IGR and Formalization of the Informal Economy in Nigeria

Nigeria has had a turbulent history, marked by decades of heated political and civil strife since gaining independence in 1960. The oil boom of the 1970s brought windfall profits to the burgeoning state, but corruption and gross mismanagement have shattered economic indicators and left most of its population destitute. A reform process that began after the first democratically elected government was sworn into power in 1999 is beginning to show results, but hardly on the kind or scale that can reassure a country desperate to shake off its Third World heritage .

At the lower level, continued economic stagnation and Nigeria’s continued failure to implement corrective measures have produced a thriving informal economy – the sum total of financial and business activities that operate outside of government control and do not tax or contribute to the country’s GDP. It includes everything from backyard employment and self-help financing to street vending and unregulated manufacturing. Nigeria’s vast informal economy of products, services and financial services was born out of necessity but is now estimated to contribute up to 65% of current gross national product. Even if the percentage is significantly adjusted, there is no question that the state loses millions in its own income (IGR) as a result of its activities in the unorganized sector. IGR or Inland Revenue refers to government revenue from duties and taxes. Although current figures for Nigeria’s federal IGR are unavailable, it has traditionally been small relative to the country’s oil profits, which account for 85% of government revenues.

On the African continent in general, and in Nigeria in particular, the informal sector no longer plays a supporting role but leads the official economies to sustain livelihoods and create new jobs. The current Nigerian government accepts that more than 90% of all new jobs are created by this unorganized sector. Indeed, the Lagos Report clearly shows that Nigeria is vitally dependent, albeit unconsciously, on its informal economy. Moreover, it must cultivate this sector and subject it to the tax regime if its long-term macroeconomic goals are to be met. The Nigerian informal economy is therefore crucial in two respects: in terms of untapped revenue and, more importantly, as a driver behind rapid enterprise development for sustained economic growth. Here is what the government can do to gradually bring the informal economy under its jurisdiction:

* Develop innovative policies to bring disorganized activities into official purview through a system of sops, tax breaks and funding targeting both existing and emerging unregulated businesses.

* Streamline tax and business regulations for universal applicability; take action against systemic corruption through severe penalties.

* Foster a credit environment that accommodates the realities of small businesses. Government efforts should focus on stimulating lending through equity rather than debt, as Nigeria’s informal economy is dominated by high-risk, proprietary businesses.

* Improving productivity in small businesses through infrastructure development and the removal of trade and administrative barriers. Improving technical support and capacity building support to support existing and emerging entrepreneurs.

* Transform education at the job and skill level to create a dynamic workforce equipped for entrepreneurial challenges. Creation of add-on programs for relevant technology and computer education.

Spain is an excellent example of how to do it right. In the 1990s, the Spanish government embarked on a radical reform program that reduced corporate taxes and regulated labor laws. The result was a sharp 40% fall in the unemployment rate over six years, fueled by massive job opportunities in the informal sector. Even though tax rates had been reduced, the government boosted the revenue generated by small businesses by over 75% by bringing more of them under regulation.

Although Nigeria has for years been the continent’s second largest economy after South Africa, independent researchers have long pointed out that the ranking is unrealistic in that it does not take into account Nigeria’s huge parallel economy. While not improbable, the theory is nearly impossible to prove due to the lack of sufficient relevant data for Nigeria. However, there is no doubt that the country’s future position in world affairs depends significantly on the development and formalization of its massive informal economy. As far as the attitude is concerned, what is needed above all is the abolition of conventional perceptions of the unorganized sector, i.e. a paradigm shift in the economic policy perspective and implementation.

The Nigerian economic reform process, which began in 2001, has brought concrete steps to strengthen the private sector:

* A bank consolidation program was launched in 2004 to strengthen financial institutions and improve access to credit for the private sector.

* Rapid divestment to large companies has begun with the privatization of mining, communications and oil distribution companies.

* The government deregulated oil prices in 2007 and enforced the National Tax Responsibility Act and the Government Procurement Act.

Some of these measures have produced tangible results by lowering inflation and increasing international reserves. However, their long-term effects have yet to be observed or studied.

In December 2008, the government of President Umaru Yar’Adua presented budget proposals to withdraw US$200 million from African Development Bank trust funds to issue 10-year government bonds. The move was part of the Treasury Department’s effort to plug a sizeable budget deficit of almost 4% of GDP. Unfortunately, short-term actions like this otherwise unremarkable decision have defined Nigerian economic policy for more than the last half century. What it needs to shed its Third World credentials is a unified, innovative strategy that reverses its over-reliance on oil and actively seeks to formalize its informal economy.

In particular, Nigeria needs to develop practical measures to transform its traditional survival practices into entrepreneurial ventures that contribute revenue, create more jobs and offer innovative products and solutions. A series of Abuja policies in recent years have aimed to reform the old economy, ostensibly to encourage small business and spark an entrepreneurial revolution. In addition to its obvious contributions to job and income creation, the Nigerian informal economy is responsible for a number of positive effects –

* It provides a productive outlet for a vast population of Nigerians who are self-employed voluntarily or out of necessity.

* It creates economic competition and encourages innovative business practices relevant to local realities.

* Most importantly, it mobilizes Nigeria’s significant human resource pool that would otherwise go unused or worse, abused.

In the Nigerian context, the formalization of the informal economy is synonymous with enterprise development and long-term macroeconomic growth. An endeavor of such moment calls for creative innovation in policymaking as much as motivated implementation. Given the country’s troubled past, his government would also do well to build a general consensus on important issues before attempting to push through radical legislation. However, far-reaching changes will only come with the recognition that harnessing the informal economy is key to solving the age-old Nigerian paradox – a country of vast resources and extreme poverty