating that the share of informal economy employment was 76 percent of total employment, clearly indicating the high levels of informality in the country.
The International Monetary Fund (IMF), in a report, said Zimbabwe has the second largest informal economy as a percentage of its total economy in the world, after Bolivia.
In a working paper titled, “Shadow economies around the World: What did we learn over the last 20 years?” in which 158 economies were studied, Zimbabwe, with a score of 60,6 percent, came second to Bolivia which topped at 62,3 percent.
Roughly 3,7 million people in Zimbabwe are involved in the informal sector where 54,6 percent are females, according to the IMF.
However, the downside is that the sector is not being regulated for the purposes of generating national income and decent employment.
In addition, workers in the informal sector lack the protection that formal sector workers receive from social insurance.
McKinsey thus sees the Covid-19 pandemic as an opportunity to accelerate the formalisation of the sector and so improve its productivity, access to finance, and integration into the supply chains of larger businesses and the public sector.
“Formalisation would also create additional protection and opportunities for employees of MSMEs, and eventually contribute additional tax revenues for governments,” reads part of the research paper encompassing views from across the McKinsey Africa Practice.
For formalisation to happen at scale, fresh impetus is needed for SMEs to register with governments and regulators.
There is, however, need to deal with barriers such as prohibitive costs, bureaucratic processes, and a perceived lack of benefit from formalisation.
There needs to be sufficient incentive for SMEs to formalise, both from the public sector and through connection to larger corporates in the private sector.
With survival in the balance and registration being a prerequisite for accessing government relief, many SMEs may now see the benefits of entering the formal economy, Mckinsey said.
Zimbabwe seems to be heeding this call and is asking affected players in the informal sector to register and apply for assistance.
This week, Minister of Women Affairs, Community and Small and Medium Enterprises Development, Dr Sithembiso Nyoni, said SMEs suffering as a result of the lockdown, should register to access the cushioning fund.
Minister Nyoni also said her ministry was working on a strategic plan to not only formalise, but decongest areas like the Glen View Complex.
She said those with work stations at the Complex will only be allowed to return under more formal structures.
“We don’t want people to go back to those squalors. We are now reorganising to decongest the place. So discussions are ongoing with the leadership there and as soon as we are given land somewhere, we start constructing new places for them,” said Minister Nyoni.
The move will be a big step towards formalising the informal sector.
To draw millions of SMEs into the formal economy, Mckinsey suggest governments channel stimulus funding toward SMEs than large corporates.
“Governments can encourage more small businesses to enter the formal economy by generating market access schemes for SMEs.
“For example, they can strengthen government-guaranteed offtake schemes and incentivise large companies to integrate SMEs into their supply chains.”
Again Government is taking a similar approach.
“We have worked with the Women’s Bank and put funds into three tiers, one the green field, if there are SMEs that have lost everything out there, go to the Women’s Bank, they will retrain you, re-orient you and restart you.
“The second one is the informal sector. There are some that hang in there but the funds are depleted. We also had a slot for them, to fund them, to resuscitate and grow their sector.
“The last one is the SMEs, these are registered companies with a fixed abode. They should also come and apply,” said Minister Nyoni.
Another priority area suggested is for governments to launch a targeted campaign to formalise SMEs. Small enterprises need to be convinced of the broader benefits of formalisation, notably access to finance, markets, and labour.