• Wednesday, February 21, 2024
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Nigeria’s shadow economy is becoming too big to ignore

Nigeria Economy chart

Nigeria’s informal economy is becoming too big to ignore for a country struggling with economic growth and job creation.

The informal economy encompasses the broad range of economic activities not captured in a country’s official statistics.

Informality in Africa is highest in Nigeria, according to the World Bank, which values the activities of the sector at $302 billion.

That means the sector accounts for 80 percent of the country’s Gross Domestic Product and is as big as Qatar and Angola combined.

If viewed as a standalone economy, Nigeria’s informal sector would also be the second fastest growing in Africa behind Ethiopia, going by estimates from consulting firm FDC Ltd, which shows the informal economy has expanded by an average of 8.5 percent over the last three years.

The impact of sucking in the informal economy could be telling for a country that has been struggling for growth since the 2016 recession. While the formal economy grew a paltry 1 percent between 2016 and 2018, the informal sector has expanded eight times faster.

Merging the informal economy with its formal counterpart would value the economy at $678 billion, almost double the official size of GDP which was $376 billion in 2017.

“There are certainly benefits to bringing more people into formal structures, but people can’t be forced into formal structures,” said Andrew S. Nevin, chief economist at consulting firm PricewaterhouseCoopers (PwC).

“The formal structure has to be better than the informal or self-organised structure,” Nevin told BusinessDay.

Other factors that contribute to keeping the informal sector away are regulatory bottlenecks in setting up formal enterprises, multiple taxation, and rigorous business registration processes.

Though the ease of doing business has somewhat improved, analysts say more work needs to be done by the government to incentivise informal sector players to be officially captured.

Giving tax breaks and providing infrastructure have worked magic in other climes where the government sought to draw informal activities into the formal fold.

Businesses in the informal sector, as do their formal counterparts, suffer limited growth, constraining income generation and ability to hire more people. This takes a toll on the economy and even public revenue.

“It would be a win-win for all parties if government recognises existing corporatives in informal sector, support them to have skills required to transit to formal economy,” Ayo Teriba, CEO Economic Associates, said.

The high incidence of informality, whilst a major challenge, presents opportunity for achieving “decent work for all and sustainable and inclusive development”, Rafael Diez de Medina, director, International Labour Organisation (ILO) Department of Statistics, said.

Nigeria’s government is struggling to generate more revenue to finance its growing budget amid unreliable oil revenue. The country’s debt has grown more than 160 percent to N24 trillion in the last five years. Tax to GDP remains low at 6 percent, one of the lowest globally.

Integrating more people into the formal sector would translate to higher tax revenues for the government and harnessing the potentials inherent would boost the economy

The gains might not be realisable in the near term, said Boniface Chizea, MD BIC Consultancy Services.

“The government has to move closer and understand the operations of the informal sector, then mobilise them through corporative, create business hubs and improve business environment,” Chizea said.

The dilemma is that while the government has become more intent on improving its tax revenue, the informal sector is shying away from the extra costs that come with that.

“Most SMEs won’t participate in the formal sector unless it can significantly improve their business. Most of them are tax averse,” he added.

Improving business registration process, credit to businesses, restructuring tax policy to be supportive of business growths as well as broader economic reforms remain essential.