Global informal economy declining, but large in sub-Saharan Africa, says IMF

The informal economy, which is an economic activity that falls outside the regulated economy and tax systems, such as street vending or unregistered taxi drivers, is declining across the globe but remains large in sub-Saharan Africa and Latin America, the International Monetary Fund (IMF) said on Wednesday.

In a report titled ‘The Global Informal Economy: Large but on the Decline’, by Thomas F. Alexander, the IMF said the regions with the highest share of informality during 2010–17 are sub-Saharan Africa, Latin America and the Caribbean—both at 34 percent of GDP. This compares with 9 percent of GDP for North America. In the Organisation for Economic Co-operation and Development, the informal sector is equivalent to nearly 15 percent of GDP.

Ayodele Akinwunmi, relationship manager, corporate banking, FSDH Merchant Bank Limited, said the informal economy is large in Nigeria and it is one of the reasons there is low financial penetration and low tax revenue in the country.

However, he said the adoption of financial technology is bringing the unbanked into the financial system, therefore reducing the size of the informal economy.

“Our chart of the week, based on an updated version of earlier IMF research, shows that the size of the informal economy—measured as a share of GDP—has fallen gradually across all regions. While reforms to reduce informality, such as reducing the hurdles to registering a business, are working, the shift from informal to formal takes time,” the IMF said.

The IMF said the challenge for policymakers is to create an environment where the formal sector can thrive while creating opportunities for people working in the informal sector to maintain or improve their living standards. Some of these measures include reducing the costs of doing business, tackling corruption, and improving access to finance and services.

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Nigeria moved up 15 places to rank 131 out of 190 nations in the latest World Bank’s ease of doing business ranking released on October 24, 2019.

Godwin Emefiele, governor of the Central Bank of Nigeria (CBN) said the Bank was working to encourage banks and other financial institutions to lend from their balance sheet in order to support the growth of critical sectors of the economy, such as Agriculture, MSMEs and the Real Estate Sector. Greater emphasis on improving consumer spending and business investment by MSMEs is critical to sustainable double-digit growth of the Nigerian economy.

The informal economy is a key component of most economies in sub-Saharan Africa, contributing between 25 and 65 percent of GDP and accounting for between 30 and 90 percent of total non-agricultural employment, the IMF said.

“Our estimates suggest significant heterogeneity in the size of informal economies in sub-Saharan Africa, ranging from a low of 20 to 25 percent in Mauritius, South Africa, and Namibia to a high of 50 to 65 percent in Tanzania and Nigeria.”

According to the Fund, the sub-Saharan Africa unweighted average share of informality reached almost 38 percent of GDP during 2010–14. This is surpassed only by Latin America and the Caribbean, at 40 percent of GDP and compares with 34 percent of GDP in South Asia, and 23 percent of GDP in Europe. In member countries of the Organisation for Economic Co-operation and Development (OECD), the informal sector is estimated to account for 17 percent of GDP.