Are SMEs supported by appropriate legislation for a re-bound?

Small to Medium Enterprises are specifically defined by their size and each country has its
threshold. In Zimbabwe, ZIMRA classifies SMEs as businesses that employ between 5-40
people with annual turnover and assets from as low as $50,000 to $2 million. The local tax
net has been cast wide and can include literally any economic activity that brings income to
the business owner. The SME’s sector is the backbone of economic activity in Zimbabwe.
According to research SMEs contribute half of the world's economic output and employ
two-thirds of the global workforce. In Zimbabwe, SMEs contributed $8.58 billion to the
country's GDP in 2016 and employed more than 5.9 million people (over 75% of the total
workforce of 7.8 million.

The sector has been adversely affected by the effects of COVID 19 which took its toll in
Zimbabwe from March 2020 to date. Several adverse factors decimated the operations of the
sector. Zimbabwe has experienced adverse effects of the pandemic following the
implementation of various levels of lockdowns since 30 March 2020. These measures have
reduced economic activity and exacerbated the already precarious economic situation. The
SME sector in Zimbabwean has bemoaned the impact of COVID-19 on their operations,
against the backdrop of an already fragile economy. During this period from March 2020 to
date the sector has seen business volumes declining considerably due to low aggregate
demand. Some of the business closed operations at the outbreak of the virus and that date of
reopening remained uncertain. Like most countries throughout the world, Zimbabwe will not
escape the negative impact of restricted traveling both internally and externally and the
knock-on effect of depressed demand following the virtual devastation of the tourist industry.
Consumer demand has generally been on a downward trajectory and reduced incomes cannot
keep pace with rising inflation.

In many urban centres designated markets were revamped and illegal vending sites were
demolished as government targeted informal markets which were potential hotspots for
Covid-19 and this resulted in some SMEs loosing work stations. Some of these SMEs had
debts from lending institutions ranging from Commercial Banks to Micro Finance
institutions. This has seen increased indebtedness as some SMEs fail to meet their obligations
on time because of loss of business. Drop in import and export business due to suspension of
airlines and other related travel restrictions.

The question to be asked, is whether there is adequate legislation in place that can support a
rebound of the sector and also avoid the sector going through demolition of their operating
sites and arbitrary relocations and other measures that are employed in the name of bringing
sanity in the operations of the sector.

Current Legislation

It is not possible in this paper to look at each piece of legislation that affects SME’s in
Zimbabwe. This would cover multiple industries, trades, professions, and sectors. I have
therefore chosen the following legislation which governs and has the greatest effect on the
operations of SMEs in the Republic of Zimbabwe;

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 1. The Companies Act, Chapter 24:03
2. The Small Enterprises and Development Act, Chapter 24:12
3. The Value Added Tax Act 23:12
4. The Income Tax Act 23:06 
5. The Labour Act 28:01

This research paper has found that:

(a) There is a multiplicity of regulations to be followed by a start-up SME. The burdensome

procedure for registering and commencing business are key deterrent to SMEs growth and
development in Zimbabwe.

(b) Some recent policies such as the Buy Zimbabwe Campaign or antitrust legislation which
are meant to incentivise large business have a detrimental effect on SME’s. For instance,
Statutory Instrument (SI) 64 of 2017 was meant to discourage the importation of second hand
clothes (Bhero) and some products (agriculture products, cooking oil, mealie meal, building
materials e.g. cement etc) which are locally produced. This has adversely affected SMEs
operations in Zimbabwe because locally produced products are expensive, lowered the small
traders’ margins of profit and in some instances has made them a nullity in the market.

(c) The Zimbabwean government selectively exempts and grants special treatment on excise
duties for big and established manufacturers and industries. ZIMRA heavily taxes goods that
are imported from other countries which are locally produced and this has severely limited or
blocked their growth potential. Some of these products are heavily taxed 40% which
disincentivise SMEs from trading. This in turn, has resulted in the unwanted state of
smuggling and corruption at our national borders.

(d) Due to cash crisis in Zimbabwe government come up with fiscal incentives and protective
fiscal policies (cash limits) that restrict free movement of cash. These policies are meant to
discourage SMEs from trading outside the country and favour large businesses. Large
business has more bargaining power than SMEs when it approaches the Reserve Bank of
Zimbabwe (RBZ) to buy forex on its foreign currency auctions.

(e) Most SMEs are failing to stock due to lack of hard cash, as the government adopted a
cashless transaction system (digitalised transaction system) most of the trading transactions
are done using either debit card (SWIPE as commonly referred in Zimbabwe) or ecocash.
This entails that policies are made without consulting the institutions directly affected such
that inconsistencies often exist in their interpretations. SME’s rely heavily on imports and
cashless payments cannot be used outside of Zimbabwe to restock, which has resulted in a
multi-tiered and much maligned triple pricing system instead of forex by way of cash
bond/swipe/ecocash.

(f) Hostile tariffs ensure that many SMEs in the informal sector enter into the black market
economy as a strategy to stay in business.

(g) Poor co-ordination of government policies and policy reversals, the government of
Zimbabwe at one time allowed free trade to SMEs and other players in most parts of the

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country, and recently in October 2017, the same government embarked on a “clean-up
operation”. Policy inconsistencies inhibit SMEs to strategize, hence forth stagnation or
extinction. Repressive State Apparatus (RSA) such as council police and Zimbabwe Republic
Police (ZRP) used force to push out SMEs from Central Business District (in most towns and
cities), the resultant effect is disempowering and killing potential entrepreneurs.

Legislative proposals to support SME’s

a) The amendment of the Companies Act and Municipal Council By-Laws to simplify
and make the process cheaper for SME’s to register as companies and get business
licences. This would have to go hand in hand with the local municipalities providing
adequate and rentable shelters/sheds/structures/warehouses close to their Central
Business Districts or areas with high human traffic volume in major towns and cities.

b) The amendment of the Income Tax Act and Value Added Tax to reduce the relevant
taxes charged on SME’s. This would encourage more operators and businesspeople to
register their small enterprises in the knowledge that they can avoid paying expensive
bribes and inducements to council police, national police, local and national
government inspectors; by legally registering their businesses.

c) The amendment of the Labour Act to make it easier for SME’s to hire and dismiss
employees, without risking expensive labour legal disputes with former employees.
This may be in the form of placing caps on damages claimable by former employees
to three months wages or salary.

d) SMEs in Zimbabwe are affected by limited access to finance and the high cost of
finance. The constraints of this sector are absence of security and lack of track
records. They lack equity to finance their operations and invariably resort to
borrowing from financial institutions to start and expand their businesses and this has
resulted in SMEs being highly geared. The creation of subsidiary legislation to the
SMEDCO Act, governing how it may and the standards it can set for the loan
procedures and requirements of the SEDCO Bank are required. On this point, we
must take note of Grameen Bank approach in Bangladesh which has mastered how to
make small loans to a multiplicity of clients whom are mostly women or persons
residing in rural areas of that country and still turn a reasonable profit whilst
empowering their citizens in SME sector.

e) Regulations on import tariffs and taxes must be either removed or their levels
reduced. If the government wants to make locally produced goods cheaper and more
competitive, it must create statutory instruments giving tax holidays, tax relief,
reduced VAT on local companies. It may seem the easier approach to economically
blockade the country of imports but it won’t change the fact that local businesses are
overtaxed and over regulated; their prices will not fall until this intervention is taken.

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 f) The Government of Zimbabwe must liberalize the purchase and sale of all currencies
in the country. The Reserve Bank needs to withdraw its draconic control of how and
where foreign currency is purchased and sold. As a free market economy, let the final
consumer decide the value of our currency and it will allow SME’s to freely trade and
sell their imports whilst contributing to the fiscus through reasonable taxes.

IN CONCLUSION

The current situation in Zimbabwe can only be addressed through a team effort. It requires
the national, provincial, and local government to each do its part and establish the proper
legislative framework which allow the resuscitation of SME’s in Zimbabwe. It is also missed
that a great opportunity exists for the government to tap into a massive untaxed market which
will bring in greater revenue to treasury. A former Minister of Finance once said he would
rather have “10% of an elephant than 90% of a rat”. We need SME’s to get integrated into
our formal economy and properly play their role and this begins with the legal framework
and environment. If we create and amend the right laws then we have succeeded in giving
SME’s the much needed support and base from which they can grow and thrive.

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