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 ownaccount 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