The Growth of the Informal and Cash Economy in Zimbabwe: Causes, Implications and the Road to Sustainable Formalisation
Introduction
Zimbabwe’s economy has undergone a profound transformation over the last three decades. What was once a relatively formalised economy, characterised by large-scale manufacturing industries, organised retail chains, commercial agriculture and stable financial institutions, has increasingly evolved into an economy dominated by informal business activities and cash-based transactions.
Today, street vendors, informal transport operators, cross-border traders, small-scale manufacturers, flea market operators, artisanal miners, backyard workshops, money changers and countless micro-enterprises have become the lifeblood of economic activity in many urban and rural communities. Recent economic census findings suggest that more than three-quarters of Zimbabwean businesses operate informally, highlighting the scale of this transformation. External reports and Zimbabwean economic discussions increasingly point to the informal sector accounting for a substantial share of employment and national economic activity.
The growth of the informal economy has been accompanied by an equally significant expansion of the cash economy. Despite increased digital payment platforms, large portions of economic activity continue to rely on cash settlements, informal value transfer systems, and transactions conducted outside formal banking channels.
This article examines the growth of the informal and cash economy in Zimbabwe, its causes, advantages, challenges, impact on government revenue and monetary policy, and possible strategies for promoting sustainable economic formalisation.
Understanding the Informal Economy
The International Labour Organisation (ILO) generally describes the informal economy as economic activities conducted outside formal regulatory frameworks, including businesses that are unregistered, untaxed or operate without compliance with labour and social security requirements.
In Zimbabwe, the informal economy includes:
Trade and Commerce
- Street vending
- Market stalls
- Flea markets
- Home-based grocery stores
- Imported goods traders
Manufacturing
- Furniture production
- Welding businesses
- Tailoring operations
- Brick moulding
- Food processing
Mining
- Artisanal and small-scale mining
- Gold panning
- Small-scale chrome mining
Services
- Hair salons
- Informal transport services
- Repair workshops
- Mobile money agents
- Domestic services
The informal economy has become the primary source of livelihood for millions of Zimbabweans.
What is the Cash Economy?
The cash economy refers to an economic environment where transactions are largely settled using physical cash rather than through formal banking channels.
A cash economy is not necessarily illegal. However, where transactions occur outside banking systems, authorities may struggle to:
- Monitor economic activity
- Collect taxes
- Track money flows
- Enforce compliance regulations
In Zimbabwe, the cash economy often overlaps with the informal economy because many operators prefer immediate cash settlements.
Historical Evolution of Zimbabwe’s Informal Sector
Phase 1: Economic Structural Challenges (1990s)
The Economic Structural Adjustment Programme (ESAP) introduced during the 1990s brought liberalisation reforms aimed at improving economic efficiency.
However, many industries struggled to adapt.
Consequences included:
- Factory closures
- Job losses
- Reduced formal sector employment
- Expansion of self-employment activities
Many retrenched workers began engaging in small-scale trading and informal businesses.
Phase 2: Hyperinflation Era (2000-2008)
The hyperinflation period fundamentally altered Zimbabwe’s economic structure.
Businesses faced:
- Rapid price changes
- Working capital erosion
- Supply shortages
- Reduced access to formal credit
Formal employment opportunities declined sharply.
To survive, citizens increasingly relied on:
- Informal trade
- Currency dealing
- Cross-border trading
- Small-scale manufacturing
This period accelerated informalisation significantly.
Phase 3: Dollarisation (2009-2018)
The adoption of the United States Dollar stabilised prices and restored some confidence.
However:
- Formal investment remained low
- Industrial recovery was limited
- Many informal enterprises remained operational
Instead of disappearing, the informal sector became more organised.
Examples included:
- Wholesale trading networks
- Informal distribution channels
- Micro-manufacturing clusters
Phase 4: Currency Reforms and Economic Adjustments (2019-Present)
Exchange-rate volatility, inflationary pressures and recurring liquidity challenges further encouraged citizens and businesses to seek alternative methods of preserving value.
Many businesses began:
- Holding cash inventories
- Trading in foreign currency
- Operating partly outside formal banking systems
- Conducting direct cash sales
The informal economy consequently became deeply integrated into economic life.
Why Has the Informal Economy Grown So Rapidly?
1. High Unemployment and Limited Formal Jobs
The strongest driver of informality is limited formal employment.
Each year:
- Thousands graduate from colleges and universities.
- Labour market entrants exceed formal job creation.
As a result, self-employment becomes the easiest entry point into economic activity.
For many families, informal trading is a necessity rather than a choice.
2. Economic Survival Strategy
Zimbabweans have consistently demonstrated resilience.
When formal opportunities decline, individuals create alternative livelihoods.
Examples include:
- Vegetable vending
- Informal transport
- Cross-border trading
- Online trading
- Home industries
The informal economy functions as a social safety net.
3. High Cost of Formalisation
Many entrepreneurs perceive formalisation as expensive.
Costs may include:
- Company registration fees
- Local authority licences
- Tax registration requirements
- NSSA obligations
- Compliance costs
- Professional accounting services
For micro-businesses generating modest revenues, these costs may appear prohibitive.
4. Regulatory Complexity
Many small businesses find compliance requirements difficult to navigate.
Challenges include:
- Multiple licences
- Numerous inspections
- Complex tax procedures
- Frequent reporting obligations
Where compliance becomes complicated, businesses often remain informal.
5. Limited Access to Finance
Financial institutions typically require:
- Audited accounts
- Bank statements
- Registered business status
- Security or collateral
Most informal traders cannot satisfy these requirements.
Consequently, they rely on:
- Personal savings
- Family funding
- Rotating savings clubs
- Informal lenders
6. Urbanisation
Continuous migration into cities increases demand for:
- Retail goods
- Transport services
- Accommodation
- Food services
Informal enterprises respond quickly to these opportunities.
The Expansion of the Cash Economy
Why Cash Remains Important
Although Zimbabwe has experienced significant digital payment adoption, cash remains highly attractive because it offers:
Immediate Settlement
Cash removes delays associated with electronic transfers.
Privacy
Cash transactions are difficult to trace.
Exchange Rate Flexibility
Foreign currency cash often serves as a store of value.
Convenience
Some suppliers, traders and transport operators prefer cash.
Foreign Currency Cash Transactions
The United States Dollar has become a major medium of exchange in many sectors.
Transactions involving:
- Rentals
- Construction materials
- Vehicles
- Imported goods
are frequently settled in cash.
Consequently, a parallel cash ecosystem has emerged alongside the formal banking sector.
Positive Contributions of the Informal Economy
Despite concerns, the informal economy contributes significantly to Zimbabwe’s economic resilience.
Employment Creation
The informal sector provides livelihoods for millions.
Without it:
- Poverty levels would increase substantially.
- Social welfare demands would rise dramatically.
- Urban unemployment pressures would worsen.
Employment generation remains the sector’s greatest contribution.
Wealth Creation
Many successful businesses began informally.
Examples include:
- Furniture manufacturers
- Clothing producers
- Transport operators
- Food processors
The informal economy often acts as an incubator for entrepreneurship.
Economic Flexibility
Informal businesses adapt faster than larger corporations.
They can:
- Enter markets quickly
- Change product lines rapidly
- Respond to customer needs efficiently
This flexibility enhances overall economic resilience.
Local Manufacturing
Small workshops produce:
- Furniture
- Metal products
- Household items
- Building materials
These activities support import substitution and local production.
Community Development
Informal operators frequently support communities through:
- School fees
- Household consumption
- Employment opportunities
- Informal lending arrangements
The sector therefore plays a critical social role.
Challenges Created by the Informal Economy
While valuable, extensive informalisation generates serious economic concerns.
Reduced Tax Revenue
Informal businesses often operate outside the tax net.
Consequences include:
- Lower income tax collections
- Reduced VAT receipts
- Weaker municipal revenues
This restricts government’s ability to finance:
- Roads
- Healthcare
- Education
- Water infrastructure
Recent discussions on formalisation are partly driven by this challenge.
Unfair Competition
Formal businesses incur costs such as:
- Corporate tax
- VAT
- NSSA contributions
- Regulatory licences
- Employee benefits
Informal competitors often avoid these costs.
This creates an uneven playing field.
Indeed, Zimbabwean corporate reports have increasingly highlighted pressure from informal market competition.
Weak Labour Protection
Workers in informal businesses frequently lack:
- Pension contributions
- Medical aid
- Job security
- Paid leave
This exposes employees to economic vulnerability.
Difficult Monetary Policy Management
When large portions of economic activity occur outside banking systems:
- Money supply estimates become difficult.
- Transaction tracking becomes harder.
- Economic forecasting becomes less reliable.
This complicates central bank policy implementation.
Informal Settlements and Congestion
Rapid informality often leads to:
- Street congestion
- Unsanctioned trading sites
- Infrastructure strain
- Waste management challenges
Many local authorities struggle to provide adequate facilities.
Impact on Zimbabwe’s Financial Sector
The growth of cash-based trading has significantly affected banking institutions.
Challenges include:
Reduced Deposits
Cash retained outside banks reduces deposit mobilisation.
Reduced Lending Capacity
Lower deposits restrict banks’ ability to extend credit.
Increased Informal Lending
Private loan arrangements often substitute formal finance.
Weak Financial Inclusion
Large numbers of businesses remain disconnected from formal financial systems.
The Informal Economy and GDP Measurement
A major challenge is accurately measuring economic activity.
Recent economic census exercises indicate that informal businesses constitute the majority of establishments nationally. Some public reporting around the census and GDP rebasing process suggests that recognising informal activity substantially increased estimates of Zimbabwe’s economic size.
This demonstrates an important reality:
Economic activity may exist even when it is not fully captured in official statistics.
The informal economy often generates genuine production, employment and income despite being largely outside traditional reporting systems.
The Informal Economy and Tax Administration
For ZIMRA, informality presents both challenges and opportunities.
Challenges
- Difficult taxpayer identification
- Inadequate record keeping
- Cash transactions
- Limited compliance monitoring
Opportunities
Growing business volumes indicate potential future taxpayers.
With proper support, many informal operators can transition into:
- Registered companies
- VAT operators
- Income tax taxpayers
The objective should not be punitive taxation but sustainable formalisation.
International Experiences
Countries such as:
- Rwanda
- Kenya
- South Africa
- Brazil
have pursued formalisation programmes involving:
Simplified Taxes
Reduced compliance burdens for small businesses.
Digital Registration
Online business registration systems.
Access to Finance
Funding linked to registration.
Business Support Services
Training and capacity development.
These programmes show that formalisation succeeds when incentives outweigh compliance costs.
Pathways Towards Sustainable Formalisation in Zimbabwe
1. Reduce the Cost of Doing Business
Government can encourage formalisation by:
- Lowering registration costs
- Eliminating redundant licences
- Simplifying procedures
2. Introduce Simplified Tax Systems
Small businesses need easy-to-understand tax regimes.
Tax compliance should be:
- Predictable
- Affordable
- Digital
- Transparent
3. Improve Access to Finance
Registered businesses should receive:
- Preferential loans
- Credit guarantees
- Business development support
This creates incentives to formalise.
4. Expand Financial Inclusion
Banks can develop products specifically designed for:
- Vendors
- Cross-border traders
- Artisans
- Small-scale manufacturers
Affordable banking solutions can reduce dependence on cash.
5. Promote Digital Payments
Digital transactions improve:
- Transparency
- Security
- Financial records
- Credit access
Mobile payment platforms remain important tools for gradual formalisation.
6. Develop Dedicated SME Infrastructure
Government and municipalities can establish:
- Modern markets
- Industrial clusters
- Trading centres
- Shared production facilities
These provide informal businesses with a pathway into the formal economy.
7. Build Trust Between Authorities and Businesses
Formalisation efforts should emphasise:
- Partnership
- Support
- Incentives
rather than punishment.
Businesses are more willing to comply when they perceive benefits from formalisation.
Conclusion
The growth of Zimbabwe’s informal and cash economy is both a symptom of economic challenges and a testament to the resilience, innovation and entrepreneurial spirit of Zimbabweans. Faced with limited formal employment opportunities, recurring economic shocks, regulatory complexities and financial constraints, millions of citizens have created livelihoods through informal business activities that now constitute a substantial part of economic life.
The informal economy has played an indispensable role in employment creation, poverty reduction, entrepreneurship development and economic survival. It has kept communities functioning during periods of instability and has become a significant contributor to production, trade and income generation.
However, excessive informality also creates important challenges. Reduced tax revenue, weak labour protection, difficulties in implementing monetary policy, unfair competition for formal businesses and limited access to finance all constrain long-term economic development.
The solution is not to eliminate the informal economy. Rather, the objective should be gradual, inclusive and incentive-driven formalisation. Zimbabwe must create an environment where businesses choose to formalise because the benefits are greater than the costs. Lower compliance burdens, simplified tax systems, improved access to finance, digital payment adoption, supportive infrastructure and regulatory reform will be critical to achieving this goal.
Ultimately, the future prosperity of Zimbabwe depends not on fighting the informal sector, but on transforming its energy, innovation and entrepreneurial capacity into a thriving, productive and increasingly formal economy that expands opportunities for all citizens while strengthening national development.
