By Joan Atim
We live in unprecedented times as the COVID-19 pandemic continues to inflict high and rising human costs worldwide. By protecting lives and allowing healthcare systems to cope, the health crisis has already had and is having a very severe impact on economic activity since contagion has required isolation, lock-downs and widespread closures to slow the spread of the virus. As a result, the IMF projects that the global economy is projected to contract sharply by 3% in 2020 much worse than during the 2008-2009 financial crisis and using a baseline scenario, the assumption is that the pandemic fades in the second half of 2020 and containment effects can be gradually unwound helped by policy support. Nevertheless, this seems rather unlikely due to the new infection rates in Kenya in recent weeks.
Measures have indeed been put in place by the government, however, these measures are restricted to the formal sector hence forgetting the informal sector that houses and employs a big percentage of the working population in Kenya; 83.6% of the total employment and 762.1 thousand new jobs in 2018
according to the Kenya National Bureau of Statistics. Dr. Jacob Omolo (economist at Kenyatta University) calls the sector a policy orphan and states that workers in the informal sector are most affected by these measures. It’s key to note the operations of the informal sector; which are quite dynamic. Underneath lie social relations and associations formed by people largely involved as traders, manufacturers, and small-scale farmers in their own right. Their interactions are trust-based, face-to-face relations, and transactions of inter-dependence. These social relations and associations fulfill multiple tasks and functions like addressing fundamental concerns, regulating members’ behavior, coordinating markets, production, consumption, distribution, protection, and transformation.
Moreover, recent measures by the regional block have affected this as Dr. Omolo argues, “the closure of borders particularly by Kenya’s trading partners in the East African Community, in-country travel restrictions have caused disruptions in the sector’s supply chains by constraining production, marketing, and distribution of goods and services and as such informal sector workers and operators have lost employment, income, and consumption.” In addition, the introduction of a reduction in turnover tax (now payable every month at a rate of 1% from the previous 3%) and presumptive tax (an advance tax paid by a person acquiring or renewing a business permit or trade license at the county government at a rate of 15% of the business permit fee or license) may not benefit the sector. The taxes are for small businesses whose gross sales does not exceed or is not expected to exceed KES 50 million from the upper limit of 5 million.
However, in no way do these changes capture the informal sector as the reduction in turnover tax would completely ignore the small businesses since there is no clarity on the status of businesses with turnover below the prescribed limit; (which most businesses in the informal sector seem to fall under). As for taxing reductions as announced by the president in his speech of the 25th of March 2020; the specific fiscal interventions aimed at increasing the spending power of individuals and cash flows for businesses and the Tax Laws as amended is according to KPMG beyond the COVID-19 interventions since drastic changes to the tax incentives and exemptions regime simply water down the tax reductions. Professor Attiya Waris (Director of Research and Enterprise at the University of Nairobi) on the other hand presents very interesting data and shows the percentage of registered taxpayers in a few African countries including Kenya by using the number of registered voters i.e., just 39% of 19.6 million registered voters are registered taxpayers (individuals and corporations-no data aggregation). The reason is that; there seems to be high unemployment and a higher probability that many of the
unregistered taxpayers are in the informal sector
Despite the above, the informal sector has continued to prove a useful concept for many policymakers, activists, and researchers because of the reality it captures. We acknowledge that the government has to date not only received funding from international financial institutions, but received donations and
gifts in the fight against COVID-19. There have been budget allocations; including supplementary budgets, however, allocations have not been made to the informal sector and the sector has been left at the mercy of philanthropists. The government has the mandate to take care of all its people and their
innovations through its laws and policies.
From my point of view, the government can do the following to cushion the informal sector during these hard times:
Implement substantial targeted fiscal, and monetary measures to support households and businesses in the informal sector. In particular, social protection schemes i.e. healthcare and maternity protection schemes, social insurance, social assistance schemes; and tax-financed benefits mainly for the poor, who receive little or no benefits from other forms of social protection.
Financing the informal sector should be an option explored with proper policies and regulations, because the overwhelming majority of informal sector business is self-fund. People mostly get money from friends and relatives, credit, and advances from suppliers and customers which tend not to be sustainable. They should also be encouraged to take advantage of the Immovable Property Security Rights Act while the government gives directives to financial institutes to lessen their financing requirements.
The Kenyan Government should further reach out to the social institutions and groups within the informal sector to help register all those whose businesses have been disrupted so that they are included in government relief packages. Those whose employments have been disrupted should be encouraged to register with their institutions and groups so that they can benefit from stimulus packages. Thus, the coronavirus “safety net” with direct payments should reach everybody until the pandemic ends and businesses reopen. Cash transfers are a good initiative and the government must prioritize it to vulnerable groups (under which the informal sector falls under). Moreover, the Kenyan Government should undertake post-crisis economic inclusive packages with the aim to introduce sustainable effects on the sector, i.e., improve cash transfers, asset transfers and business coaching in the long run.
The Kenyan Government should invest in long-term infrastructure and build modern market places with adequate room size, and storage that will accommodate traders, artisans, and peasants. Finally, the Kenyan government should invest in better digital infrastructures i.e., the installation of fibre optics
even in rural areas, and constant power supply as digital platforms offer a progressive road to formalization. The more people use them, the more they become formalized tax payers.