The size of the informal economy and its impact on tax revenues in Zimbabwe: 2009-2013

Abstract

This study estimated the size of the informal economy using time series analysis for Zimbabwe using monthly data for the period 2009 -2013. The study makes use of the indirect approach for measuring the informal economy, the monetary approach which makes use of the money demand model. Ordinary Least Squares (OLS) econometric estimation technique was used to estimate the money demand model for Zimbabwe where money supply growth component (M2) was the dependent variable while inflation rates, tax revenue, industrial index and commercial banks’ deposit interest rate were the explanatory variables. Industrial index is taken as a proxy to GDP. From the regression analysis, the model was found to be significant and its estimates turned out as expected and we found out that tax revenue has the greatest impact on money demand hence determining the size of the informal economy. On average the size of the informal economy for the entire period as a percentage of the industrial index averages at 39%, where the highest average of 52% was attained in 2010. Findings of a significant informal economy have implications for the conduct of monetary policy and fiscal policy. The paper further discusses the policy implications of the findings.