HARARE, Feb. 2 (Xinhua) -- Formal retailers and wholesalers in Zimbabwe are experiencing a decline in customer traffic as consumers increasingly prefer informal shops, which offer more affordable and convenient shopping options.

Several established chain stores in Harare, the capital of Zimbabwe, have recently ceased operations or scaled down their business due to competition from the informal sector.

The operational challenges faced by formal businesses have also resulted in some outlets failing to stock products, leaving their shelves almost empty and further driving people to small informal retailers known as tuck shops locally.

The tuck shops are mainly conveniently located in downtown Harare and are usually packed with customers buying various household grocery items.

The Confederation of Zimbabwe Retailers (CZR), a retail business representative body, recently confirmed the closure of some formal chain stores due to competition from the informal sector and exchange rate distortions in the country's multi-currency system.

"The unregulated informal sector offers goods at much lower prices, largely because it operates outside compliance with statutory obligations such as taxes, licensing fees, and labor laws," CZR President Denford Mutashu said in a statement, adding that this reality has made it increasingly difficult for formal businesses to compete effectively.

In addition, he said another challenge facing the formal sector is the use of both the U.S. dollar and the local Zimbabwe Gold (ZiG) currency as legal tender, which disproportionately affects formal retailers and wholesalers who are required by law to trade at the official exchange rate.

The ZiG is trading at around 26 to one U.S. dollar at the official exchange rate, while on the black market, the rate is around 38.

In response to the currency distortions, informal traders now conduct business exclusively in U.S. dollars, giving them a competitive edge over formal retailers.

"Formal businesses are compelled to accept the ZiG in a predominantly dollarized supply chain. This is exacerbated by key operational costs, such as fuel for generators, which must be paid for in U.S. dollars," said Mutashu.

Despite the U.S. dollar accounting for over 80 percent of transactions in Zimbabwe's highly informalized economy, according to the Zimbabwe National Statistics Agency, the ZiG is mainly accepted in limited formal transactions that include chain stores and settling government bills.

While formal businesses conduct trade largely in the ZiG, suppliers usually demand U.S. dollars.

The Reserve Bank of Zimbabwe, the central bank, introduced the gold-backed ZiG last April, replacing the Zimbabwean dollar, which had been ravaged by inflation.

The ZiG, however, has experienced turbulence, with its inflation surging to 10.5 percent in January from 3.7 percent recorded the previous month, leading many informal traders to reject it.

In November last year, Choppies Zimbabwe, a supermarket chain, announced its departure from the country, citing exchange rate regulations that had pushed customers toward the informal market.

The growth of the informal economy has resulted in the shrinking of the tax base, and the government is taking measures to increase formalization.

Finance, Economic Development and Investment Promotion Minister Mthuli Ncube on Friday announced that to level the playing field between formal and informal shops, businesses are now required to transact through point-of-sale machines and operate a bank account linked to the Zimbabwe Revenue Authority, the national tax collection agency.

Other measures include ensuring that all eligible taxpayers comply with regulations, establishing an inter-agency enforcement team to enforce compliance in the informal sector, and discouraging manufacturers from supplying directly to end users and the informal market, said Ncube.

He added that local authorities and the central government would collaborate in the licensing and enforcement processes to ensure businesses' compliance while streamlining regulatory processes and reducing fees and duplication to lower business costs and encourage formalization. Enditem

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