Nigeria’s Untapped Informal Sector


Organising the informal sector and harnessing its massive potential will significantly contribute to Nigeria’s economic development, writes Obinna Chima

Yakubu Mohammad is a tailor with an uncommon knack for fine fabrics. As a fashion designer, he has been able to carve out a niche for himself in African fashion. He is renowned for making some of the finest Danshiki, Kaftan, Babariga, and female Buba designs. Mohammed’s success story had its incubations from the Idi-Araba community, a suburb community in Lagos.

“The tailoring job kept me away from the streets and helped me to engage in something productive,” Mohammed said in a recent interview with THISDAY.

Still, Mohammed is worried that there is no support from the state government. Having spent four years in the business, he lamented that it is faced with a litany of challenges which, though, are not alien to other small scale businesses in the country.

But his love for the business has kept him going. “Funding is a major issue in the business. It prevents us from buying materials needed to do our job and power our generators. There is very little you can achieve in this job without constant power. Therefore, we are compelled to fuel our generators on a daily basis,” he said.

Away from Mohammed, inside the Yaba market where fairly used wears are sold, a wooden staircase takes you to a room that houses over 30 tailors. Throughout the time THISDAY spent carrying out this observation, the men and women in this room where seen busy with heaps of clothes they respectively had to amend. One of the operators who simply identified himself as Jideofor called for support from government for him to expand his business.

Unfortunately, Jideofor has no bank account and as such is excluded from the financial system.
In the stories of Mohammed, Jideofor, the tailors in that room at Yaba as well as so many artisans scattered all over the country lays the opportunities in the country’s untapped opportunities in the country’s informal sector.

With the rising level of unemployment in the formal sector, the number of those seeking for opportunities in the informal sector has continued to swell.
The youth unemployment in rate of 21.50 per cent in the first quarter of 2016, compared with 19 per cent in the fourth quarter of 2015, released by the National Bureau for Statistics (NBS), in a country with an estimated population of 180 million, is as scary. Youth unemployment rate in Nigeria averaged 16.43 per cent from 2014 until 2016 and reached an all-time in the first quarter of 2016.

It is even more worrisome because the figure is bound to increase in the current year with tertiary institutions set to churn out a fresh batch of job seekers, alongside the recorded high level of job losses across all sectors.

The sector, which is also referred to as ‘grey economy’ is the part of an economy that is neither taxed, nor monitored by any form of government. Unlike the formal economy, activities of the informal economy are not included in the gross national product (GNP) and GDP of a country.

The informal sector generally is characterised by absence of official protection and recognition, non-coverage by minimum wage legislation and social security system, predominance of own-account and self-employment work, absence of trade union organisation, low income and wages, little job security as well as the absence of fringe benefits from institutional sources.

The informal sector represents an important part of the economy, and particularly of the labour market, in many countries, especially developing countries, and plays a major role in employment creation, production and income generation.

The acting Managing Director/Chief Executive, NEXIM Bank, Mr. Bashir Wali recently described Nigeria as a blessed country with huge untapped resources in the non-oil sector, just as he cited an NBS report which put the total value of the country’s non-oil earnings in 2015 at $5.9 billion, with an average of $6.18 billion over the past five years. However, the NEXIM boss pointed out that in terms of informal trade, the amount ranges between $12 billion and $14 billion annually.

Indeed, in countries with high rates of population growth or urbanisation like Nigeria, the informal sector tends to absorb most of the growing labour force in the urban areas. Informal sector employment is a necessary survival strategy in countries that lack social safety nets such as unemployment insurance, or where wages and pensions are too low to cover the cost of living.
According to the Africa Development Bank (AfDB), the prominence of the informal sector stems from the opportunities it offers to the most vulnerable populations such as the poorest, women and youth.

Even though the informal sector is an opportunity for generating reasonable incomes for many people, most informal workers are without secure income, employments benefits and social protection, the multilateral institution noted.

This explains why informality often overlaps with poverty. For instance, in countries where informality is decreasing, the number of working poor is also decreasing and vice versa.
The informal economy is often associated with increasing poverty and weak employment conditions. According to the African Development Bank, middle-income countries have smaller informal sectors but higher unemployment rates than the poorest countries. By investing through informal channels, African entrepreneurs seek to reduce costs related to wages, retirement pensions and other social benefits.

Beyond poverty and social issues, the prevalence of informal activities is closely related to an environment characterised by weaknesses in three institutional areas, namely taxation, regulation and private property rights.
Higher taxes and complicated fiscal process may prevent informal sector operators from formalising their activities. Long requirements for registration as well as licensing and inspection requirements are also barriers faced by the informal sector.

Moreover, limited access to capital is an important constraint for operators working in the informal sector. Lack of skills, education and training are also impediments to the formal sector in Africa. Other factors include the limited access to technology and poor infrastructure. Furthermore, the informal sector doesn’t seem to be on the development agenda of African countries or their multilateral development partners.

Informal Sector as Catalyst for Economy

Considering Nigeria’s present economic situation, a report by the Chatham House, the Royal Institute of International Affairs, recently stressed the need for reforms by government that could encourage millions of businesses in the nation’s informal sector to move into the formal sector.
This, according to the report would provide clear opportunity for diverse business growth in Nigeria and also ensure greater regional self-sufficiency in areas such as grains and cotton textiles in West Africa.

Clearly, the London-based independent policy institute, in the 62-page report titled: “Nigeria’s Booming Borders -The Drivers and Consequences of Unrecorded Trade,” revealed that despite the size of Nigeria’s Gross Domestic Product (GDP), estimated at $510 billion, vast external trade in the country remains largely informal, unrecorded and untaxed. This, it stressed leaves much of the country’s economic potential unrealised.

It pointed out that a substantial proportion of Nigeria’s cross-border trade currently flows through informal channels, adding that there are strong indications that unrecorded flows through the key economic corridors between Nigeria and its neighbours are several times greater in volume than the amount of trade that is officially reported.
This, it noted, also reflected the scale of domestic informal business within Nigeria, just as it estimated that unrecorded or informal activity could account for as much as 64 per cent of Nigeria’s GDP.

“There is a temptation to view informal trade as a marginal, grassroots cultural phenomenon, a throwback from a traditional way of life before national boundaries were drawn, or as something quite detached from the realm of formal trade relations. Such perceptions are reinforced by the apparent vibrancy of day-to-day economic life. Trucks line up at official border crossings and bump over muddy back-roads, motorbikes stutter along laden with fuel tanks, barges slip through coastal creeks, and battered cars with raised axles weighed down by sacks of grain or cement trundle along border tracks.

“In crowded city markets and remote villages, across Lagos and the animated streets of Kano, and all along Nigeria’s 4,047 km of land borders, deals are done and goods and money change hands. But this bustling – and growing – resourcefulness needs to be firmly interpreted within the context of the economic challenges confronting Nigeria today.

“Given the country’s current sobering economic outlook, this critical perspective is even more urgent. Reduced revenues from crude oil, Nigeria’s main export and the source of 80-90 per cent of its government’s foreign-exchange earnings, have once again put the country under pressure to insulate itself better from the perennial cycles of oil-market boom and bust and improve the socio-economic stability of the country,” it explained.

Furthermore, the report stated that deeper understanding of the unrecorded side of Nigeria’s non-oil external trade would be the key to the process, saying that it could offer the government a critical opportunity to pursue a path of economic growth that is less volatile and more sustainable.

While urging Nigeria’s federal government to recognise the dynamic informal business community as a fundamentally positive national asset, it pointed out that only when such recognition manifests itself in the implementation of reform will it be truly meaningful.
Specifically, it called on the government to view its taxi drivers, wholesale and retail marketers and distributors, private educators, hairdressers, mobile phone card vendors, transporters and shop owners as economic partners who can help to build growth, prosperity and employment prospects. The Nigerian government must also be realistic and transparent about the drivers of informal activity, it also stated.

It added: “Nigeria cannot seal its borders; nor can it abolish West Africa’s parallel currency market. If the conditions for trading formally are too difficult or expensive, business people will simply move their goods by informal routes instead. If small traders cannot make or receive cross-border payments easily and cheaply through the officially regulated financial system, they will simply turn to the unregulated parallel market. They cannot be stopped from doing so.

“The prevailing socio-economic conditions offer a critical opportunity to create incentives for pursuing less volatile, more sustainable economic growth. This level of opacity presents serious policy challenges for Nigeria as the government finds itself grappling with reduced revenues in the wake of the decline in global crude oil prices – down by about 60 per cent since June 2014 – and the weakening of the local currency, the naira.

“The prevailing socio-economic conditions offer a critical opportunity to create incentives for pursuing less volatile, more sustainable economic growth. But Nigeria’s capacity to design policies and strategies to boost its economy, and specifically to promote development of the non-oil sectors, is hindered by the absence of balanced and reliable information on the pattern, scale and impacts of unrecorded economic activity.”

It also noted that the prevalence of a large informal sector has several main interrelated consequences for the Nigerian economy. It highlighted some of the consequences to include the loss of government revenue from taxes, customs duties and tariffs.

“The second is that Nigeria’s previous over-reliance on oil revenue has left a legacy of failure by successive governments to understand and develop the non-oil tax base and thereby diversify the economy. The lack of government focus on the development of non-hydrocarbons activity has been accompanied by a burgeoning volume of unrecorded non-oil trade.

“Yet despite the resilience of the non-oil sector, periods of political and economic uncertainty have exposed its fragilities – and the limitations associated with developing on an informal basis without the support of government economic strategy or public services. Although unofficial trade has grown even during episodes of economic crisis, this cannot mask underlying weaknesses in the functioning of the economy, its supporting services, and the operation of public administration and border management,” it added.

Option of Micro-Insurance

The National Pension Commission (PenCom) has said it is working on modalities to extend coverage towards capturing the informal sector in its scheme. Micro-pension is a financial programme for the provision of pension services to informal sector operators and workers. The programme has been successful in India, Kenya, Ghana and other countries.

The Director-General of PenCom, Mrs. Chinelo Anohu-Amazu said the commission has set up a micro-pension department to cater to the needs of operators in the informal sector.
“Part of the work we are doing now is direct active engagement of even the semi-formalised informal sector. It is a whole gamut. From the entertainment industry to the casual works, we are engaging them all.

“We are working with the hairdressers, the union of transport workers, the tailors and a whole set of those who employ themselves. The reason for this is to gather accurate data, hear them, examine and analyse their livelihood, because that would inform the regulation we would issue, to make compliance easier,” Anohu-Amazu said.
She said robust technology system was being work on to ensure smooth operation of the scheme, adding that Pencom has decided to run a pilot phase of the proposed scheme.

Harnessing Opportunities

To Dr. Kim Bettcher of the Center for International Private Enterprise (CIPE), informal businesses account for 35-50 per cent of GDP in a lot of developing countries. According to him, the sector contains both entrepreneurial spirit and the struggle for subsistence in any nation.
He argued that the solution is neither to encourage nor suppress informal economic activity, but rather to facilitate the transition of informal businesses to the formal sector and reduce barriers for all businesses(formal and informal).

“Opening routes to formality creates new opportunities for the poor to realise their potential and raise national competitiveness. Acquiring formal status allows entrepreneurs to access formal markets, invest with security, obtain new sources of credit, and defend their rights.
“An effective route to formality, however, requires more than registration and enforcement. It requires the tearing down of barriers at the origin of informality to improve the business climate for all entrepreneurs. Lowering barriers increases business opportunities while facilitating compliance.

“Simply put, informal entrepreneurs have tremendous potential, but in order for them to realise that potential they must be allowed to make the shift into the modern market economy. This will give the same opportunities to all entrepreneurs and create higher-quality new jobs,” he wrote in a report.

On his part, Boston, the Senior Partner and Managing Director, Boston Consulting Group ( BCG), a professional services firm which recently opened its Lagos office, Mr. Luis Gravito, stressed that Nigeria has a huge informal sector whose opportunities remain unexploited .

“There is a very big informal sector in Nigeria and harnessing the opportunities and making sure that they (informal sector) become part of the mainstream economy is also very important. At least, from the point of view of very short-term objectives, this includes the need to enlarge the country’s revenue base which would definitely add value to the Nigerian economy.

“Secondly, once the informal sector becomes part of the formal sector, it enhances the country’s capabilities of also exporting and diversifies the sources of foreign exchange earnings,” he added.

Also, the President, Chartered Institute of Bankers of Nigeria (CIBN), Prof. Segun Ajibola, said formalising the informal sector would help promote financial inclusion, allow for effective transmission of monetary policy as well as boost government’s revenue generation capacity.

“The financial inclusion programme is to make operators in the informal sector to be able to access the financial system and also enables them to be able to access some of the intervention funds in the country.

“The reason why microfinance banks were set up was to help those who are in the informal sector to also have access to funding and necessary support to operate. You know there rules and regulations in this country that also encourage co-operatives society. If properly structured, those in the informal sector can take advantage of the opportunities to access certain facilities.

“We also need to still study the kind of models they have in countries such as Malaysia, Singapore, Indonesia, South Korea and even India, where operators in the informal sector are contributing significantly to the GDP of their nations. So, we need to study how they have operated their models successfully to make impact in their economies,” the CIBN president added.
But the Chief Executive Officer of Proshare Nigeria Limited, Mr. Femi Awoyemi, held the belief that over 75 per cent of Nigeria’s population operate in the informal sector.

According to him, corruption has also been a major source of funding for the informal sector. Awoyemi said: “Whenever we draw our budget and we don’t take that sector into consideration, then we are missing the point. Formalising the informal sector is not just what government needs to do, it is the only thing they need to do because that is almost the whole economy of Nigeria we are talking about.

“So, if government does not have plan for people in the informal sector, then they have a serious problem on their hands. The money they ought to spend on the sector might have to be spent on increased policing and security.”

The Director-General of the Nigeria Employers Consultative Association (NECA), Segun Oshinowo had said the informal sector remains key to the promotion of social economic development of Nigeria.
According to him, if the country desires to reduce poverty, it is important for it to address the basic policy option available to tackle the problem.

“As you well know, over 90 per cent of Nigeria operates in the informal sector. If we are to reduce poverty in Nigeria, it is extremely important that we address the basic policy option by encouraging transition of enterprises and workers from the informal to formal sector,” he said.
He decried the challenge of building up institution and evolving policies that would promote the formalisation of the informal sector in the country.