The informal sector occupies a disproportionate position in Cameroon. While it ensures the survival of many workers, it prevents the country’s development by maintaining low incomes and reducing its tax revenues. It therefore needs to be brought down to an acceptable proportion. There are many initiatives to promote the transition of SMEs from the informal to the formal sector. To be more effective, they need to be scaled up and pursued simultaneously.

This article is an excerpt from Issue 32 : SME finance in Africa

The term “informal sector” historically made its first public appearance in the report of a general employment mission conducted by the International Labour Organization (ILO) in 1972, in Kenya. Today, a consensus seems to be emerging over its main characteristics: no administrative registration; little or no regulation of the activity; the relatively small scale of activities and capital mobilized; no fixed business premises; development outside organized circuits (markets, etc.); family labor mainly used and, finally, no security and social protection system.

In Cameroon, the National Institute of Statistics^{1 assesses the informal sector using three criteria: the independence of the promoter (owner working on his own account), no administrative registration (no tax identification number) and no formal accounting. On this basis, estimates show that the informal sector occupies a predominant position in Cameroon’s economy, with some 50% of GDP in 2005. In 2010, 89.1% of the working population was part of it, i.e. some 9.2 million people, mainly in agricultural and craft trades.}

Estimates show that the informal sector occupies a predominant position in Cameroon’s economy, with some 50% of GDP in 2005. In 2010, 89.1% of the working population was part of it, i.e. some 9.2 million people.

Only 5% of promoters had received higher education, while 46% had a primary level and 49% a secondary level of studies. The average annual turnover of non-agricultural informal production units (IPU) was assessed at CFAF 3,801,600 (about EUR 5,780),² the average added value at CFAF 1,150,800 (about EUR 1,750) and average productivity per capita stood at some CFAF 887,520 (about EUR 1,350).

With no effective industrial sector, the economy tends to specialize in “end of sector” activities: firstly, extraction (mining and oil) and subsistence farming and, secondly, trade and services

THE DETERMINANTS OF THE INFORMAL SECTOR

The overdevelopment of the informal sector in Cameroon is mainly due to the lack of productivity and deficiencies in terms of economic governance.

Hourly labor productivity in the informal sector stands at CFAF 463 (about EUR 0.70). It reaches a maximum level of CFAF 1,037 (about EUR 1.60) for IPU (informal production units) with three people and declines beyond that. The problem of the level of education and the level of information explains to some extent the scale of the informal sector: interviewed in 2010, 27.4% of IPU promoters said that they did not know that an administrative registration was necessary and 45% thought it was not mandatory.

With no effective industrial sector, the economy tends to specialize in “end of sector” activities: firstly, extraction (mining and oil) and subsistence farming and, secondly, trade and services. Due to a poor integration into the now globalized international economy, Cameroon suffers tremendously from its structural inability to build value chains.

While low productivity is the major barrier for the formalization of companies, the fact remains that the excessive development of this sector also stems from deficiencies related to economic governance. Indeed, the economic regulation system still carries the stigma of its colonial origins, where it was designed to regulate the subsidiaries of international groups. The indigenous economy, a refuge sector, which existed at the time outside regulations, gradually developed towards the current informal sector. Unfortunately, it is still not taken into account when designing regulation policies, whose requirements continue to be designed with reference to large companies.

The informal sector, regarded as a refuge sector for many people finding it hard to integrate the formal fabric, benefits from an “administrative tolerance”. In addition, the laxity, lack of transparency and deficiencies of the public service foster the maintenance of a significant segment of production units in the informal sector.

SOCIAL AND ECONOMIC CONSEQUENCES

Due to its importance, the informal sector has a number of social and economic repercussions. It is, admittedly, often regarded as a “social buffer” insofar as it provides an income to many citizens. It also generally offers goods and services at prices adapted to the low purchasing power of citizens. In this respect, it often provides a “bottom end” response to the shortcomings of public services.

But the informal sector has real and numerous negative effects. Socially, it sustains poverty due to the very low wage levels of the jobs on offer which, in addition, are very precarious. Non-compliance with standards and hygiene rules results in high health risks, due to the dubious quality and origin of products (food products and drugs, in particular). Economically, for the State, the informal sector represents a shortfall in taxes. Many parts of the economy are tax-free, reducing the tax base and obliging the State to constantly increase levies on the structured and visible sector. The tax injustice resulting from the low level of taxation of the informal sector discourages the formal investors already in place and drives them to concealment and sometimes to tax evasion. The informal sector sows the seeds of illicit trade practices (smuggling, counterfeiting, fraud).

Generally speaking, the informal sector maintains the overall lack of competitiveness of the economy. For example, the presence of informal players in the external trade chain contributes to extending the time required for the passage through ports due to their approximate command of procedures (which are, moreover, complex) and their lack of financial strength to handle the logistical obligations. The port is thereby transformed into a storage place instead of being a transit area. This results in recurrent problems of congestion and a saturation of logistical capacities.

Generally speaking, the informal sector maintains the overall lack of competitiveness of the economy.

TRANSITION TOWARDS THE FORMAL SECTOR

The formalization process comes up against a number of administrative barriers: cumbersome and multiple administrative procedures, slowness in processing files, inaccessibility of public services and bureaucratic obstruction. Cameroon’s business environment, which ranks as the 165th economy in the “Doing Business” ranking, hampers formalization initiatives. The particularly cumbersome and costly administrative procedures sow the seeds of the informal sector, where the entry is free and with no cost.

There are, fortunately, a number of government initiatives to promote the migration of informal units towards the formal sector. They range from facilitation measures to coercive mechanisms. Support programs mainly focus on information, awareness-raising, training and capacity building for promoters and workers. They sometimes also provide financial support or facilitate access to markets or financing.

The State of Cameroon has in particular adopted a law on the promotion of SMEs which has several advantages that are potentially accessible to registered companies. In addition, Business Formalities Centers (CFCE) have been set up to act as “one-stop shops”, bringing together all the administrations involved in business start-up procedures. Approved Management Centers (CGA) have also been deployed to assist small businesses in fulfilling their tax obligations. Membership of a CGA comes with advantages in terms of reductions or temporary exemptions for certain taxes.

Restrictive measures have also been introduced to discourage operators from remaining in the informal sector. For example, the tax administration applies high withholding rates for operators in the informal sector. Companies in the formal sector are called on to contribute: they are legally liable for certain taxes concerning their suppliers and they must obtain their tax file before settling any invoice, otherwise it will not be accepted as an ordinary operating expense.

Despite this system, it has to be said that the informal sector is continuing to grow. The strategies implemented, without lacking relevance, clearly seem insufficient. While a part of economic activity is undoubtedly destined to remain in the informal sector, it is essential to limit it.

To do so, the responses require a holistic approach. It is firstly necessary to expand capacity- building programs, for example, by more effectively teaching the culture of standards and the quality approach, human resources management, and marketing techniques. Furthermore, IPUs need to be given better access to financing: this is one of the the main constraints on their activities. Sectors also need to be structured better, so that SMEs can integrate value chains, for example, by using public procurement as a driver. Finally, the business environment also needs to be generally improved, by making the market regulation system more effective and by reducing shortcomings in terms of administrative and legal governance (administrative delays, corruption, tax harassment, protection of the economic territory, security of goods and persons, settlement of trade disputes, etc.) –, which are specific obstacles to the formalization of companies.

^{1 Three editions of the Surveys of Employment and the Informal Sector (SEIS) have already been conducted: in 2005, in 2010 and 2018; the results of this last operation are still awaited
2 The CFAF-EUR conversions indicated in this article correspond to the rate in June 2019.}