laying the foundation

Coronavirus: Now is the time to build a future for Africa’s informal workers

By Brice Ngameni

Posted on June 3, 2020 10:59

Today’s challenges present a unique chance to make lemonade out of lemons, by laying the foundation of a stronger and more resilient Africa by including informal workers.

African cities are teeming with market stalls of all sorts, ranging from the celebrated suya stands (selling popular spiced up grilled beef) to the indispensable mobile phone booths (allowing customers to rent a mobile phone for a call in exchange for a fee) and the oft-deplored regiments of motorcycle taxis.

These workers are typically unregistered, unregulated and untaxed.

In the lingo of economists, they belong to the informal or traditional sector. In Africa, informal workers represent a whopping 86% of all jobs.  In Sub-Saharan Africa specifically, they contribute 38 percent of GDP and up to 60% of Nigeria’s GDP.

READ MORE Nigeria VS Coronavirus: Hardest hit least helped, informal workers

Like other parts of the economy, the informal sector has taken a hit from the COVID-19 crisis. Governments have mandated workers to take costly protective measures, such as the regular purchase of masks, the reduction in the number of passengers for motorcycle taxis, or the observance of curfews. Farmers have seen falling demand for their produce as restaurants have reduced their purchases in the face of dwindling traffic.

Universal Basic Income?

Whilst policymakers in Spain and France have been toying with the idea of a universal basic income that would extend a safety net to virtually all those unemployed (regardless of whether they qualify for traditional unemployment benefits), policymakers on the continent have done little to extend concrete support to the millions of unregistered workers who keep Africa’s market stalls, work on its farms or toil in its workshops.

Governments should inject capital into African tontines …in a country like Cameroon, up to 50% of the population participates in tontines or other parts of the informal financial system.

In one of the great ironies of the crisis, no focused support has been directed towards the shadow economy in the very continent that depends the most on it. That point doesn’t take away from the fact that African governments have been uncharacteristically responsive to the pandemic.

READ MORE Coronavirus: Nigeria’s informal economy hit hard

Some of these responses have included free testing and COVID-19 treatment, reduced collections of taxes and customs duties, as well as food distribution. These efforts are commendable but insufficient.

African governments need a targeted set of relief measures for the continent’s informal economy. Such a stimulus programme is especially appropriate, considering the role that government containment measures played in bringing about the near collapse of that sector of the economy.

The backbone of the economy

These workers must be protected from the devastating effects of the COVID-19 crisis, because of their critical contribution to African economies, their importance to Africa’s food security and their vulnerability to economic shocks.

Africa’s informal sector witnessed significant growth over the past decades, aided by a combination of technological and macro-economic trends. The advent of mobile phones and easy access to motor cycles facilitated the creation of hundreds of thousands of informal jobs in the 2000s.

Two decades prior, Structural Adjustment Programs led to the closing of many state-run industries, forcing many former public employees to find work in the underground economy. Currently, the COVID-19 crisis is also threatening to destroy more jobs in the formal economy thereby pushing additional workers towards the informal route.

Today’s challenges present a unique chance to make lemonade out of lemons, by laying the foundation of a stronger and more resilient Africa.

Informal workers are also critical to the uninterrupted supply of food to African consumers. In East Africa for example, the combination of COVID-19 and ongoing locust invasions have threatened the livelihoods of those in the farming sector and also the food supply to citizens.

READ MORE Hopping to another crisis: Locusts and coronavirus in East Africa

These are the people the government needs to support.

“Economically vulnerable”

Informal workers remain an economically vulnerable sector of our societies. They often lack sufficient savings so their livelihood depends on each day’s earnings. In recognition of the Cornelian dilemma of “contagion or starvation, many African countries have hastily tapered off initial restrictions of movement. However, merely allowing people to go back to work does not guarantee the return of customers concerned for their health; nor does it compensate workers for weeks of inactivity.

The intersection of poverty and gender inequality adds another layer of vulnerability to the countless women who are part of Africa’s informal sector. With 90% of women across Africa employed in the informal sector, COVID-19 threatens their economic self-sufficiency and dignity that they have traditionally derived from plying their trade and contributing to the livelihood of their household.

Measures to reinvigorate the informal sector

Several measures should be taken in order to extend a life raft to Africa’s battered informal workers:

  • On-lending facility through non-traditional financial channels: Informal workers on the continent urgently need a liquidity boost in order to cover unavoidable personal or work expenses. Because the traditional banking system only engages with formally registered businesses, it would be unable to supply the necessary liquidity. Governments should inject capital into African tontines (with or without the mediation of the formal financial architecture). Tontines have existed in African communities for generations. In a country like Cameroon, up to 50% of the population participates in tontines or other parts of the informal financial system. Tontines are associations of people from a given community who pool their savings together at regular intervals. The tontines then distribute funds to members following a defined rotation schedule or pursuant to loan requests from members. The loan proceeds then cover big ticket expenditures, such as the expansion of a small business. Due to the high level of familiarity and social trust among members, combined with the fear of reputational damage in one’s community, tontine loans have extraordinarily low levels of default, in marked contrast to the high delinquency rates in Africa’s formal banking system.
  • Suspension of rent payments and utilities bill assistance for some SMEs: A temporary suspension of rent payments that fall below a certain amount. Many small-scale traders do not own their place of business. Instead, they must pay rent or market dues for the right to transact where they do. The drastic reduction in earnings that COVID-19 has brought upon informal traders makes many unable to cover such rent. Landlords, in contrast, are generally more resilient to economic shocks. They tend to have more savings and alternate sources of income to live on. Suspending rent payments would also be less disruptive to other segments of the economy than one would imagine. Unlike landlords in many western countries, those in Africa rarely access credit in order to build or acquire real estate. They often pay with cash. This means that a suspension of rent payments is less likely to trigger bank defaults. For those real assets financed with debt, governments could adopt a moratorium on foreclosures and work with bank regulators to mitigate any adverse effect on banks’ non-performing loan portfolios. In addition, it is important to recognise that some landlords (including many retirees) are low-income earners who are heavily reliant on rent payments. Those should receive a temporary allowance by the State if their rent collections get reduced. In addition to rent suspension, countries should consider granting SMEs and self-employed workers a means-tested temporary suspension of water and electricity bills. Informal workers should receive a utility bill credit which may vary based on the average income level in the beneficiary’s line of work. To qualify, workers would submit evidence of their occupation which can be obtained without undue inconvenience.
  • Retroactive and forward-looking Tax breaks: In order to encourage informal workers to register with the State, we believe that governments should eliminate back taxes due by underground workers and exempt them from taxation for a few years after their entrance into the formal economy. The scheme would afford benefits similar to the corporate income tax incentives that already exist in many African countries for foreign investors. For instance, Ethiopia provides tax exemption to new investors that can last for as long as nine years depending on the sector of activity. I find it unnerving that a similar benefit would be unavailable to local informal workers who account for the majority of jobs in many African countries and are likely to spend their earnings in the local economy instead of distributing them to parent entities overseas as foreign-owned corporations do.
  • Subsidies for inputs: Governments could also provide temporary subsidies to small household farms and informal workers for the purchase of inputs critical to their trade. Industries where administering such a program is most feasible are a good place to start. For instance, governments could implement price discrimination at the pump, by setting a lower price for gasoline sales to motorcyclists subject to a weekly cap on the volume of sales per motorcyclist. Governments should also increase or initiate subsidies for the cost of inputs of small household farmers. This is especially true in parts of East Africa under the menace of insect-driven famine.
  • Bank loan to SMEs: Bank regulators should adopt more flexible capital and deposit reserve requirements, coupled with SME loan origination targets in order to shore up the small-scale formal sector and thereby support the informal economy. Many informal workers are vendors or customers of SMEs or their owners. Increasing lending to battered registered SMEs can therefore set off a virtuous economic circle or stave off a vicious one, in either case with profound ramifications for informal workers.

Lessons learned for an inclusive future

Africa’s aim in navigating the COVID-19 crisis ought to be not merely preservation but amelioration; not simply a return to normalcy but the improvement of standards of living. The unfolding crisis presents a unique opportunity to reshape the continent by bringing a large number of informal workers out of the shadows, something that has eluded policymakers on the continent for decades.

READ MORE Coronavirus in Africa: opportunity to reshape development

In order to qualify for the many proposals I have written about, informal workers would need to register with State agencies. These registration records could later serve to expand the national tax base, putting the continent on stronger fiscal footing post-crisis. This approach would also enable governments to regulate the informal sector and rectify longstanding issues therein (lack of consumer welfare protection, inadequate workers’ safety and child labour just to name those few). President Obama’s former chief of staff, Rahm Emmanuel was fond of saying: “[One] should never let a good crisis go to waste.”

Today’s challenges present a unique chance to make lemonade out of lemons, by laying the foundation of a stronger and more resilient Africa.

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