The World Bank says with 89 percent of private sector firms in the informal economy, Malawi’s recovery will be delayed as the country struggles to mobilise fiscal resources to bolster the economy.
A new World Bank Group study published last week found that a strikingly large percentage of workers and firms operating outside the line of sight of governments in emerging markets and developing economies (Emdes).
The report says this diminishes these countries’ ability to mobilise fiscal resources to bolster the economy in a crisis, conduct effective macroeconomic policies, and build human capital for long-term development.
The study is titled The Long Shadow of Informality: Challenges and Policies.
It has found that the informal sector accounts for more than 70 percent of total employment, and nearly one-third of gross domestic product (GDP) in Emdes, including Malawi.
It said this is a challenge that is likely to hold back the recovery in these economies unless governments adopt a comprehensive set of policies to address the drawbacks of the informal sector.
Reads the report in part: “In Emdes, far too many people and small enterprises operate outside the line of sight of governments, in a zone where little help is available to them in an emergency such as the Covid-19 crisis.
“This Covid-19, however, has heightened the need for prompt and comprehensive action. The pandemic increased global poverty for the first time in decades.”
The bank said the damage to households and firms in the informal sector poses a significant threat to the global economic recovery and to long-term efforts to achieve green, resilient and inclusive development.
Published World Bank figures show that there are an estimated 1.1 million micro, small, and medium enterprises in Malawi where 89 percent or 979 000 are informal.
However, only 10 percent of medium-sized enterprises, five percent of small enterprises, and three percent of micro enterprises have credit from a commercial bank while domestic credit to the entire private sector as a percentage of GDP is less than 10 percent.
This is way below an average of 28.4 percent for the sub-Saharan Region.
In an interview yesterday, Chamber for Small Medium Businesses Association secretary general James Chiutsi said SMEs have not received any meaningful interventions that could support growth and survival, adding that the sector needs capacity building skills and government support.
He said: “We need capacity building on how businesses can survive in these pandemic times and an extension of moratorium on loans and reduced charges on both bank and mobile money transactions.
Minister of Finance Felix Mlusu Mlusu earlier said Treasury wants the authority to be innovative and explore ways of tapping into the informal sector to expand the tax base, admitting that the demands are more on the budget.
According to the World Bank, government revenues in Emdes with above-average informality totalled about 20 percent of GDP, which is five to 12 percentage points below the level in other Emdes.