The government’s exchange rate policies have driven trade to the informal sector, and this is bad news for the tax earnings. In this extract from a recent note to investors, John Legat, CEO of Imara Asset Management, warns that if this trend continues, government coffers will run dry and we may see some casualties in formal retail, writes:
In 2024, the formal sector is weak. Retailers cannot sell product at prices that make economic sense, so trade goes elsewhere and Government receives less Value Added Tax than it should.
We would opine that Government would be better off making life easier for the formal sector, especially retail, so that at least it has a chance to survive and hence pay its taxes. Increasing VAT simply drives more trade to the informal sector. Government’s aim should therefore be to level the playing field with the informal sector rather than punish the formal one.
Asking local manufacturers to cease trading with the informal sector as the budget suggested, will simply persuade the informal sector to source from the region. Local manufactures will therefore suffer as will government’s tax revenue. Taxing sugar used in beverages will simply make local drinks more expensive compared to the same products available in the region. The informal sector will therefore buy there and not at home.
The economy would appear to be growing just fine albeit now driven by the informal sector that operates largely in USD cash. We should soon start to hear from companies about the final quarter’s sales in 2023 which will give us an idea as to how the economy is performing, or at least the informal economy. If it continues to grow as we expect, then the formal sector and the Government sector will by definition continue to shrink as a percentage of the whole economy. Should that trend continue, we may well see further casualties in the formal retail sector as we began to witness in 2023.
We remain concerned for businesses in the retail sector given our concerns with regard to the un-level playing field that the government has unintentionally engineered between the formal and informal sectors. Those businesses supplying the informal sector should continue to do better, notwithstanding the regulations regarding selling to informal traders. The current market valuation for the whole of Delta is a mere US$500 million, with an estimated annual dividend yield of 6% payable in USD. It should have a fantastic second half year to end March 2024 given the new capacity that it installed in 2023.
Both Simbisa and Innscor have also boosted their capacity to meet demand which should be reflected when they report their interim numbers to the end of December. As a result of strong USD cash generation, most corporates have been able to carry out extensive capital expenditures to either refresh or expand capacities in recent years. We are beginning to see the benefits of these initiatives as companies are now able to reduce costs and record improved efficiencies.
Source: NewZwire