## 5.      Zambia’s private sector exhibits a dual structure that limits broad-based growth

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### Overview: Dual structure and informality
- A small number of large firms—typically in mining, finance, and telecommunications—coexist with a vast number of micro and informal enterprises, while formal small and medium-sized enterprises (SMEs) remain relatively scarce.
- According to the Zambia Labor Force Survey 2023, about 76 percent of the workforce is employed in the informal economy.
- Estimates suggest that the informal sector accounts for about 40 percent of GDP (Elgin et al., 2021).
- Widespread informality reduces firms’ access to finance, technology, and growth opportunities, constraining quality job creation and tax base expansion.

### Constraints to firm growth (perceptions and survey evidence)
- Firms consistently identify the three most binding obstacles: limited access to finance, unreliable electricity supply, and competition from informal firms.
- World Bank Enterprise Survey trends:
  - 2019: 28.5 percent of firms cited access to finance as their biggest obstacle (up from 18.1 percent in 2007).
  - 2019: 25.8 percent flagged electricity constraints (rebounding after a temporary dip in 2013).
  - 2019: 12.8 percent pointed to informal competition (down from 22.6 percent in 2013).
- Zambia versus peers (2019 comparisons):
  - Finance as top constraint: Zambia 28.5 percent; Sub-Saharan Africa 23.2 percent; lower-middle-income countries 15.6 percent.
  - Electricity as top constraint: Zambia 25.8 percent; regionally 12.7 percent.
  - Informal competition: Zambia 12.8 percent; Sub-Saharan Africa 10.4 percent.
- Access to finance:
  - Nearly all formal firms have a bank account, but only about 10 percent have a bank loan or line of credit—well below the Sub-Saharan Africa average of around 20 percent and the lower-middle-income average of 26 percent (World Bank, 2020).
  - 2022 MSME Finance Survey: 69.3 percent of Zambian business owners relied on personal funds to start their businesses; 3.3 percent accessed formal external sources.
  - Average retail lending rate of about 28 percent in 2024.
- Electricity supply:
  - 2019 Enterprise Survey: 87 percent of firms reported experiencing power outages, averaging 13 outages per month (regional average 8.6 outages per month).
  - Firms rely on expensive generators or accept productivity losses; infrastructure (power, transport, telecommunications) has not kept pace with private sector demands.
- Informal competition:
  - High prevalence of informality distorts competition and discourages formalization; senior managers in Zambia report spending more time on regulatory compliance than counterparts in peer countries (World Bank, 2024).
  - Informality is reflected in employment and firm counts and limits long-term investment.

### Econometric evidence: effects on firm growth (fixed-effects panel estimates)
- Regression analysis uses firm-level data on real sales growth, controlling for time, firm, sector, and location effects, and confirms access to credit, stable electricity, and level playing field significantly affect firm growth.
- Key coefficient estimates reported in Table 2:
  - Access to overdraft facility: 4.4447** (positive effect on annual real sales growth).
  - Finance major constraint: -8.1283*** (negative effect on annual real sales growth).
  - Frequency of power outage: -0.1837*** (each additional outage per month associated with a 0.18 percentage point decline in annual real sales growth).
  - Informality constraint: -3.6575*** (negative effect on annual real sales growth).
- Model summary reporting (as presented):
  - Observations86868686
  - R-squared0.48990.46430.32350.6190
  - Robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1
- Interpretation highlights:
  - Access to finance shows the strongest individual effect: firms with access to an overdraft grew faster; firms reporting finance as a major constraint experienced substantially lower growth.
  - Electricity reliability imposes measurable and cumulative costs: each additional outage lowers annual sales growth, with larger cumulative impacts in energy-intensive sectors.
  - Informal competition materially hinders formal firm growth: firms citing informal competitors grew slower, reinforcing that informality limits both firm performance and broader macroeconomic outcomes.
- Aggregate implication: access to finance, power reliability, and informality are empirically linked to weaker firm growth and are prime targets for policy intervention.

### New firm formation, stock, and entrepreneurship dynamics
- New business formation:
  - Zambia records about 1.6 new formal businesses per 1,000 working-age adults annually—above the average of 0.9 to 1 for low-income and lower-middle countries, but well below the 5–7 observed in upper-middle and high-income economies.
- Formal business stock (business density):
  - Total business density: about 18 registered firms per 1,000 working-age adults.
  - Comparators: roughly 12 in the lower-middle-income group, 60 in upper-middle, and 74 in high-income countries.
- Entrepreneurship profile:
  - Much entrepreneurship is necessity-driven rather than opportunity-driven.
  - Global Entrepreneurship Monitor (GEM): 39 percent of the adult population was engaged in starting or running a new business in 2013.
  - Zambia’s rate of established business ownership—defined as firms older than 3.5 years—is less than one-tenth of its early-stage rate.
  - Zambia ranks among the highest globally in terms of business exit rates.
- Constraints suppressing entry and survival:
  - Regulatory hurdles and administrative complexity raise costs and uncertainty for startups.
  - Lack of collateral, credit histories, and tailored financial products limit startup access to finance.
  - High informality deters formal entrepreneurship and reduces firm quality and tax base.

### Good practices and policy implications (targeted reforms to unlock growth)
- Address access to finance:
  - Expand SME finance initiatives, improve credit infrastructure, and promote alternative funding sources such as fintech and leasing.
  - Leverage digital financial services (mobile money, fintech innovations) to broaden financial inclusion—especially in rural areas—while ensuring supportive regulation.
- Improve electricity reliability:
  - Invest in both generation and grid reliability to stabilize supply and reduce business costs, particularly for energy-intensive sectors.
- Tackle informality and level the playing field:
  - Simplify business registration and compliance; continue progress on digitization of registration systems.
  - Implement simplified tax regimes and reduce compliance costs for small firms.
  - Combine predictable enforcement with incentives and education to encourage formalization.
  - Provide targeted support services—training, mentorship, incubators—to help firms transition from necessity-driven microenterprises to growth-oriented ventures.
- Support entrepreneurship ecosystem and firm survival:
  - Strengthen advisory services, incubators, and buyer linkages to improve firm survival and scale-up.
  - Target interventions to high-potential sectors such as agribusiness, light manufacturing, and digital services.
- Draw on integrated formalization strategies (Box 1 good practices):
  - Simplifying registration and compliance (examples such as same-day registration and single digital portals).
  - Implementing simplified tax regimes and leveraging digital tools to reduce compliance burdens.
  - Providing targeted support and combining enforcement with supportive measures to lower formalization costs.

### Key statistics and data sources cited
- Global Entrepreneurship Monitor (GEM) 2013: Necessity Entrepreneurs (Percent of population aged 18-64) — chart comparing Advanced, Upper Middle, Lower Middle, Low Income, Zambia, Sub-Saharan Africa (scale labels shown: 0 2 4 6 8 10 12 14 16 18 20).
- Bank of Zambia (2022). MSME Finance Survey 2022 Report.
- World Bank: multiple sources cited including Enterprise Survey: Zambia 2019 Country Profile, Doing Business 2020, Country Private Sector Diagnostic: Creating Markets in Zambia (2024), and Zambia Country Economic Memorandum, June 2024.

### Aggregate policy message (section 24): Unlocking Zambia’s firm growth potential requires decisive policy action to address
- Key findings and diagnosis:
  - Expanding access to finance, ensuring reliable electricity supply, and establishing a more level playing field for formal enterprises are critically important for firm growth.
  - Targeted reforms would enable existing firms to expand and compete more effectively, and policies to support new firm creation are essential to spur innovation and job creation.
  - Structural constraints highlighted include limited credit market depth, weak financial infrastructure, insufficient power infrastructure, and complex regulatory processes.
  - Policies that support new firm creation should include improved access to startup capital and tailored support for entrepreneurs.
  - Together, the recommended measures would accelerate structural transformation, raise productivity, and foster more inclusive and resilient economic growth.
- Policy recommendations (targeted reforms):
  - Deepen credit markets:
    - Strengthen financial infrastructure to reduce financing constraints for firms.
    - Improve access to startup capital for new firms.
  - Invest in power infrastructure:
    - Ensure reliable electricity supply to reduce production costs and operational disruptions for firms.
  - Simplify regulatory processes:
    - Create a more level playing field for formal enterprises by reducing entry and operating barriers.
    - Simplify procedures to encourage formalization and firm growth.
  - Support entrepreneurship and firm creation:
    - Provide tailored support for entrepreneurs, including mentorship and business development services.
    - Facilitate access to finance specifically designed for startups and young firms.
- Expected outcomes and broader impacts:
  - Enabled firm expansion and stronger competition among firms.
  - Accelerated structural transformation of the economy.
  - Increased productivity and job creation.
  - More inclusive and resilient economic growth.

*Source: IMF Selected Issues Paper chapter "5. Zambia’s private sector exhibits a dual structure that limits broad-based growth" (sipea2025126).*

### 5.      Zambia’s private sector exhibits a dual structure that limits broad-based growth

### 5.      Zambia’s private sector exhibits a dual structure that limits broad-based growth

### Overview: Dual structure and informality
- A small number of large firms—typically in mining, finance, and telecommunications—coexist with a vast number of micro and informal enterprises, while formal small and medium-sized enterprises (SMEs) remain relatively scarce.
- According to the Zambia Labor Force Survey 2023, about 76 percent of the workforce is employed in the informal economy.
- Estimates suggest that the informal sector accounts for about 40 percent of GDP (Elgin et al., 2021).
- Widespread informality reduces firms’ access to finance, technology, and growth opportunities, constraining quality job creation and tax base expansion.

### Constraints to firm growth (perceptions and survey evidence)
- Firms consistently identify the three most binding obstacles: limited access to finance, unreliable electricity supply, and competition from informal firms.
- World Bank Enterprise Survey trends:
  - 2019: 28.5 percent of firms cited access to finance as their biggest obstacle (up from 18.1 percent in 2007).
  - 2019: 25.8 percent flagged electricity constraints (rebounding after a temporary dip in 2013).
  - 2019: 12.8 percent pointed to informal competition (down from 22.6 percent in 2013).
- Zambia versus peers (2019 comparisons):
  - Finance as top constraint: Zambia 28.5 percent; Sub-Saharan Africa 23.2 percent; lower-middle-income countries 15.6 percent.
  - Electricity as top constraint: Zambia 25.8 percent; regionally 12.7 percent.
  - Informal competition: Zambia 12.8 percent; Sub-Saharan Africa 10.4 percent.
- Access to finance:
  - Nearly all formal firms have a bank account, but only about 10 percent have a bank loan or line of credit—well below the Sub-Saharan Africa average of around 20 percent and the lower-middle-income average of 26 percent (World Bank, 2020).
  - 2022 MSME Finance Survey: 69.3 percent of Zambian business owners relied on personal funds to start their businesses; 3.3 percent accessed formal external sources.
  - Average retail lending rate of about 28 percent in 2024.
- Electricity supply:
  - 2019 Enterprise Survey: 87 percent of firms reported experiencing power outages, averaging 13 outages per month (regional average 8.6 outages per month).
  - Firms rely on expensive generators or accept productivity losses; infrastructure (power, transport, telecommunications) has not kept pace with private sector demands.
- Informal competition:
  - High prevalence of informality distorts competition and discourages formalization; senior managers in Zambia report spending more time on regulatory compliance than counterparts in peer countries (World Bank, 2024).
  - Informality is reflected in employment and firm counts and limits long-term investment.

### Econometric evidence: effects on firm growth (fixed-effects panel estimates)
- Regression analysis uses firm-level data on real sales growth, controlling for time, firm, sector, and location effects, and confirms access to credit, stable electricity, and level playing field significantly affect firm growth.
- Key coefficient estimates reported in Table 2:
  - Access to overdraft facility: 4.4447** (positive effect on annual real sales growth).
  - Finance major constraint: -8.1283*** (negative effect on annual real sales growth).
  - Frequency of power outage: -0.1837*** (each additional outage per month associated with a 0.18 percentage point decline in annual real sales growth).
  - Informality constraint: -3.6575*** (negative effect on annual real sales growth).
- Model summary reporting (as presented):
  - Observations86868686
  - R-squared0.48990.46430.32350.6190
  - Robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1
- Interpretation highlights:
  - Access to finance shows the strongest individual effect: firms with access to an overdraft grew faster; firms reporting finance as a major constraint experienced substantially lower growth.
  - Electricity reliability imposes measurable and cumulative costs: each additional outage lowers annual sales growth, with larger cumulative impacts in energy-intensive sectors.
  - Informal competition materially hinders formal firm growth: firms citing informal competitors grew slower, reinforcing that informality limits both firm performance and broader macroeconomic outcomes.
- Aggregate implication: access to finance, power reliability, and informality are empirically linked to weaker firm growth and are prime targets for policy intervention.

### New firm formation, stock, and entrepreneurship dynamics
- New business formation:
  - Zambia records about 1.6 new formal businesses per 1,000 working-age adults annually—above the average of 0.9 to 1 for low-income and lower-middle countries, but well below the 5–7 observed in upper-middle and high-income economies.
- Formal business stock (business density):
  - Total business density: about 18 registered firms per 1,000 working-age adults.
  - Comparators: roughly 12 in the lower-middle-income group, 60 in upper-middle, and 74 in high-income countries.
- Entrepreneurship profile:
  - Much entrepreneurship is necessity-driven rather than opportunity-driven.
  - Global Entrepreneurship Monitor (GEM): 39 percent of the adult population was engaged in starting or running a new business in 2013.
  - Zambia’s rate of established business ownership—defined as firms older than 3.5 years—is less than one-tenth of its early-stage rate.
  - Zambia ranks among the highest globally in terms of business exit rates.
- Constraints suppressing entry and survival:
  - Regulatory hurdles and administrative complexity raise costs and uncertainty for startups.
  - Lack of collateral, credit histories, and tailored financial products limit startup access to finance.
  - High informality deters formal entrepreneurship and reduces firm quality and tax base.

### Good practices and policy implications (targeted reforms to unlock growth)
- Address access to finance:
  - Expand SME finance initiatives, improve credit infrastructure, and promote alternative funding sources such as fintech and leasing.
  - Leverage digital financial services (mobile money, fintech innovations) to broaden financial inclusion—especially in rural areas—while ensuring supportive regulation.
- Improve electricity reliability:
  - Invest in both generation and grid reliability to stabilize supply and reduce business costs, particularly for energy-intensive sectors.
- Tackle informality and level the playing field:
  - Simplify business registration and compliance; continue progress on digitization of registration systems.
  - Implement simplified tax regimes and reduce compliance costs for small firms.
  - Combine predictable enforcement with incentives and education to encourage formalization.
  - Provide targeted support services—training, mentorship, incubators—to help firms transition from necessity-driven microenterprises to growth-oriented ventures.
- Support entrepreneurship ecosystem and firm survival:
  - Strengthen advisory services, incubators, and buyer linkages to improve firm survival and scale-up.
  - Target interventions to high-potential sectors such as agribusiness, light manufacturing, and digital services.
- Draw on integrated formalization strategies (Box 1 good practices):
  - Simplifying registration and compliance (examples such as same-day registration and single digital portals).
  - Implementing simplified tax regimes and leveraging digital tools to reduce compliance burdens.
  - Providing targeted support and combining enforcement with supportive measures to lower formalization costs.

*Source: IMF Selected Issues Paper chapter "5. Zambia’s private sector exhibits a dual structure that limits broad-based growth" (sipea2025126).*

### 24.      Unlocking Zambia’s firm growth potential requires decisive policy action to address

### 24.      Unlocking Zambia’s firm growth potential requires decisive policy action to address

### Key findings and diagnosis
- Expanding access to finance, ensuring reliable electricity supply, and establishing a more level playing field for formal enterprises are critically important for firm growth.
- Targeted reforms would enable existing firms to expand and compete more effectively, and policies to support new firm creation are essential to spur innovation and job creation.
- Structural constraints highlighted include limited credit market depth, weak financial infrastructure, insufficient power infrastructure, and complex regulatory processes.
- Policies that support new firm creation should include improved access to startup capital and tailored support for entrepreneurs.
- Together, the recommended measures would accelerate structural transformation, raise productivity, and foster more inclusive and resilient economic growth.

### Key statistics and data sources cited
- Global Entrepreneurship Monitor (GEM) 2013: Necessity Entrepreneurs (Percent of population aged 18-64) — chart comparing Advanced, Upper Middle, Lower Middle, Low Income, Zambia, Sub-Saharan Africa (scale labels shown: 0 2 4 6 8 10 12 14 16 18 20).
- Bank of Zambia (2022). MSME Finance Survey 2022 Report.
- World Bank: multiple sources cited including Enterprise Survey: Zambia 2019 Country Profile, Doing Business 2020, Country Private Sector Diagnostic: Creating Markets in Zambia (2024), and Zambia Country Economic Memorandum, June 2024.

### Policy recommendations (targeted reforms)
- Deepen credit markets:
  - Strengthen financial infrastructure to reduce financing constraints for firms.
  - Improve access to startup capital for new firms.
- Invest in power infrastructure:
  - Ensure reliable electricity supply to reduce production costs and operational disruptions for firms.
- Simplify regulatory processes:
  - Create a more level playing field for formal enterprises by reducing entry and operating barriers.
  - Simplify procedures to encourage formalization and firm growth.
- Support entrepreneurship and firm creation:
  - Provide tailored support for entrepreneurs, including mentorship and business development services.
  - Facilitate access to finance specifically designed for startups and young firms.

### Expected outcomes and broader impacts
- Enabled firm expansion and stronger competition among firms.
- Accelerated structural transformation of the economy.
- Increased productivity and job creation.
- More inclusive and resilient economic growth.

*INTERNATIONAL MONETARY FUND*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025126.pdf_