As Tanzania ups its game to reduce donor dependency by 9.3 per cent, a new study underlines the need to unleash the informal sector’s potential.
Finance and Planning minister Philip Mpango says the country would generate $6.29billion in tax in the formal sector, with the non-tax sources raising $755.5million in its quest to reduce donor’ reliance. He says that the country would seal loopholes at the Tanzania Revenue Authority (TRA) to collect $2.59 billion from international trade taxes, $1.74billion from domestic taxes and $2.36billion form corporate tax, withholding tax and levies.
In terms of borrowing, Tanzania will raise $1.47billion from the domestic market through Treasury bills, while it expects to use $1.23billion of this amount to settle the bond maturities within the same financial year.
The amount of external loans and grants is projected at $939.7million, which is a nine per cent reduction, thanks to increase of revenue collection targets by 14 per cent.
However, the new study dubbed “Towards more inclusive business formalisation” indicates that the informal sector is, in fact, the sleeping giant. It can contribute effectively to the national coffers to do away with donor dependency in a long term if its opportunities are unleashed.
Over the last four decades, the informal sector in Tanzania has grown faster than the forma economy, but its formalisation has been a hard nut to crack, the study shows.
Although estimates vary, but they show that between 39 per cent and 60 per cent of the country’s GDP, is contributed by the informal sector where non-tax compliance practices deny the country a $2billion a year. Tanzania’s informal sector is also a key source of jobs, as it accounts for nearly 80 per cent of employment and 70 per cent of services, mostly consumed by the poor, who constitute the largest part of the 47 million country’s population.
Moreover, the informal sector absorbs over 62.5per cent of the urban labour force annually against barely 8.5 per cent found in the formal economy, implying that if formalised, the sleeping giant could turn round Tanzania’s economy.
It is time, findings of the study suggest, the government drummed up support for formation of associations in the informal sector for it to indirectly but effectively bring the sleeping giant into the formal economy and tap in it.
The conventional approach has been a direct one, whereby the government used to deal directly with the businesses to provide formalisation related interventions such as, constructing and managing workspaces; simplifying regulations and enforcing regulations. But the style proved ineffective, compelling BEST-Dialogues to commission the Institute of Management and Entrepreneurship Development (IMED) to examine the nature of business informality and bring fresh insights into the formalisation.
In an indirect formalisation, control over the informal business activities is partly through self-regulation mechanisms within the associations or cooperatives. For instance, almost 62 per cent of informal entrepreneurs indicated that they were willing to pay taxes, if an affordable rate and a convenient payment modality is in place.
Apart from Tanzania, the researchers visited Ghana, Rwanda and Kenya. The study advocates the indirect approach through business associations and cooperatives’ formation as the effective way to formalise the informal sector and bring them to the formal economy