Workable policies for Nigerian economy’s informal structure

The Nigerian economy is characterised by a large informal sector with a sizeable share of its output, labour force, income and economic activity. Understanding the informal structure better will help us formulate workable policies which can spur economic growth, reduce poverty and improve the living conditions of its citizens. In this regard, this article explores and analyses the structure of the informal sector in Nigeria, its size, the challenges and the needed policy direction to maximise its potential.

The informal sector is an essential part of the Nigerian economy. It accounts for approximately 65 per cent of the country’s labour force, about 45 percent of GDP, and 60 percent of total domestic investment, which suggests that the informal sector holds the key to boosting growth. Despite its size, studies of the Nigerian informal sector are limited mainly due to the underground nature of most of its members.

The significance of the informal sector in Nigeria
The informal sector is the major contributor to Nigeria’s economy because it involves economic activities that are not under the control of the government and are not conducted according to the rules and regulations of a formal business. These activities are small-scale retail trade, agriculture, transport, construction and a host of service-provision jobs. The sector is reported to account for employment of about 65 per cent of Nigeria’s labour market, 84 per cent of urban productivity and 65 per cent of rural productivity.

It covers a considerable part of employment. According to the International Labour Organisation (ILO), over 65 per cent of working Nigerians are in the informal sector (a moderate estimate). The sector also contributes significantly to the country’s gross domestic product (GDP) by creating commodities and services to cater to the needs of the local population. Moreover, the flexible and adaptable nature of the sector makes it the most responsive part of the economy, especially in times of recession or national economic crisis.

Challenges faced by the informal sector
The informal sector’s importance can hardly be overstated. This is so because it employed more than 80 per cent of Nigeria’s labour force, as well as it widens the base of tax collection; it paid taxes, created wealth, poverty reduction, reducing inflation limits, and so on. Nevertheless, this informal sector is characterised by many problems that make it difficult for them to be effective and efficient. Some of the problems include…

Lack of access to finance: Small businesses run on credit and operating capital. That is a challenge for informal businesses – they often find it difficult to access formal sources of finance, from loans to credit to bank accounts. This means they can’t expand, diversify, invest in technology and training, or improve their operations.

Regulatory Impediments: Operating in the informal sector means staying away from government regulations; this may result in proprietors having to face harassment from the authorities or fines. This can act as a destabilising factor and slow down growth.

Inadequate infrastructure: Informal sector enterprises are often deprived of basic physical infrastructure, such as power supply, reliable water supply, transport networks and so on, which they are unable to afford, though they badly need them. This makes the enterprises less productive, and less competitive in relation to the formal sector.

Skills gap: Many workers in the informal sector are not skilled enough to boost productivity and earnings. Poor availability of formal schooling and vocational training contribute to this employment skills gap.

Social protection: Workers in the informal sector are often excluded from social protection programmes, such as health insurance, pensions and social assistance programmes. This renders them even more vulnerable to economic shocks and health crises.

Case studies: Successful policy interventions
Kenya’s Micro and Small Enterprises (MSE) Act: The Kenyan government enacted the country’s Micro and Small Enterprises (MSE) Act to promote, develop and regulate micro and small enterprises. The MSE Act created the Micro and Small Enterprises Authority (MSEA) of Kenya, a government agency that provides support services, training and access to finance to informal businesses.

Pradhan Mantri Mudra Yojana (PMMY) scheme in India: As a new scheme that was started in April 2015, providing loans to small- and micro-enterprises, it has been able to support financing for informal businesses that often operate in cash and facilitate them by allowing them to increase their scale and get more formalised businesses.

Rwanda’s Umurenge SACCO Programme: A strategy to promote financial inclusion in Rwanda involved the establishment of Savings and Credit Cooperative (SACCO) programmes intended to improve the access to and use of savings and credit services by the underserved and the poor, particularly those in the informal sector. Access to finance for informal commercial and domestic enterprises now stands at 51.3 per cent.

Policy recommendations for Nigeria
To harness the potential of the informal sector aand address the challenges it faces, pmakers need to develop targeted strategies and policies.  First, a comprehensive analysis of its current contribution pattern and future potential must be done by and for policymakers. A whole range of drivers are behind this important shift, and in turn tailored strategies, policies and programmes will propel these drivers to their full potential. Here are a few policy recommendations for the same:

Integrated financial services
Microfinance Institutions (MFIs): Expand the microfinance network that provides small credits and lending facilities for informal sector businesses. Encourage linkages between MFIs and commercial banks to widen the scope and scale of outreach and financial inclusion.

Mobile banking
Use mobile banking platforms that facilitate access to banking services for informal firms, including digital payment systems for transactions and savings.

Financial literacy programme
Implement financial literacy programmes to teach informal sector entrepreneurs how to manage their finances, get access to credit and use financial services.

Simplified regulatory frameworks
Making registration easier: Make it easier for businesses to register, including informal firms that want to formalise, and make it possible for them to do so under one roof, in one-stop shops for business registration and tax compliance and access to government facilities.

Tax incentives: Implement tax incentives such as lowering rates or granting exemptions for formerly informal businesses. Subsidise or grant support to get into the formal sector in the first place.

Regulatory support: create units to help informal businesses with regulatory requirements and processes to find and legislate for compliance.

Infrastructure Investments
Market Facilities: Improve and modernise market facilities to create safe and enabling environments for informal traders. Water, sanitation and waste management must be readily accessible.

Transportation Networks: Better roads and railways connect people to global networks and markets. Provide adequate technical support for transportation infrastructure to allow for increased productivity and efficiency as well as more effective utilisation of resources.

A considerable number of people can be lifted out of poverty simply by stim, especially by investing in road construction and maintenance.

Access to utilities: Open access to reliable electricity, clean water and internet access for informal sector enterprises. Roll out community infrastructure programmes to meet local priorities.

Vocational Training and Education
Skill development programmes: Design and implement vocational training programmes that meet the needs of informal sector workers. Identify and train workers in in-demand skills such as carpentry, tailoring, agriculture and technology.

To be continued tomorrow.

Dr Oluwadele is an Author, Chartered Accountant and Public Policy Scholar based in Canada. He can be reached Via: [email protected]