The Informal Sector: Unlocking Nigeria's Trillion-Dollar Goldmine

Introduction

In the bustling streets of Lagos, amidst the rhythmic hum of daily life, lies an economic powerhouse often overlooked by policymakers and economists alike. The vibrant and dynamic informal sector constitutes over 50% of Nigeria's GDP. This sector, teeming with small businesses, entrepreneurs and hardworking individuals, offers a hidden treasure trove of opportunities that, if harnessed correctly, could transform Nigeria's economic landscape. However, the path to formalising and integrating this sector is fraught with challenges, requiring a nuanced and strategic approach.

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The Informal Sector's Contribution to Nigeria's GDP

The informal sector is not just a significant part of Nigeria's economy; but definitely its backbone. Recent reliable economic source indicate that the informal sector comprises approximately 58.2% of Nigeria's economy, translating to over a trillion when adjusted for purchasing power parity (PPP) levels. This sector includes around 40 million small enterprises, ranging from street vendors to artisans and is responsible for more than 50% of the country's GDP (IMF). The World Bank estimates Nigeria's GDP at $362.81 billion, highlighting the substantial role of the informal economy in the broader economic context.

A critical look at key economic statistics in the informal sector highlight its importance:

Employment Generation: The informal sector provides up to 90% of total employment in Nigeria (NBS). This statistic underscores the sector's role as a vital safety net for millions who face barriers to formal employment, especially in a country with high unemployment rates at 41% just before changes in the unemployment metrics, surging to 5% (0.8% increase) as at 2023. According to a 2020 report by the National Bureau of Statistics (NBS), the informal sector employs about 80% of the workforce, offering livelihoods to those unable to secure formal jobs. In comparison to recent report from National Bureau of Statistics (NBS) shows that Informal employment rate in Q3 2023 was 92.3%, while Q2 2023 was 92.7%. Percentage of youth Not in Employment, Education or Training (NEET Rate) was 13.7% in Q3 2023.

Revenue Generation: Approximately 72.3% of informal businesses generate over ?1,000,000 monthly in revenue. This demonstrates the robust economic activity within this sector, even if it operates largely outside the formal financial system. The International Monetary Fund (IMF) estimates that the informal economy in Nigeria accounts for around 65% of the country's economic activities.

Profit Margins: Despite high revenue figures, around 90% of informal businesses make less than ?500,000 in monthly profit, with only 1.3% earning above ?2.5 million (NBS). This indicates that while the sector generates substantial revenue, profit margins remain relatively low for most businesses, highlighting the need for support and intervention to enhance profitability.

Entrepreneurial Motivation: More than 51% of informal business owners started their enterprises due to unemployment, while 35.9% did so because their current jobs did not provide sufficient income (MR). This further underscores the role of the informal sector in providing alternative livelihoods and economic opportunities. The Central Bank of Nigeria (CBN) reports that many entrepreneurs turn to the informal sector due to the high barriers to entry in the formal economy.

Business Longevity: Only 18.3% of businesses in the informal sector have been operating for more than five years according to bloomberg. This points to the challenge of sustaining businesses in this sector and highlights the need for policies and support systems that can enhance business longevity and stability. A study by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) shows that the majority of informal businesses struggle to survive beyond their fifth year due to lack of access to finance and formal support systems.

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The Challenges of Measuring and Regulating the Informal Sector

One of the primary hurdles in harnessing the potential of the informal sector is the difficulty in measuring its size and impact. The lack of comprehensive data complicates efforts to evaluate the effectiveness of policies aimed at fostering inclusive economic growth. Moreover, regulating the myriad of small businesses in this sector presents a herculean task due to their sheer number and diversity.

The International Monetary Fund (IMF) has often noted that the informal economy is a pervasive phenomenon, mostly prevalent in developing economies. In Nigeria, this sector includes millions of small businesses operating outside the formal financial system, significantly contributing to employment and economic activity. However, the absence of reliable data on the informal sector makes it challenging to understand its full impact and potential contributions to the economy.

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Opportunities for Integration

To bring informal workers into the formal economy, a multifaceted approach is necessary. Here are some proposed strategies to activate:

Lower Registration Costs: Reducing the financial burden of registration can attract more informal businesses into the formal economy. Simplifying the registration process and offering incentives can encourage more entrepreneurs to formalise their operations. The Corporate Affairs Commission (CAC) has initiated several programs to reduce registration costs, but more needs to be done to reach the vast majority of informal businesses.

Delegated Tax Collection: Empowering trade unions or business groups to assist in tax collection can ensure a more efficient and widespread reach. This approach can make tax compliance easier for informal businesses, while also increasing government revenue. The Lagos State government has successfully piloted such initiatives, partnering with local market associations to improve tax collection rates.

Financial Inclusion Programs: Enhancing access to financing and support programs can improve business resilience and growth. Financial institutions should develop tailored products and services that cater to the unique needs of informal businesses. Initiatives like the CBN's Micro, Small and Medium Enterprises Development Fund (MSMEDF) aim to provide affordable credit to informal businesses, but accessibility remains a challenge.

Digital Payment Adoption: Promoting digital payments can increase transparency and reduce reliance on cash. This facilitates easier tracking and taxation of transactions, while also providing informal businesses with a secure and efficient payment method. The introduction of mobile money services by telecom companies like MTN and Airtel has seen significant uptake, offering informal businesses a reliable alternative to cash transactions.

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The Way Forward

It is crystal clear that the need to enumerate and tax the informal sector has become more imperative. By activating this playbook, the informal sector can contribute its fair share to the country's tax revenue, which will help finance government spending and improve the nation's tax-to-GDP ratio.

Formalising the informal sector is beneficial for both the sector and the wider economy. It creates a more stable and predictable tax system, encouraging greater investment and economic growth. Moreover, it provides informal businesses with access to formal financial services, legal protections and support systems that can enhance their growth and sustainability.

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A Holistic Approach to Activating Nigeria's Trillion-Dollar Goldmine

Developing a holistic approach to formalising the informal sector requires addressing several key areas:

Policy Framework: The government must establish a comprehensive policy framework that supports the integration of informal businesses into the formal economy. This includes simplifying regulatory requirements, offering incentives and providing support services. Policies should focus on reducing bureaucracy and ensuring that informal businesses have a clear pathway to formalisation.

Capacity Building: Training and capacity-building programs are essential to equip informal business owners with the skills and knowledge needed to thrive in the formal economy. These programs should cover areas such as financial management, digital literacy and business development. Organisations like SMEDAN and the National Association of Small and Medium Enterprises (NASME) are crucial in delivering these training programs.

Access to Finance: Improving access to finance is crucial for the growth and sustainability of informal businesses. Financial institutions should develop tailored products and services that cater to the unique needs of informal businesses, including microloans, savings accounts and insurance products. Programs like the CBN's Anchor Borrowers' Programme, which provides funding to small-scale farmers, can be expanded to include other informal sector activities.

Infrastructure Development: Investing in infrastructure development, such as markets, transport systems and digital infrastructure, can support the growth of informal businesses and facilitate their integration into the formal economy. Government initiatives like the Nigerian Economic Sustainability Plan (NESP) include provisions for infrastructure development that can benefit the informal sector.

Public Awareness Campaigns: Public awareness campaigns can educate informal business owners about the benefits of formalisation and encourage them to register their businesses. These campaigns should highlight the advantages of formalisation, such as access to finance, legal protections and support services. Collaborative efforts between government agencies, NGOs and the private sector can amplify these strategic awareness.

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Conclusion

In the lingo of economists, the informal sector provides immense contributions to the vibrancy of Nigeria's economy. By recognising and integrating this sector, Nigeria can lay the foundation for a stronger and more resilient economic future. The journey to formalising the informal sector may be challenging, but the rewards are substantial. By unlocking the trillion-dollar goldmine that is Nigeria's informal sector, the country can achieve inclusive economic growth, reduce poverty and create a more prosperous and equitable society.

The informal sector is not just a hidden treasure; it is the heartbeat of Nigeria's economy. With the right strategies and policies in place, Nigeria can turn this adversity into an advantage, transforming its economic landscape and unlocking the full potential of its people. The time to act is now and the opportunity envisaged is truly immense.

Pari-Passu..........................