AN INSIGHT INTO THE INFORMAL ECONOMY

The informal economy has been credited for absorbing a number of the unemployed and for sustaining the economy during country’s most turbulent years. Information made available by ZEPARU reveals that 60% of economic activity is in the informal sector and thousands are earning a living within this informal setting. There is of course the famous Mbare Musika, Mupedzanhamo market, the flea markets across the country and within the ranks of informal traders or entrepreneurs are carpenters, welders, electricians, builders and the list goes on.

 In this article we highlight a very vibrant informal industry, the Glenview home industries located in the Glenview high density suburb of Harare. It is there where one can get a glimpse of what the informal economy is all about as well as to understand its importance to the greater or rest of the economy. There are probably hundreds of traders, entrepreneurs, workers involved in this vast furniture making complex. The foremost business there is the manufacture of home furniture units such as lounge suites, beds, televisions stands, wardrobes etc. and there is a number of different types of these on display. A good number of the entrepreneurs there are involved in the actual making of everything on display although in some cases they do employ workers to assist them.

 However that it is only the beginning because these are very busy entrepreneurs who do not have the time to go out and source materials and this is where the other group of enterprising individuals comes in. There are several stalls or retail outlets numbering in the hundreds and here everything that the furniture manufacturer needs he/she it will be found. These traders sell timber, the adhesives, paints, nails, all the hardware needed and all of them are located inside this teeming complex adding convenience to manufacturers. The other group in this value chain includes those individuals providing food to traders and workers, those selling airtime, those providing entertainment.

Now when customers purchase furniture there is ready transport that is provided for by over a 100 trucks waiting outside the complex. It gets even crazier because the congestion inside the complex makes it difficult for vehicles to go in and some enterprising youths have cashed in by offering to carry the sometimes heavy furniture with bare hands for a small fee. To round it off you then have the noisy yet very persuasive salespersons that will pounce on anyone showing even the most remote interest in their furniture. This Glenview complex is what one might refer to as the Silicon Valley of furniture albeit on a much smaller scale because you have every business that is directly or indirectly involved located at this place and this quite a novel for the country.

Business and activities normally spike when fellow informal entrepreneurs, that is the tobacco farmers descend on Harare to sell their produce. It is not clear why but most small scale tobacco farmers will visit this place each year to buy after selling their crop and it is during this period especially now in the era of dollarization that one can appreciate the significance of the informal economy to the formal economy. The furniture’s quality is quite good and a number of furniture retail outlets in Harare and outside Harare actually source their merchandise from here.

However clearly there are some problems that are inhibiting the flow of activities and perhaps the further growth of this industrial area. The sanitation is not presently very good and space seems to be getting less to allow for others to join in. The road network appears overwhelmed most of the time and recently there was a fire that destroyed furniture worth thousands of dollars since these traders were not insured they suffered the losses.  

There are no reliable statistics on the figures involved in the informal economy that may perhaps be the reason why government has not really come to the party in terms of supporting this informal economy. However what is happening there is real, people are earning a living from this and it is imperative that due recognition and support be accorded. In fact support should be accorded to all small scale traders throughout the economy as evidence on the ground suggest doing so drives the economy forward. 

gold or commodity currency for Zimbabwe

GOLD OR COMMODITY BACKED CURRENCY IN ZIMBABWE?

Since 2009 when the country officially adopted the so-called
multiple currency system following the demise of the Zimdollar, there have been
some muted calls for the return to a local currency because of certain
obstacles associated with the use of foreign currency as legal tender in the
country.  In fact a few months ago the
central bank made a call for the introduction of what is known as gold backed
Zimdollar, basically paper money backed by gold or other precious minerals. 

A number of factors are motivating this kind of agitation
and these range from the very sentimental reasons to arguments that could actually
pass for valid economic rationale. To start with politicians, the so called
nationalists or pan Africanists feel the use of foreign currency especially
that of a major power as our own borders on neo colonialism. In the same vein
they feel this takes away a country’s pride or prestige and as such this should
not be allowed to continue. For consumers the nightmare of change continues to
be the bane as the country does not have enough smaller denominations of these
foreign currencies particularly coins forcing consumers to purchase what they
do not want or lose the change.

 While the official
position is that we use the multiple currency system, the truth is that we
mainly use the American dollar in almost all transactions, the country’s budget
is presented in the US dollars and banks use the greenback as the base
currency. It is in this context that some may feel the need to move away from
greenback especially now as that country’s debt has reached alarmingly high levels
and of course the recent downgrade of the dollar from AAA to AA+ by Standards
and Poor may have given ammunition to those against the use of the dollar. 
Now according to the central bank chief, a gold backed
Zimdollar could potentially work because the country has this resource in
abundance not to mention diamonds so according to him the currency will be
stable or even better than the greenback. 
Now it is important to understand that prior to 1971 most
countries used this sort of system where the currency in circulation was backed
by gold in national vaults but that changed after the US abandoned this in
favour of what is known as fiat money. With this sort of system the value of currency
is determined by money supply and not the value of gold or some valuable
commodity and this is what the rest of the world has since adopted. Even Switzerland
dropped its gold system when it joined the IMF although the Swiss franc is
still thought to be aligned with gold. 
This system became the favoured one because it grants the government
such an unbridled access to funds by simply issuing paper (treasury bonds) or the
printing of currency which it then uses to finance its deficits. The government
will not be limited as was the case with the gold backed currency system so for
as long as people still have confidence in the system the government will still
borrow. 
The United States whose financial system presides over the
world economy has used this fiat currency system extensively and apparently it may
have now reached the end of its tether as its national debt currently stands at
$14 trillion. According to the official count the amount of gold held by the US
at Fort Knox and elsewhere is about 8100 tonnes which at current gold prices has
a value of about $600 billion clearly this picture shows why the government
favours this system. This system allows the state live outside its means  but from a pragmatic point of view this
system appears increasingly unsustainable especially for the US economy whose
GDP is currently $15 trillion and this is what has prompted dissenting voices
like that of Congressman Ron Paul. He believes that the US should return to a
gold backed currency if it is extricate itself from this financial mess it is
currently in. A gold backed currency will rein in on government spending and
possibly eradicate America’s obsession with debt. For the United States however
the challenge of doing this is quite enormous especially as its financial system
is still the trusted and safe despite the growing criticism and there is no
alternative yet. 

For a smaller country like Zimbabwe adopting a gold backed
currency seems a plausible alternative however there are fundamental questions
that must be answered first before any decision to go for this is made. Fundamentally
the issuing of currency is founded on trust and confidence, very fragile
attributes.  If we are going to adopt
this gold backed currency, who exactly going to determine what amount of
currency is to be printed or issued? Who is going to oversee that set down
guidelines are followed? These concerns are borne out of the practices of the
central bank over the last decade, practices that are blamed for exacerbating
the inflation situation. The raiding of private accounts and the printing of
money ensured that confidence in the currency reached zero as the Zimdollar disappeared.

 Against such a
background it is highly unlikely that citizens will start to trust the central
bank once more simply because it has proposed this novel move. Citizens will
have to be convinced that if such a system was to be implemented the working guidelines
will be strictly followed no matter how difficult the circumstances might be. The
central bank at the present moment comes short on these as its so called quasi-fiscal
activities in the last decade violated the cardinal rules of the fiat currency
system and this ultimately led to the demise of the Zimdollar. There is no
guarantee that guidelines will be followed to the letter once we adopt this
system especially as the central bank has not been reformed and it is still
very much politicised organisation as the appointment of its officers is made
by politicians. Since the inception of this government in 2009, the governing
parties have regularly clashed over the appointment of the governor and this
actually means these appointees are subservient to the politicians and not the
laws of sound economics. 
However the reintroduction of local currency could work if
all factors that led to the collapse of the last currency are dealt with. Industrial
output has to be restored to pre-2000 levels and the central bank has to be
really reformed and it must be really independent of the state. Meeting some of
these conditions could guarantee the success of such a gold backed currency

tapping into the unbanked in Zimbabwe

TRYING TO RE-ESTABLISH CONFIDENCE IN BANKING

Since well before the dollarization of the economy in 2009 a lot people had grown dissatisfied with the banking system as the withdrawal limits and inflation had left a lot funds totally decimated. The high service fees and low interest on deposits meant that for the most part the exercise of banking was a costly one and subsequently people lost confidence in banks. While dollarization of the economy has ensured that inflation has been kept in check, it is the high banks service fees as evidence by the high non-interest income accruing to banks plus the low interest on deposits that continue to have many shunning the banking system.

Indeed deposits have been growing steadily but it is their transitory nature that continues to be a cause of concern because such deposits do little to aid economic recovery and there is obviously a reason for this. According to a survey by ZEPARU a local research organisation about $2.5 billion remains outside the banking system and also a snap survey carried out by the local broadcaster on the subject revealed that a lot of potential banks clients are still reluctant to embrace banks once more. The major problem according to this survey was the high fees charged and the lack of meaningful interest on deposits if there is any. Of course the previous acts by the central bank at the height of hyperinflation also still linger and since there has not been any reassuring reform at this institution people still avoid keeping their funds in banks.

It is in the back ground of this that the country’s mobile phone operators are attempting to tap into this portion of the population that is unbanked through various products known a ‘mobile wallet’. Telecel, Netone and Econet have all launched facilities which allow subscribers to send and receive cash and the emphasis is that you do not a bank account to use or access these services. The essence of this whole exercise is to have the population to at least have confidence in other economic agents who may not necessarily be banks and in this case mobile phone companies. Economic recovery in the absence of direct multilateral lender support means the domestic scene is the only viable option to fund or recapitalise industry yet this cannot happen as long as the financial system appears hamstrung by the lack of confidence in it.  An advertisement campaign by Econet explains that people will simply have to follow instructions on the sending and once a confirmation message is received by the beneficiary he/she can then go to a participating outlet to redeem the cash.

 It’s of course early days yet to tell if this is going to be a success but the sheer size of the infrastructure and organisations involved may point to its success. What is imperative is that these companies do not repeat the same approach of charging high fees for these transactions something many people are still very sensitive to. Once people feel secure with this innovative system then perhaps we might witness a significant increase of transactions that currently take place in the informal economy coming on to the fore.

This may seem unorthodox but it may perhaps be the best shot at solving this problem of low confidence in banks and with millions of mobile phone subscribers as potential clients we can only keep our fingers crossed that this turns to be a resounding success.

diaspora

ECONOMIC RECOVERY EFFORTS: DIASPORA THE FORGOTTEN GROUP

The past decade did a great deal in chasing away professionals, entrepreueners, farmers to mention just a few. As the economic and political environment deteriorated these were forced to settle in lands as far away as UK, USA and South Africa among other countries. However as the economic went into tailspin from 2003 till 2009, it became evident that these expatriates were instrumental to some degree in sustaining the faltering economy. It had been widely predicted back then that the whole country would simply collapse by 2005 as hyperinflation took its toll on the economy and the worsening poverty levels meant the country was on a path towards a full blown conflict. That did not exactly happen because by 2005 the economy was still struggling and it continued struggling until 2009 and many reasons have been proffered for this. However two factors seemed to have standout among the various propositions made, namely the informal sector of the economy and the impact of diaspora remittances during that period. Many people who lost jobs during this period were absorbed by the informal sector whose activities included cross border trading among others. This enabled families to survive during this difficult period. However it is Diaspora remittances back to Zimbabwe during that period which made people suddenly aware of the importance of this forgotten group. Millions of dollars were sent to families back in Zimbabwe thus helping to stem mass starvation and just keep things going. Efforts were then made by the government to harness these remittances but these efforts largely failed because for a long time the government seemed to misunderstand this economically important group. We may all remember the central bank’s homelink program, remittance program made to lure the Diasporas to channel their remittances through government channels and of course this did not succeed. Nonetheless the Diaspora still did sent money back through what was commonly known as the black market and indeed today a lot of people do acknowledge the critical role the Diaspora played in ensuring families back home were fed and that the general economy did not collapse. However since the start of the coalition government this group seems to have been forgotten as efforts to resuscitate the economy now seem to ignore them. It’s not clear if the consultation process which gave birth to the new economic blueprint actually reached out to the Diaspora though the final document does talk of Diaspora re engagement. As mentioned past efforts to use remittances by these to cushion the government from foreign currency shortages failed primarily because the government insisted on an exchange rate which sensationally overvalued the Zimdollar. During that period despite threats the black market was the preferred way of sending money home as the Diaspora avoided the homelink channel which was controlled by the government. Of course since we now use foreign currency as our own, money is now being sent through normal channels. However the diaspora could potentially do more for the economy if the government really listens to their concerns. The economy which has not received significant financial aid is currently in the midst of a gripping liquidity crisis yet we have the Diaspora which could potentially be sitting on a huge cash pile. The Mid Term Plan talks of Diaspora re-engagement an effort which if done sincerely could potentially avail to the economy the much needed liquidity injection. At the centre of the diaspora’s concern or anger is their apparent continued disenfranchisement especially when it comes to the country’s plebiscites. To them participation in economic revival efforts has to be reciprocated with participation or representation in national issues or events and currently that does not appear to be the case as reforms carried so far does not address this. Secondly the Diaspora just like a foreign investor expect or prefer a business environment in which the rights of property holders are respected, a stable socio-political environment and a degree of certainty in government actions.  If anyone in the Diaspora decides to invest, his investment should be accorded its due protection regardless of the investor’s background, colour or creed. Just like the constitution which is non-discriminatory, likewise policies or laws promulgated should reflect this, giving the same treatment to investments made by anyone who is a citizen of this country. If the government comes through on these then it is guaranteed that the Diaspora will certainly come forward to assist in reviving the economy. 

company results

ECONET THE TOP PERFOMER

Econet Wireless Zimbabwe the country’s biggest telecommunication company has just made public its interim results for the period ending 31 August 2011 and these results continue to reaffirm the company’s blue chip status. For a company that started operations in 1998, this has to be one of the most remarkable success stories of the country’s entrepreneurs particularly now as it has become the second largest capitalised company on the stock market after Delta Corporation.

The highlights of Econet performance include an increase in turnover by 24% from $235.4 million in the interim period last to $290.8 million this time around while earnings before tax and interest rose 14% from $114.9 million to $131.2 million. There is no doubt that this is a very good performance which not underlies the company’s own proficiency but also underscores the importance of a stable macro-economic environment. In fact since the adoption of the multiple currency system in 2009, Econet as well as other well managed companies have reaped heavy rewards and certainly it appears the trend will continue as long as the underlying economic fundamentals remain unchanged.

The other noteworthy feature of Econet’s performance is its cash generation capacity which reached $139.5 million while its debt leveraging improved from a high figure of 86% by the 28^th of February 2011 to about 68%. While this has been a concern for some, it is however this company’s interest covers which was 10.9 times thus signifying the company’s ability to meet its obligations timely. Econet got to be in this very dominant position courtesy of major investments in infrastructure and equipment which commenced soon after the dollarization of the economy. To date the amount invested stands at $ 470 million and clearly this explains its current popularity as evidenced by the number of subscribers-5.5 million as at 31 August 2011. This investment is of course reflected in the balance sheet which shows that Econet had property and equipment worth about $450 million while the total assets were $667 million as at 31 August 2011.

On the stock market Econet wireless is one of the most liquid and stable stocks, attributes which are not very common of many Zimbabwe Stock Exchange listed shares especially in this dollarization era.  Presently the Econet stock is trading at around 400 cents which gives it a market capitalisation of about $680 million and according to results just released the earnings per share increased from 38 cents to 44 cents. Going forward Econet will continue to focus on developing innovative value added services and enhancing the customer experience as has been evidenced by its latest product the eco-cash, a mobile money transfer and payment. These value added products have in the past drove clients to the Econet stable and there is doubt these products will keep them there thus helping Econet to maintain its dominant position.

For further info on Econet stakeholders can log on to www.econet.co.zw