(Guest Writer)
By Dauda A. Kuyateh (Ph.D.)
Head, Private Sector Unit, Ministry of Finance &
Part-Time Lecturer, University of Makeni
1.0 Background
Sierra Leone’s economy heavily relies on the informal sector, which accounts for over 70% of its economic activity. Informal enterprises play a crucial role in supporting critical value chains. However, they encounter different challenges than their formal sector counterparts. Unfortunately, their voices are often missing in policy and regulatory discussions. Inadequate private sector representation in policy talks is a major hindrance to their representation. Moreover, businesses, unions, cooperatives, and associations that have greater resources possess a greater advantage when it comes to addressing their concerns. However, informal enterprises and businesses experience similar limitations to those in the formal sector. When a supportive policy environment, framework, laws, regulations, and reforms are in place, formalization arrangements can be effective and efficient in promoting business growth and development in Sierra Leone. A lack of adequate legal and regulatory framework constrains small businesses. Institutional reforms and frameworks are crucial for formalizing businesses in Sierra Leone.
Critical questions need to be answered in a bid to formalize the process:
- Understand the current challenges and opportunities and explore how the formalization can work better with the informal enterprises.
- Organizing public-private dialogues for informal businesses and enterprises;
- Evaluating existing regulatory, policy, and legislative frameworks to determine their suitability for formalization;
- Engaging in extensive discussions to reach a consensus on the next steps;
- Properly structuring, funding, and formalizing the informal sector;
- Identifying solutions to overcome obstacles in the informal sector;
- Providing actionable insights and recommendations with tangible follow-through plans to address these challenges.
2.0 Introduction
The SME sector in Sierra Leone is an important contributor to the country’s economy. Though it has grown slightly in terms of employment and output over the last decade, its contribution to GDP growth remains minimal. The sector includes established entrepreneurs, female entrepreneurs who are mainly involved in domestic marketing, and Indian and Lebanese entrepreneurs. The social culture in Sierra Leone affects people’s attitudes towards entrepreneurship, their choice of career, their willingness to try again after failing, and the support provided to family members who want to start a business. Due to the low status of entrepreneurs in society, their career is not seen as aspirational. The government has made efforts to promote entrepreneurship among young people through policies and private sector development.
In the last quarter of 2016, the Ministry of Trade and Industry conducted a survey targeting 946 SMEs. The survey revealed some of the key barriers to SME growth. Out of all the SMEs surveyed, 18% reported that access to finance was the main constraint hindering their growth. Other important constraints include access to Business Development Services (52%), market access (50%), and the cost of doing business (36%). Additionally, cultural rules, values, attitudes, and behaviors pose additional challenges for potential entrepreneurs.
Sierra Leone ranked 135th out of 137 countries surveyed in the 2017 Global Entrepreneurship Index (GEI) with a score of 11.4. To address the difficulty of accessing credit, the Sierra Leone Small and Medium Enterprises Agency (SMEDA) Act 2015 aims to create a conducive business environment for SMEs in Sierra Leone. The National Strategy for Financial Inclusion (2017-20) was developed in 2016 to ensure that financial services are available, accessible, and affordable to all Sierra Leoneans, especially SMEs.
Usually, the government wants to register unregistered businesses to finance public investments. Bringing informal enterprises under the tax umbrella can also help increase compliance with labor and social security obligations. This involves educating businesses about registration processes and obligations and simplifying business registration procedures and taxation requirements. Informal enterprises and businesses are encouraged to formalize to avoid penalties, access credit and receive government support.
The Government desires that the informal sector contributes a fairer share of taxes in proportion to its size in the national economy. It is in everyone’s best interest to make compliance as easy as possible. Businesses want to carry on operations without facing delays or penalties due to non-compliance. Informal businesses, in particular, believe that avoiding penalties is the main reason for compliance. They are curious about other incentives that could be offered to their members, including the type of support they could receive as formal enterprises.
To fully comprehend the impact of the informal sector on the economy, it is important to gain critical insights regarding the appropriate policy framework for formalizing informal enterprises. This can promote inclusive and sustainable growth while addressing the challenges and opportunities associated with this sector.
This article aims to evaluate three objectives:
- Help informal businesses and economic units shift to the formal economy while still protecting the rights of entrepreneurs and providing opportunities for stable income, livelihoods, and entrepreneurship.
- Encourage the establishment, preservation, and sustainability of businesses and good jobs in the formal economy, while maintaining consistency among macroeconomic, employment, social protection, and other social policies.
- Prevent the trend of formal economy jobs becoming informal.
3.0 Formalizing the Informal Sector
Sierra Leone-like countries including South Africa, Malawi, and Mozambique recognize the significant contribution of the informal economy to their national GDP. While informal work often lacks decent work opportunities, these countries are dedicated to promoting sustainable enterprises that will help reduce poverty and achieve better working conditions.
4.0 Challenges of the Informal Enterprises
Small businesses in Sierra Leone are having difficulties accessing finance to expand their businesses. This will lead to an increase in GDP, an increase in the tax base, and a reduction in imports. The Government through SMEDA has developed policies to ensure small businesses are provided with a system for loan guarantees/collaterals to enable them to access finance. The Bank of Sierra Leone also put in place regulations for the provision of agricultural loans with the right tenure. Providing support to small businesses will make them investible.
The informal economy faces other challenges, including tax and administrative issues, capacity problems, operational difficulties, infrastructure and regulatory concerns, legislative enforcement, and review. However, these challenges can also present opportunities to gain valuable insights and perspectives that can help improve the informal sector’s socioeconomic impact for inclusive and sustainable development. The most effective way to address these issues is through public-private dialogue. Face-to-face engagement and meetings can yield significant benefits, including the identification of actionable items and the next steps for addressing the key challenges faced by informal enterprises in Sierra Leone.
5.0 The Tax Burden/ Implication on Small Businesses
Even though small businesses in Sierra Leone are not directly subjected to corporation income tax, Goods and Services Tax, Capital Gains Tax, Tax on Interest, Personal Income Tax, Import and Excise Duties, Social Security for Employees, and Withholding taxes, they play a crucial role in boosting economic activities that drive growth and create job opportunities. It is important to note that these taxes can provide the Government with the much-needed revenue to fund its programs and projects. However, since informal enterprises are small in size, and their turnover and revenue do not meet the threshold set for tax deduction by the National Revenue Authority, these taxes still impose a fiscal burden. There is growing recognition that these taxes are an administrative burden, particularly during this time when the economy is facing a tight fiscal space and a challenging business environment.
6.0 Going Forward
In light of the current global economic challenges and a highly competitive and unpredictable business environment, decision-makers, policymakers, and practitioners must prioritize the implementation of policies that support the formalization of enterprises and the development of SMEs in Sierra Leone. This will help assess practical solutions for SME development and formalization of enterprises. The discussions should be focused on results and solutions, providing stakeholders with insights into diverse examples and practices of enterprise formalization in other countries. Moreover, the measures and incentives at all levels should be reflected upon to encourage enterprises to formalize in Sierra Leone.
7.0 In Conclusion
Establishing a dialogue between the government, informal enterprises, and the private sector is crucial for promoting formalization.