How failure to optimise informal businesses is costing economy

The failure of the government to formalise the operations of over 34 million informal Micro, Small, and Medium Enterprises (MSMEs) in Nigeria has continued to minimise the potential of the nation’s economy.

The latest figures from the National Bureau of Statistics (NBS) show that, of 39,654,385 total MSMEs in Nigeria, 34,413,420 operate informally, which makes it impossible for the government to regulate and harness full benefits from them, particularly in terms of taxes.

As contained in the report of the 2020 MSMEs survey jointly conducted by the NBS and Small and MEDIUM Enterprise Development Agency of Nigeria (SMEDAN), the total assets of the MSMEs were valued at N8.41 trillion in 2020, despite the COVID-19 pandemic induced challenges that affected global business earnings.

“If nothing is done to formalise this sector, we cannot fully optimise the potential of our economy, and the growth expected cannot be actualised because the informal space is still very huge,” Johnson Chukwu, MD/CEO of Cowry Asset Management Limited, told BusinessDay over the phone.

Chukwu is particularly worried that Nigerians, over the years, have become accustomed to a cultural structure of a business, which makes it difficult for businesses to get formalised.

According to him, most business structures in Nigeria are patterned based on family lineage, and mentorship, making it almost impossible for them to attract investors.

The contribution of MSMEs to the Nigerian economy cannot be over-emphasized and therefore regarded as the bedrock of the economy.

In Nigeria, MSMEs contributed 46.31 percent of the national GDP and also accounted for 6.21 percent of gross exports. Micro Enterprises (MEs) accounted for 96.9 percent of businesses and 87.9 percent of employment.

Despite the epochal contribution of MSMEs to the Nigerian economy, challenges that impede the growth and development of the sector abound.

“There is no concerted effort in place to incorporate the activities of these businesses as well as train people in business. Hence, undermining the potential of the Nigerian economy.

“For example, most operations in the retail sector are informal, hence lack of adequate financing and skills,” he said.

The MSMEs survey was undertaken to understand their characteristics and activities and the government hopes to incorporate findings into its programmes, policies, and intervention within the sector.

Chukwu believes that offering incentives to small business owners could go a long way in encouraging formalisation of their operations.

He further harped on the need for the government to intervene in the activities of the small businesses as many are faced with challenges including poor access to finance, poor infrastructure, and technical know-how, among others.

Ibrahim Isah, an Abuja-based economic analyst, notes that the informal sector is economically efficient and possesses comparative advantages in relation to similar activities developed in the formal sector.

The sector also has the capacity to produce positive economic effects as they provide sources of livelihood and economic opportunities that may be unavailable in the formal sector.

He, therefore, stresses the need for the government to scale down regulatory barriers, and remove unnecessary bureaucracies for the informal workforce.

“An increasing tax burden and rising state regulatory activities are the major driving forces determining the size and growth of the informal economy.

“Economic institutions exercise an important influence on whether or not one registers a business because they influence the costs of entry, of doing business, and of exit,” he says.

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The results of the survey also indicate that despite the marginal increase of 3.7 percent in the sector’s employment when 2017 is compared to 2020, there was a decrease of 3.5 percent in the contribution to GDP.

Also, the number of business enterprises in 2020 was 39,654,385 as against 41,543,028 reported in 2017, indicating a decrease of 4.5 percent. The report notes the reduction could be a result of the negative impact of the COVID-19 pandemic in 2020.

Speaking with BusinessDay, Chijioke Ekechukwu, former director-general of Abuja Chamber of Commerce and Industry, raised the concerns that most MSMEs may close down if formalised.

According to him, most of them thrive because their operations are free from the control of the government.

“Every economy in the world has both the formal and informal sectors, but what is important is for us to have a credible database, which will enable the government to tax them accordingly.

“If we want to talk about formalizing these businesses, many will be forced to shut down. They raise capital by themselves, struggle to sustain the business by themselves, formalizing their activities will mean the government will have control over them, which may not be to their advantage.”

Speaking with our correspondent, Blessing Asu, owner of ‘Lady B boutique,’ states that for over five years that she has operated her business, she is yet to see the need to register the business.

She explains that her initial capital was below N100,000, which was raised through savings and support from families.

She says, “I like the way I am quietly running my business here without the government coming to disturb me or ask for tax.

“I have been in this business since 2017, I travel to Onitsha and sometimes Lagos to purchase my wares and sell. If I register this business now, I may have to start paying tax from the small money I’m making here. At least, I’m able to pay three staff and generate income for myself.

“I’m not getting anything from the government, why should I submit my business to them.”