Informal sector, capacity and business improvement in Africa
Olufemi Adedamola Oyedele, MPhil. in Construction Management, managing director/CEO, Fame Oyster & Co. Nigeria, is an expert in real estate investment, a registered estate surveyor and valuer, and an experienced construction project manager. He can be reached on +2348137564200 (text only) or femoyede@gmail.com
Micro, small and medium-sized enterprises (MSMEs) in the informal economy of Africa are the major business types particularly vulnerable to economic impacts, including those caused by COVID-19 pandemic, flooding, high foreign exchange rate, inflation, recession, unemployment, among others. Consumers will demand and spend less, leading to decreasing revenues, liquidity problems, reduced output and layoffs in the period of pandemic and economic crisis, affecting the MSMEs most. These small businesses are usually engaged in retail trading, peasant agriculture, transportation or artisanship. Over 80 percent of Africans employed are in the informal economy in Africa. Women form over half of these numbers, especially in the urban areas. The informal economy is not organised and the government must be interested in the business of the participants because they form the heart of any economy. These enterprises are most vulnerable in that they lack capacity to do business successfully. Protecting MSMEs and its workers will boost the sustainability of the economy and help reduce abject poverty.
The Nigerian government has made efforts to integrate the informal sector through formal registration, business training, loans, encouragement of cooperatives (networking) and pension schemes. Every enterprise in Nigeria is required by law to be registered with the Corporate Affairs Commission (CAC) and to comply with the relevant provisions of the Companies and Allied Matters Act, Chapter 59, Laws of the Federation of Nigeria. The Lagos State Office of Sustainable Development Goals and Investment held a workshop as part of her commitment to promote sustainable and globally-competitive enterprises in Lagos. The workshop also conducted the mapping and analysis of laws, policies and instructions for Micro, Small and Medium-sized Enterprises (MSMEs) development and employment promotion in Lagos State (business policies to promote MSMEs). Integration of informal economies and workers into the business plans of urban governments will strengthen cities’ ability to monitor and enforce better security and safety, address exploitation, and provide workers with access to basic services and rights.
A new report commissioned by the Commonwealth Secretariat, located in Marlborough House on Pall Mall, London, proposes five recommendations on how governments can help ensure the survival of MSMEs:
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Health and safety guidelines and support schemes for informal workers
Informal sector workers are highly vulnerable to getting infected as they mostly live and work in congested spaces. They go through a lot of stress getting to work, work under harsh environments, lack adequate access to water and clean sanitation. Hygiene and sanitation are critical in helping these people. As a short-term strategy, other African governments can immediately put in place health guidelines for informal traders, as has been done in South Africa. In the medium to long-term, health insurance schemes that afford significant protection for workers in the informal sector, such as Ghana’s National Health Insurance Scheme, can provide better prenatal care, preventive health check-ups and attention from trained health professionals. Nigeria’s National Health Insurance Scheme (NHIS) is also a laudable programme.
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Adequate short-term welfare support with coverage from public works programmes
To reduce the risk of extreme poverty and food insecurity, governments are embarking on online payments, in-kind transfers (food distribution) and social grants. However, access to these measures can be complex and more effective and targeted social safety nets for the informal sector are needed. Cash transfers can be particularly effective as macro-economic stabilisers, since they can take effect with less delay than other discretionary fiscal measures. However, in the medium to long-term, generating employment through paid work opportunities and public works programmes will go a long way. The Federal Government of Nigeria established the National Social Investments Programmes (NSIP) in 2016, to tackle poverty and hunger across the country. The programme must have special interest in MSMEs.
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Maintaining liquidity for firms and re-thinking operating models
To survive the crisis, small businesses in the informal sector, which are generally underfunded, need urgent liquidity support. As of May 2020, fiscal policy stimulus varies greatly across countries, ranging from 0.1 to 4.0 percent of GDP. Such short-term increase in the liquidity of MSMEs should go through the channels that entrepreneurs already know and trust like commercial banks, trade cooperatives and welfare programmes like “trader moni” (Government Enterprise and Empowerment Programme (GEEP)) in Nigeria and Impact Entrepreneurship Competition in Ghana. This means community-based financial and microfinance institutions should be considered essential services during crises, and provided [with] emergency liquidity, if within regulation. Crises usually force a fundamental rethinking of business and operating models that will transform the small business sector. Short-term measures may provide immediate support, but do little to build long-term sustainability. This requires a structural reduction of the finance gap for MSMEs by extending microfinance systems and including other services such as insurance, technical assistance in accessing loans and business training.
4. Adjusting to supply chain disruptions plus private sector development interventions
Value chain disruptions can have huge impacts in periods of crises, as MSMEs in the informal sector rely on day-to-day sales for survival. To avoid insolvencies in the short-term, these businesses will increasingly rely on stimulus measures that lower operational costs and waive existing debts. Expanding business links is also possible, whereby large, formal businesses can work with small, informal businesses as their outlets or distributors of essential goods to people’s doorsteps. Stimulus packages should improve working spaces and infrastructure of the informal economy, such as communal markets, in a way that promotes social distancing. This would allow them to become operational in the short-term. In the long-term, business performance and competitiveness could be enhanced through more comprehensive private sector development interventions. These should combine access to finance, consulting and business training with industry-specific networking, regulations, standards, innovation and linkage programmes. There is still no government trade programme as successful as the defunct Cocoa Marketing Board.
5. Structural policies for resilience
Resilience will depend on structural policies that support training and resources, provide information and invest in building capabilities. In the short-term, these should help MSMEs adopt new working modes and digital technologies that respond to the new reality of crises, such as teleworking, online retail or home delivery. However, this requires putting some basic infrastructure in place (such as internet connection), good roads and familiarity with digital platforms, along with consumer demand for such services. Less than 30 percent of the African population has access to the internet, compared to 90 percent in advanced countries and 60 percent in other developing countries of Latin America and Asia. At the same time, mobile money services such as First Money are on the rise amongst African small businesses, increasing productivity, turnover and revenues, and credibility. In Nigeria, Mobile Money is offered by MTN telephone services providers in partnership with banks. Medium to long-term digital transformation can help ensure MSMEs can operate sustainably. Simple digital solutions and training that do not require large upfront capital outlay will make it easier to adapt. Electricity and general education are potent in helping the participants of the informal sector to improve their businesses.
MSMEs are the livewire of any nation as they form between 60 to 75 percent of businesses of viable nations. The government must be ready to assist them, not only by giving them subsidies, but by providing them policies and programmes that will enhance their businesses. According to “Business Made Easy” published by Nigeria’s Presidential Enabling Environment Council (PEBEC), micro, small and medium-sized enterprises (MSMEs) account for 47.8 percent of Nigeria’s gross domestic product (GDP), despite binding constraints on productivity due to a challenging business environment. With government support, MSMEs can do better than this. The identification and implementation of various policies and operational levers to unlock SME competitiveness and growth have remained a central economic development theme at the highest level of Nigeria – primarily because of its ability to deliver transformative impact such as job creation, poverty reduction and gender inclusivity.
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