Ghana's government works to formalise the shadow economy

 

Like many sub-Saharan African countries, Ghana faces the challenge of formalising a very substantial informal sector that operates primarily outside of the government’s purview. According to the Ghana Statistical Service (GSS), 46.1% of the labour force was employed in the agriculture sector in 2013. Outside of agriculture, 77.7% of the labour force held informal employment.

There are a wide variety of contributing factors to the large size of the informal economy, ranging from poverty pressures to secondary school enrolment, but one of the biggest is the challenge businesses face in operating in the formal economy. Ghana ranks 108th out of 190 economies in terms of ease of starting a business in the World Bank’s 2017 “Doing Business” report, up from 111th in 2016. While Ghana performs better in the rankings than much of sub-Saharan Africa, there is nevertheless a significant amount of bureaucracy, regulation and taxation that businesses are able to avoid by remaining outside the formal sector.

Challenges

The informal sector poses a series of challenges for the government and impedes economic growth. It has implications for revenue mobilisation and policy formulation, and GDP calculations are sometimes over- or underestimated. The government endeavours to track employment, salary and production data from the informal sector, but without any official means to collect this data, estimates likely miss the mark.

Beyond the challenges that the informal sector poses to the economy, there is also a social component that can undermine growth and social cohesion. According to the International Labour Organisation, informal employment is often associated with income insecurity, unsafe work conditions, and limited access to the rights and benefits accorded to the formal sector. The lack of safeguards in the workplace can impact workforce participation rates and limit the contribution to the economy by lower-waged workers. There is also a gender component: based on GSS data, 86% of females working outside of the agricultural sector are employed informally, compared to 68.3% of males, meaning that the vulnerabilities associated with informal work more greatly affect women.

Mobile Money

As a result, the government is working to formalise the informal sector in order to widen the tax base, better manage the economy, and provide the social protections that promote stability and growth. However, the expansion of technology and services aimed at those at the lower end of the economic spectrum may provide one of the chief means of bringing the informal sector into the economic fold. For example, the circulation of money outside of official channels has negative implications for taxes as well as monetary policy, but new technology is allowing the banking sector to extend its reach to those operating outside of the formal sector. “Mobile money services have provided a good opening into the informal sector,” Johnson Asiama, second deputy governor of the Bank of Ghana, told OBG. “The rate of penetration has been significant, and that has helped bring many people into the formal sector.”

Traditionally it has not been profitable for banks to service individuals employed by the informal sector, especially in rural areas. However, the ubiquity of mobile phones and mobile money technology has bridged the gap, opening the door for greater transparency and making it easier to monitor economic activity. Better insight into the movement of money in the informal sector is the first step in understanding it. “The starting point is for the government and policymakers to know the informal sector,” Newman Kusi, executive director at the Institute for Fiscal Studies, told OBG. “Once we know it, we can put in place policies to formalise it.”

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The Report: Ghana 2017

Economy chapter from The Report: Ghana 2017