'Zimbabwe losing billions in tax revenue to informal sector'

Zimbabwe is losing between US$7.5 billion and US$8 billion in potential tax revenue every year due to the dominance of its informal sector, according to new estimates by the African Development Bank (AfDB).

The bank is now urging the government to urgently fast-track efforts to formalise the informal economy or implement effective mechanisms to mobilise revenue from this vast, largely untaxed sector.

Speaking during the launch of Zimbabwe's 2025 Country Focus Report in Harare this week, AfDB Principal Country Economist Kelvin Banda highlighted the gravity of the situation. "A narrow tax base, a large informal sector, and limited tax administration capacity continue to hinder domestic resource mobilisation," he said. "Zimbabwe has the potential to generate about US$7.5 to US$8 billion annually if the informal sector is formalised or resources are mobilised from it."

The informal sector now constitutes around 90% of Zimbabwe's business activity, particularly concentrated in agriculture, mining, wholesale, and retail trade. These micro, small, and medium enterprises (MSMEs) employ approximately 56% of the national workforce and contribute about 30% to the country's GDP, according to 2022 data.

In contrast, large-scale enterprises remain limited, employing just 12% of the workforce. The AfDB noted that MSMEs often face fierce competition from large formal firms and remain outside the tax net due to regulatory burdens and inefficiencies in government processes.

Cumbersome licensing, slow permit approvals, and red tape have been identified as key drivers pushing many entrepreneurs into informality, hampering the government's ability to broaden the tax base.

Dr Sehliselo Mpofu, Director of the Macroeconomic Management Programme at MEFMI (Macroeconomic and Financial Management Institute of Eastern and Southern Africa), echoed the AfDB's concerns. "The informal sector is expanding while the formal sector is shrinking," she said. "It's difficult to generate revenue from the informal sector. Authorities need to work hard on this."

Dr Mpofu also called for public education campaigns to shift perceptions. "Many people view formalisation as a threat - associating it with taxation and fees that could erase their small profits. Education is critical so that they understand the long-term benefits of operating within the formal economy," she said.

Despite these challenges, Zimbabwe has recorded gains in revenue mobilisation. According to the AfDB, the country's tax revenues increased to 17% of GDP in 2024, equivalent to US$6.58 billion, up from 14.6% in 2023. These improvements were driven by a recovery from the Covid-19 pandemic and enhanced domestic revenue collection measures.

Looking ahead, tax revenues are projected to rise further to 19.7% of GDP in 2025, supported by continued efforts to modernise tax administration and encourage compliance.

However, both the AfDB and MEFMI stress that unlocking the full potential of Zimbabwe's economy requires decisive action to integrate the informal sector into the mainstream economy - a move that could significantly bolster the country's fiscal position and economic resilience.