The pervasive rhetoric surrounding the informal economy in Nigeria is that, while the informal economy accounts for a substantial portion of Nigeria’s economy, it is unbeneficial because of its unregulated nature. Many mainstream understandings of the informal sector blame this apparent unregulated makeup as the cause of stagnation in the sector and the inability of the government to effectively include the sector in the national fiscal net. Nevertheless, on closer inspection, we can see that perhaps, our ideas about the informal sector are flawed and, in order for all relevant stakeholders to reap the benefits of the informal sector, there is a need to reframe our understanding.
As it stands, Nigeria, like most developing countries, runs a parallel economy, with the formal economy employing a substantial section of its workforce. It is estimated that up to 80 percent of working people in Nigeria are employed in the informal sector. It is not clear if the current direction of governance is towards enabling the informal economy thus encouraging its growth and eventual absorption into the formal economy, or towards stifling the sector due to the apparent inability to understand how the government can effectively add value to the sector and vice versa.
For one, this prevalent idea that businesses within the informal sector do not pay tax is at best an unexamined evaluation of their operations. It is common knowledge that these businesses often have different kinds of levies imposed on them, for example, by local governments or local councils. From the Iyaloja in the markets charging daily/weekly fees to operators of concession stalls to the arbitrary levies imposed on dispatch riders, commercial vehicle operators, and road-side sellers. Whether we like it or not, these levies are a form of taxation. A challenge, however, is that because they are not fully recognized by the government, these businesses do not receive the protection and cover that traditional taxpayers expect. This clearly shows an existing ability to enter a social contract where services are provided in return. There is an opportunity to therefore consider how we may transition from the unconventional structures these current, sometimes predatory levies take, to one that is formally recognised by government systems and structures and affords the local administration the financial means to provide adequate social services in return.
The fact that these businesses remain outside of the formal economy is a major factor behind the continued state of stagnation that many of them face. Access to finance and financial services is crucial in supporting business growth and expansion but, unfortunately, small businesses across the country are excluded from such benefits because they do not meet the requirements for such support and also because they lack the means to provide verifiable credit history.
The ongoing COVID-19 pandemic is an example of how informality affects businesses longevity. The Federal Government and some state governments introduced some support packages for businesses that had suffered substantial losses as a result of the pandemic. While the informal sector made up a significant portion of those businesses, many of them did not receive support as they did not qualify, primarily because their operations are not immediately visible to formal authorities. According to research from EFInA, a third of Nigerians use informal financial services to manage some of their financial needs. This means that even though 59 percent of informal sector workers are banked, they still take many of their financial needs through informal channels. This is because receiving loans and other financial assistance typically predicates formal registration and having a substantial credit history.
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Another challenge of informality is the opacity of the sector. In most cases, the data out of the informal sector is patchy and often does not provide the necessary insight needed to engage functionally with businesses in the sector. This lack of data makes most traditional financial institutions wary about extending services to business owners in the sector.
Yet, the informal sector cannot rectify this challenge on its own. There is a need for increased government support to aid formalization. It is not enough to encourage businesses in the informal sector to formalize; instead, it is necessary to ensure that formalisation is not only touted as an ideal but an accessible ideal. Ease of doing business is not solely a concept for businesses with offices or attractive turnovers but, in fact, it should encompass micro-businesses as well.
Ultimately, being registered is a critical step in the formalization process. Ensuring that you and your business, however small, qualify for all the support that should be available in times of shock to access fundamental systems and products like tax incentives, access to affordable credit and insurance is imperative. Thus, making the process of registration easier is one step towards encouraging formalisation. Digitisation is key here, as a digitised registration process can help eliminate room for predatory practices. This digitisation also includes introducing digital identity databases such as the National Insurance Number (NIN) to serve as the framework for increased inclusion. So far, over 51 million people have been assigned NIN. This is a positive step towards increased inclusion and creating social protection nets for the people at the bottom of the pyramid.
Beyond digitisation, investing in the necessary infrastructure such as ICT, transportation and affordable financial services will also contribute to encouraging micro-business owners to pursue and have easy access to the registration process through which they can attain formal status. Until it is more convenient to operate within the formal economy than it is to operate informally, there is no real incentive for businesses to make the switch.
In fact, the focus on taxation as the major incentive to formalise the informal economy is deeply problematic as it reiterates this idea of predatory interest in the sector as opposed to one that is concerned with the growth of the sector, and how to address the challenges faced by microbusinesses. The government’s approach to the informal sector should prioritise support as opposed to extraction of rent, particularly because many businesses are on the brink, teetering the line between survival and bankruptcy. Government actors should concern themselves with ways to lift these people out of poverty and create a dynamic and growing workforce at the bottom of the pyramid. To achieve this, the government needs to identify infrastructural gaps, the entrepreneurial opportunities and then invest in its workforce both financially and through comprehensive policies.
Nigeria’s informal economy is teeming with potential and entrepreneurial energy and the formal economy at large is at a loss if we cannot effectively tap into this space. We must rid ourselves of the idea that the informal economy is this unknowable space that needs complete upheaval before it can be harnessed. This is not true, nor is it helpful. There are structures in place that can be utilized, as well as ongoing trust relationships between micro-businesses and community leaders that can be leveraged. Introducing traditional taxes to businesses already paying indirect taxes through levies will only further burden them, thus there is a need to work creatively within the structures that already exist.
*Araba is a member, Malabo Montpellier Panel.
