Nigeria has a problem

Nigeria has a Problem. No. It’s not what you think. I’m not referring to the economic recession. We seem to be making some progress towards overcoming that problem, even though the current economic growth rate (at 1.4%) is still much less than the population growth rate (3%).

Here’s the problem: Nigeria’s informal economy as a percentage of GDP is among the highest in the world. And we seem to have accepted this anomaly as a given: It does not even feature in government economic policy discussions. It’s almost as if it is normal for the informal economy to account for nearly half of Nigeria’s GDP. Not even one sentence was devoted to reducing the size of the informal sector in the Economic Recovery and Growth Plan (ERGP) launched a few months ago by the Federal Government.

The informal economy, also referred to as the shadow or grey economy, comprises of economic activities that take place outside of legally regulated sectors or which operate outside of the banking system. The most prevalent types of work in the informal economy are farmers, home-based workers, market traders, street traders, cross-border trade, etc.

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The share of the informal economic activities as a percentage of GDP in sub-Saharan Africa is the largest in the world, and ranges from a low of 20-25% of GDP in Mauritius, South Africa and Namibia, to a high of 50-65% in Benin, Nigeria and Tanzania, according to an IMF paper published in July 2017. Last year, the National Bureau of Statistics published data which indicates that the informal economy accounted for 41.4% of Nigeria’s GDP in 2015. The size of Nigeria’s informal sector is underscored by the crowded city markets and the animated streets of Lagos (Oyingbo, Mile 12, Alaba, etc.), Kano, Onitsha, etc. and the thousands of trucks that line up at official border crossings.

Why is this a problem that the Federal Government must tackle comprehensively? A large informal sector hinders economic progress. Nigeria’s capacity to effectively implement economic diversification and development programs will always be hindered by the absence of reliable information on the pattern, scale and impact of unrecorded economic activities in the informal sector. Conditions in the informal economy also undermine inclusiveness. There is compelling evidence that an economy with less informality will be more efficient and a lot easier to manage. Markets will be more robust. It is a well-known fact that informal economic activities severely limit tax revenues for developing countries.

Opening practical routes to formality for economic actors in the informal economy will also create new opportunities for the poor to realize their potential and promote economic inclusiveness. But the question must be asked: how did Nigeria end up with such a large informal sector? Fundamentally, the colonial economic structures, which served the interest of Great Britain, failed to accommodate the traditional economic structures which consisted of subsistence farmers and township/village markets. Nearly six decades after independence, we have done nothing to address this structural defect, which has now become more severe.

There is also a tendency by the institutions and players in the formal sector to ‘intimidate’ the players in the informal sector with complex processes, very long application forms that contain useless information, technical language (‘turenchi’), and bureaucratic red tapes. We need to consciously tear down these barriers and make the processes friendlier to the informal sector players. Some players in the informal sector have tried to embrace formality by opening savings accounts with commercial and Microfinance banks. However, their negative experiences have discouraged others from doing same. They are usually not well treated by banks. They don’t really care much about the odd N15,000 in that savings account. There is also a lack of transparency in the fees and account charges applied by some banks. The attitude ought to be that a small informal sector player today, if well supported, might become a big formal sector player tomorrow.

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Another factor is information asymmetry, where most of the market information available to the institutions in the formal sectors is not available to players in the informal sector. For instance, in the financial sector, both the Central Bank of Nigeria(CBN) and the Securities and Exchange Commission(SEC) have established full-fledged directorates or departments aimed at promoting consumer and investor education. Plans have reached advanced staged for the launch of Nigeria’s first Digital Investor Education and Investment Platform (www.getrates.co) to also fill this gap.

Then there is the issue of inconvenience. The formal instructions are simply too far away from many informal sector players for them to be noticed. Take Banks for example. According to the available World Bank data, Nigeria had 4.6 branches per 100,000 Nigerian adults as at 2015, compared to the global average of 12.6 branches. Fortunately, the informal sector players have shown that they are not shy of new technologies. They have embraced the Telecommunications sector in just the last 16 years, much more than the Bank’s have managed to achieve in over 100 years.

Mobile and Internet subscription was about 140 million and 93 million as at October 2017, compared to a mere 30 million bank accounts recorded under the recent BVN registration exercise. Banks clearly have a major opportunity to digitally reach out to the informal sector. Nigeria has an incentive to understand the scale of informal economic activities and take practical steps to shift production and trade from the informal to the formal sector. India has provided an effective model for other developing countries to adapt in dealing with this problem once and for all.

In November 2016, Indian Prime Minister, Narendra Modi, launched a Demonetization Program which succeeded, during a 50-day period, in sweeping over 90% of the actors in India’s informal sector, which accounted for 45% of GDP (about the same level as Nigeria), into the formal sector. They are now part of a national digital economic grid comprised of bank accounts, mobile banking apps and bank payment cards.

 

Rasheed Olaoluwa
Olaoluwa is President/CEO Niche Capital LLC