New perpectives: Corruption and debt under informality

Michael Zuze ZIMBABWE is a country characterised by a huge informal sector.

At the same time, it is a country where the extent of corruption in every sector is remarkably high.

Stifling bureaucratic interference and corruption at every stage of economic activities is one of the main reasons behind high participation in informal and unregulated sectors.

In 2021, Transparency International released the Corruption Perceptions Index (CPI), which examines perceived levels of public sector corruption.

Zimbabwe, along with Honduras, Iraq and Cambodia, was ranked 157th out of 180 countries where a high ranking corresponds to a perception of high corruption in the public sector.

On the other hand, Zimbabwe remains in debt distress. Zimbabwe’s total Public and Publicly Guaranteed (PPG) (external and domestic) debt is estimated at US$13,722 billion as at end September 2021, representing 86,37 % of GDP.

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Of this debt, public external debt amounted to US$13,2 billion and domestic debt was US$532 million. This debt is a 28% growth from US$10,7 billion debt as at end of December 2020 (72,1% of GDP) and a 32,1% growth from US$8,1 billion (84% of GDP) as at end of December 2019. The quantum of debt is against the Public Debt Management Act target of 70%.

Corruption and Public debt are a double edged-sword that is negatively impacting Zimbabwe’s economic growth.

Rampant corruption affects government revenues as it facilitates illicit activities like tax dodging, tax evasion and tax avoidance among others.

Corruption also results in public funds being diverted from public to private priorities.

This reduces the much-needed revenue and thus the government has to resort to borrowing to finance projects and social protection.

This can lead to a vicious cycle of corruption and borrowing thus increasing public debt.

Closely related to the concept of corruption, is the informal economy. The informal sector in Zimbabwe has been a marginalised survival sector, which contributes to mopping up entranced and retrenched workers from the formal sector.

According to the International Monetary Fund about 80-90% of Zimbabweans are employed in the informal sector.

Although the informal sector contributes immensely to the urban economy in terms of income and employment, it has also contributed to avenues of corruption.

A lot of small businesses evade compliance by paying bribes. It is important to note that with bribes and low tax compliance, potential fiscal revenue is diverted and instead of going into the fiscus, it benefits private individuals.

Thus, with tax evasion, avoidance and bribery state coffers are deprived of potential revenue, thus forcing the state to borrow.

Those who evade taxes are driven out of the official economy and become part of the informal economy.

Zimbabwe suffers from the challenge of low tax compliance rate and this is linked to the perverse bribery.

Citizens and businesses opt to pay bribes primarily because the cost of compliance is high monetarily and it eases the obtaining of services.

For the public officials, there seems to be a huge affinity for bribes, and this could be blamed on the very low wages.

Corruption results in more public spending and borrowing.

Borrowing is raised because tax revenue to finance the increased spending falls short due to larger informal economies associated with greater incidence of corruption.

Under these circumstances, it can be expected that the country would accumulate a larger public debt.

Evidence has shown that corruption reduces growth, discourages investment, lowers expenditure on education and health and adversely affects the poor.

Greater domestic resource mobilisation is a crucial scaffold in the process of rebooting economic growth, tackling poverty and fortifying social contract as well as “inoculating” the country against aid addiction and debt dependence.

The need for a greater domestic revenue mobilisation strategy is particularly urgent in Zimbabwe where the country is currently mired in  economic turmoil that is characterised by perennial fiscal deficits and deepening debt distress among the other economic and social ills.

It is no secret that Zimbabwe has long been engrossed in the morass of a debilitating debt trap and has been struggling to extricate itself from this trap, especially in the last two decades.

The governments seeking to reduce public debt should strive to curb both corruption and the size of the informal economy, because both contribute to increasing government debt. However, the reduction of both corruption and the informal economy is a challenging task.

Improving and strengthening the quality of governance and public institutions, in general, should diminish both corruption and the informal economy.

The government needs to reduce public borrowing not only through a reduction in spending, but also by changing the structure of spending from programmes prone to corruption to ones that can be better monitored and managed.

This type of restructuring could bring down the incidence of massive corruption in the country.

To prevent the continuous public debt increase as a result of corruption, there is a need to prevent corruption in public finance management.

Some of the key preventive approaches worth considering include adopting e-procurement (embrace online contracting initiative), declaration of assets by senior public officials, introducing lifestyles audit for specific public office holders, publishing information on public sector procurement projects, including the cost and the phase of the project.

Continued efforts from the Zimbabwe Anti-Corruption Commission (Zacc) need support from everyone in the fight against corruption. People linked to corruption should be profiled and never be allowed near public offices until their cases are finalised and absolved of any wrongdoing.

The National Prosecuting Authority (NPA) and Zacc need to prioritise asset recovery.

The process of asset recovery depends on the government’s ability to enforce declaration of assets, verification of these assets and lifestyle audits.

Lastly, there is a need to understand the nature of the informal businesses and the reason why the informal entrepreneurs prefer to stay informal.

After understanding these reasons, the government should provide necessary incentives and also mechanisms that will motivate the informal traders to consider formalising.

A number of initiatives and incentives that can be taken into consideration might include improvement in accessing loans, labour standard improvements, stronger and more representative informal sector associations that can add the voice of informal workers to the policy process.

These policies should not be only on paper but they should be implemented. If successfully implemented, the policies will not only reduce the high rising informality in Zimbabwe but also they will tame corruption and in turn reduce public debt.

• Zuze writes in his personal capacity. Nyamudzanga is an economist. — lnyamudzanga@gmail.com.These weekly New Perspectives articles published in the Zimbabwe Independent are coordinated by Lovemore Kadenge, an independent consultant, 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.