The future of ZiG amid high informality in Zim

The ZiG currency marks the sixth attempt in nearly 15 years to establish a stable local currency in Zimbabwe.

ZiG was introduced with the goal of restoring trust in Zimbabwe’s financial system after years of hyperinflation and currency instability.

Zimbabwe’s economic landscape remains complex, with one of the highest informality rates in the region.

A June 2024 report by the International Labour Organisation and Unesco highlights the critical importance of Zimbabwe's informal economy, which provides employment for over 70% of the population. In this environment, the new ZiG currency recently launched by the government to bolster economic stability, faces unique challenges and opportunities.

The path for ZiG’s future depends largely on how effectively it integrates into Zimbabwe's vast informal economy, which encompasses nearly over 70% of the workforce. ZiG gained traction in certain sectors of the formal economy within its first three months, but its uptake in the informal sector has been sluggish, casting doubt on its long-term potential impact.

Informality in Zimbabwe

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Zimbabwe’s informal economy plays a vital role in daily life, with street vendors, small traders, and independent contractors forming the backbone of economic activity for millions. The informal sector is also a significant source of income for people who lack access to the formal job market due to limited economic opportunities.

However, the informal sector is undermining formal businesses, reducing government revenue inflows, and making it nearly impossible for the Government of Zimbabwe (GoZ) to enforce policy compliance. The Retailers Association of Zimbabwe recently revealed that numerous supermarkets, including OK Zimbabwe, TM Pick n Pay, and Gain Cash & Carry, are shutting down some branches.

This trend is attributed to the rapid growth of the informal sector, which has flooded the market with inexpensive imports ranging from groceries and clothing to medical supplies, posing significant challenges for the formal retail industry.

The growth of informal traders challenges the success of the ZIG currency, which is primarily digital, both in the short and long term.

Since the informal sector operates largely on cash transactions and rarely utilises digital currency, it remains largely unaffected by RBZ policies or announcements.

Consequently, many businesses and individuals opt to transact in US dollars, further diminishing demand for the local currency. As the demand for ZIG declines, its value decreases accordingly. Many informal workers rely on cash transactions to avoid excessive taxation and regulatory oversight, making the shift to a traceable digital currency a potential concern. While ZiG offers security and ease of use, some fear that using it might attract government scrutiny or result in unexpected tax liabilities.

These fears, in turn, hamper ZiG’s acceptance in informal markets, where cash remains king.

Clearly, this highlights the existence of deeply ingrained structural issues that demand a significant transformation in how we manage our economy. We need practical solutions, innovative strategies, and bold, unconventional thinking.

Barriers to full adoption of ZIG

A major barrier for ZiG is the lack of trust in government-backed currencies, exacerbated by previous currency reforms that have wiped out citizens' savings.

The legacy of past currency failures has left people wary of government promises tied to the new currency. For ZiG to gain traction, the government must focus on establishing credibility through consistent policy and maintaining the currency’s stability.

A large informal sector hinders the full adoption of ZiG, as the government has limited control over transactions within this sector.

Although the government has made significant efforts to promote the use of the local currency such as mandating businesses and individuals to transact in ZiG, the disparity between the official exchange rate and the black market rate continues to grow.

Measures like requiring taxes, duties, and fees to be paid exclusively in ZiG have been implemented but remain largely futile, as they target only the small formal sector. The majority of businesses in Zimbabwe operate informally, meaning these policies have little impact on the demand for ZiG within this sector.

The way forward

While ZiG is an ambitious step forward, its success is far from guaranteed. For now, Zimbabwe remains a largely cash-driven society, and many traders are sceptical of any new currency tied to the government. 

The future of ZiG hinges on the political commitment of authorities to tackle the deeply-entrenched structural problems affecting our economy, such as fragile institutions that drive informality, low productivity, and a lack of confidence and trust. Failing to resolve these issues makes the plan of adopting a mono currency another potential pathway to failure.

Further, the success of ZiG depends on the government’s ability to strike a balance between regulatory oversight and the flexibility needed by the informal economy.

Over-regulation could drive people further into cash transactions, while too little oversight could render ZiG ineffective as a stabilising force.

I opine that, the government should establish a clear and transparent framework for ZiG's use in the informal economy. 

This includes offering assurances against punitive tax measures for traders transitioning to the system. For instance, a phased tax exemption or simplified taxation structure during the initial implementation period could incentivise adoption while fostering trust among informal traders.

• Masona is an economist  and lecturer. —  cmasona@staff.zegu.ac.zw or 0774857167.  These weekly New Perspectives articles, published in the Zimbabwe Independent, are coordinated by Lovemore Kadenge, an independent consultant, managing consultant of Zawale Consultants (Pvt) Ltd, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). — kadenge.zes@gmail.com or mobile: +263 772 382 852.