By Mthokozisi Mabhena
THE Government’s push for the formalisation of the informal sector is a most welcome and long-overdue development. In an economy where the informal sector plays a pivotal role in employment creation and economic growth, integrating this segment into the mainstream economy is a necessary and progressive step towards achieving Vision 2030.
For decades, the informal sector has been the backbone of economic activity in many developing nations, including ours. It has provided livelihoods to millions of people who, due to various economic challenges, have been unable to secure employment in the formal sector. The informal sector is estimated to contribute a significant percentage to national GDP, yet it remains largely unregulated and untaxed. This anomaly must be addressed to ensure that all economic activities contribute to national development equitably.
The informal sector is not just a peripheral part of the economy; it is the economy itself for many citizens. Small-scale traders, vendors, artisans, transport operators, and home-based businesses all play a crucial role in sustaining economic activity. Their contribution to employment creation is undeniable, absorbing a workforce that the formal sector cannot accommodate.
Given this reality, it is counter-productive to continue regarding such an enormous economic player as ‘informal’. Instead, the focus should be on how to enhance its efficiency, promote compliance with regulatory frameworks and create an environment where informal businesses can thrive while contributing to national development goals.
Cabinet’s recent pronouncement of several measures to align the formal and informal sectors is commendable. These measures include the mandatory use of electronic money for all businesses and the introduction of a compulsory tax payment system to enhance compliance with tax laws. These steps will not only increase Government revenue but also promote financial inclusion and stability in the economy.
One of the key measures introduced is the compulsory adoption of electronic money transactions. In an era where digital financial systems are becoming the norm, integrating informal businesses into the formal banking and electronic payment system is a significant step forward.
Cash transactions have often been associated with tax evasion, money laundering and a lack of financial records, making it difficult for informal businesses to access credit and other financial services. By mandating electronic transactions, the Government is fostering transparency, accountability and financial inclusion. More informal businesses will now have the opportunity to build credit histories, making them eligible for financial support from banks and microfinance institutions.
Moreover, electronic transactions enhance security, reducing the risks associated with handling cash. This move aligns well with the national digitisation agenda and Vision 2030’s goal of creating a modern, technology-driven economy.
Taxation is the lifeblood of any economy and for too long, a large portion of economic activity in the informal sector has gone untaxed. The introduction of a compulsory tax payment system ensures that every business, regardless of size, contributes to national development.
Many informal businesses have thrived without paying taxes, while formal businesses bear the burden of funding public services. This imbalance is unsustainable. Formalising taxation for all businesses not only increases Government revenue but also creates a level playing field for all enterprises.
The Government must, however, ensure that the tax rates for small businesses are reasonable and do not stifle their growth. A progressive tax structure that accommodates small enterprises while ensuring compliance is necessary to make this initiative a success.
One of the major challenges facing informal businesses is limited access to capital. Many of these businesses lack proper financial records, making it difficult to secure loans from banks. With formalisation, businesses will be required to keep financial records, making it easier to access credit facilities.
Financial inclusion also allows businesses to participate in broader economic activities, including trade agreements and partnerships that were previously out of reach.
Informal employment is often associated with poor working conditions, lack of job security, and low wages. By integrating the informal sector into the formal economy, workers in this sector will have better access to labour protections, pension schemes, and social security benefits. This enhances their overall well-being and economic security.
A well-regulated informal sector contributes to economic stability. Informal businesses become more resilient to economic shocks when they are integrated into formal financial systems. They can also participate in Government programmes, benefit from business incentives, and contribute to national economic planning.
While the formalisation of the informal sector presents numerous benefits, it is not without challenges. Resistance from informal traders, concerns over excessive taxation and the need for proper infrastructure to support electronic transactions are some of the hurdles that must be addressed.
To ensure successful implementation of these reforms, the Government must engage all stakeholders, including informal traders’ associations, financial institutions and development partners. Awareness campaigns should be conducted to educate businesses on the benefits of formalisation and how to comply with new regulations.
Moreover, policies must be structured in a way that supports the transition rather than punishing businesses. Incentives such as tax breaks for newly formalised businesses and access to microfinance facilities can encourage compliance.
The push to formalise the informal sector is a progressive step towards achieving Vision 2030. A whole huge sector that significantly contributes to development and employment creation cannot continue to be regarded as ‘informal’.
With the right policies, incentives, and stakeholder engagement, formalisation can lead to a more robust, inclusive and sustainable economy. It is time to move beyond outdated notions of informality and recognise the informal sector for what it truly is, a vital engine of national development.
