2009: Goodbye parallel market, hello formal economy

In fact, for many economic agents (both households and corporates), 2009 is a year of recovery for the formal economy after more than a decade of inexorable downturn characterised by hyperinflation, staggering budget and trade deficits, record unemployment and widespread de-industrialisation.
Simon Munongo, a Harare economist, said the market correction, which started last year with the liberalisation of the economy is likely to strengthen  this year and positively impact on key macro-economic variables.
“The RBZ (Reserve Bank of Zimbabwe) took a bold step forward by ‘introducing FOLIWARS’ last year at a time when foreign currency had a narrow circulation. Despite the heavy criticism that greeted it at the time, the measure has brought about the much-needed stability,” Munongo says. “What we need now are effective policies and strategies to promote formal productive enterprise and bring medium-size players into the mainstream of the economy for they are an important part of the ‘private sector’ especially in Africa.”
The level of economic informality in Zimbabwe reached shocking levels last year with estimates putting the ratio of parallel market dealing to overall economic activity at about 80 percent and formal sector unemployment around the same rate.
According to the World Bank 2009 Doing Business report, informality flourishes in an environment where regulation is either “onerous” or “lax” and institutions too weak to support conventional business.
In the economic maelstrom of last year and a few years back, professionals would quit formal employment to indulge in street-corner petty commodity broking; operate street bureaux de change and engage in any shady dealings, which the overvalued Zimbabwean dollar would support.
The last two months, however, have seen the cycle reversing — small companies like bears have gone back into their hiding holes; the number of job-seekers has increased phenomenally and the formal economy is slowly making a rebound.
However, there is still concern that a lot remains to be done to accelerate the adjustment process as only a few non-critical sectors — retail, tourism and business support services — have recovered while the agricultural, manufacturing, mining, construction and financial sectors are still fighting to keep their heads above the water.  According to economists, the financial sector and business support services will flourish only if the manufacturing industry has a high absorption rate for capital and diversified services, which help reinforce strong forward and backward linkages that promote value chain development.
“The level of financial deepening depends on whether the productive sector, especially the manufacturing sector, is growing or not. “The sad news for our banks is that this critical sector is contracting and cannot borrow to invest. The few companies that are still going strong are also reluctant to bank money,” Munongo said.
The Confederation of Zimbabwe Industries (CZI) says the unwillingness by companies to bank their receipts is both a manifestation and consequence of excessive economic informalisation, which “entrenched” and “spread its tentacles” as a result of slipshod regulation.
“For quite good reasons, companies have had to duck and dive so long as doing so is not equal to breaking the law. These are the consequences of informalisation. Our authorities allowed the economy to informalise. Now, the ‘informal sector culture’ has permeated the formal sector. Right now, companies are not sure of many things — the policy on FCAs, the level of bank charges and things like that,” Kumbirai Katsande, the CZI president said. “We need policies that improve business confidence. For as long as there is business confidence, markets correct on their own and money will flow into the banks. It didn’t take the police to move people from the streets, but  just a good policy.”
The harsh operating environment and low business confidence have created a new kind of industrial decomposition — a homogenisation of formal and informal enterprises or — as only a thin line now separates formal institutions from informal ones in terms of business conduct.
Industrial decomposition normally takes place when there are strong value chain and market linkages that allow small, semi-formal businesses that provide essential business support services and larger formal corporations to grow into each other.
Katsande also warned that if the market took too long to adjust and lower costs, many Zimbabwean companies with regional operations could consider moving manufacturing business to their operations around southern Africa and turn their Zimbabwean units into distribution centres.
In the last five years, Zimbabwean companies expanded into nearly all countries in southern Africa to open income streams in foreign currency as a way to hedge themselves from high operating costs in the country, which undermined profitability and competitiveness.
The companies, which already face stiff import competition from low-cost regional producers, say they have found it increasingly difficult to maintain margins against astronomical rent, water, electricity and telephone costs.
“Some of the imports of finished goods are even cheaper than some raw materials here,” Katsande said.