Namibia: Should the Informal Sector Be Formalised?
22 April 2014
Windhoek — Government should focus on the inclusion of the informal sector to boost its contribution to the mainstream economy, a local economic analyst has proposed. His comment follows the findings in the African Development Bank 2013 report, titled “Recognizing Africa’s Informal Sector,” which found that the informal sector contributes about 55 per cent of Sub-Saharan Africa’s GDP and 80 per cent of the labour force.
“With the inclusion of the informal sector it could be expected to result in growth for the local economy, employment and wealth creation, and yes, ultimately, improved revenue for government,” IJG research analyst Rowland Brown said last week in response to questions from New Era regarding the role of the informal sector in the country.
There have been calls in the past for government to formalise the informal sector in order to broaden the tax base considering the amount of money circulating in the untapped informal sector. However, Brown cautions that a large number of those operating in the informal sector are earning a lot less than the minimum thresholds for the various forms of tax, particularly income and VAT (value added tax).
“Some informal trade is certainly being carried out as a secondary income for people with primary incomes from formal employment, and in these instances, tax revenue is definitely missed,” he said. He outlined that challenges such as access to finance also hamper the development of small businesses. “A major problem in this regard is the fact that many nascent businesses are required to go through a period of losses before they enter profit-making territory,” he said.
Brown says bank funding is not ideal for SMEs as interest payments are generally required from day one. He suggested that there is a need for more private equities, and that venture capital investors could help to develop the informal sector, but so would more SMEs with good business ideas and implementation.
When asked whether it would be wise to broaden the tax base by formalising the untapped informal sector, Brown said: “In some sense yes, however the tax base can and should also be broadened by doing exactly what the Ministry of Finance is doing and improving on the administration of the tax system, which should in turn reduce tax avoidance and evasion.”
The report also found that many African countries have experienced a growth revival, but this has not necessarily generated decent jobs, as unemployment remained high among youth and the adult African population.
“Even though the informal sector is an opportunity for generating reasonable incomes for many people, most informal workers are without secure income, employment benefits and social protection. This explains why informality often overlaps with poverty,” states the report.
In countries where informality is decreasing, the number of working poor is also decreasing and vice versa. The report states that the prevalence of informal activities is closely related to an environment characterised by weaknesses in three institutional areas such as taxation, regulation and private property rights.
“Higher taxes and complicated fiscal process may prevent informal sector operators from formalizing their activities. Long requirements for registration as well as licensing and inspection requirements are also barriers faced by the informal sector,” says the report.
Source: New ERA, Namibia