The failure of the government to formalise the operations of over 34 million informal Micro, Small, and Medium Enterprises (MSMEs) in Nigeria has continued to minimise the potential of the nation’s economy. The latest figures from the National Bureau of Statistics (NBS) show that, of 39,654,385 total MSMEs in Nigeria, 34,413,420 operate informally, which makes it impossible for the government to regulate and harness full benefits from them, particularly in terms of taxes.
As contained in the report of the 2020 MSMEs survey jointly conducted by the NBS and Small and MEDIUM Enterprise Development Agency of Nigeria (SMEDAN), the total assets of the MSMEs were valued at N8.41 trillion in 2020, despite the COVID-19 pandemic induced challenges that affected global business earnings.
“If nothing is done to formalise this sector, we cannot fully optimise the potential of our economy, and the growth expected cannot be actualised because the informal space is still very huge,” Johnson Chukwu, MD/CEO of Cowry Asset Management Limited, told BusinessDay over the phone. Chukwu is particularly worried that Nigerians, over the years, have become accustomed to a cultural structure of a business, which makes it difficult for businesses to get formalised.
According to him, most business structures in Nigeria are patterned based on family lineage, and mentorship, making it almost impossible for them to attract investors. The contribution of MSMEs to the Nigerian economy cannot be over-emphasized and therefore regarded as the bedrock of the economy. In Nigeria, MSMEs contributed 46.31 percent of the national GDP and also accounted for 6.21 percent of gross exports. Micro Enterprises (MEs) accounted for 96.9 percent of businesses and 87.9 percent of employment.
Despite the epochal contribution of MSMEs to the Nigerian economy, challenges that impede the growth and development of the sector abound. “There is no concerted effort in place to incorporate the activities of these businesses as well as train people in business. Hence, undermining the potential of the Nigerian economy. For example, most operations in the retail sector are informal, hence lack of adequate financing and skills,” he said.
The MSMEs survey was undertaken to understand their characteristics and activities and the government hopes to incorporate findings into its programmes, policies, and intervention within the sector. Chukwu believes that offering incentives to small business owners could go a long way in encouraging formalisation of their operations. He further harped on the need for the government to intervene in the activities of the small businesses as many are faced with challenges including poor access to finance, poor infrastructure, and technical know-how, among others.
Ibrahim Isah, an Abuja-based economic analyst, notes that the informal sector is economically efficient and possesses comparative advantages in relation to similar activities developed in the formal sector. The sector also has the capacity to produce positive economic effects as they provide sources of livelihood and economic opportunities that may be unavailable in the formal sector.
He, therefore, stresses the need for the government to scale down regulatory barriers, and remove unnecessary bureaucracies for the informal workforce. “An increasing tax burden and rising state regulatory activities are the major driving forces determining the size and growth of the informal economy. Economic institutions exercise an important influence on whether or not one registers a business because they influence the costs of entry, of doing business, and of exit,” he says.