Informal sector fails to address job crisis in Uganda

Ending poverty by 2030 is impossible, says World Bank

As the country’s dollar millionaires bask in the glamour of their riches, the vast majority of the country’s citizens continue to wallow in poverty. Most of them are young. On August 27, 2022, President Museveni in an uncharacteristic outburst snapped while officiating at the International Youth Day in Gulu City. 
Uganda’s head of state since 1986 asked the youth who had used the public address system at Kaunda Grounds to stop lamenting about their joblessness. They should instead, he added, “engage in commercial agriculture, and stop wasting our time because in some of the meetings, I may turn up and become rude and say sit down because you are talking nothing.”

Mr Museveni pointed to his own lived experience where “my farms in Rwakitura and Kisozi” have not only put money in his pocket “but … also … created jobs for many people.”
Along with commercial farming, the President also believed that information and communications technology or ICT also teems with many employment opportunities for Ugandan youth. 
Experts say the government’s recent emphasis on agro-industrialisation as a route out of poverty for its citizens tells its own story. State actors have severally said the reduction in subsistence farming and informality can drive the economy towards middle-income status.
Uganda has a young population, with official statistics noting that 80 percent of it is aged under 30. There are only 238,000 jobs available for the 700,000 of these youth who annually enter the job market.

The vast majority (75 percent) of the country’s working people operate in the informal sector as per the Finance ministry’s Poverty Status Report 2021. The report—released in February 2023—also indicates that working conditions in the informal sector are “precarious.” From low wages to no job security, the sector is in many respects a minefield.
“While their employment status is ambiguous, rendering them unable to enjoy, exercise or defend their fundamental rights, these workers are not organised,” the report reveals, adding that the workers “have little or no collective representation compared to their employers or public authorities, characterised by varying degrees of dependency and vulnerability.”

Tough times
At the macro level, the report notes that informal enterprises tend to narrow the tax base while at the same time benefiting from public goods and services without a commensurate contribution to national and municipal coffers. Such enterprises also leave their employees—shorn of things like sick leave—poorer. The Uganda National Household Survey (UNHS) of 2019/2020 offers more clarity, noting that informal employment in the mining and quarrying industry is associated with a poverty rate of 29.8 percent. 

Many artisanal miners are paid abjectly low wages to extract minerals like the precious metal that contributes greatly to Uganda’s export receipts. In the Karamoja Sub-region as well as districts of Mubende and Busia, artisanal gold mining has become a major occupation. It employs women and children, exposing the two vulnerable groups to dangerous working conditions with low pay. 

The UNHS report also notes that the informal employment opportunities gleaned from other sectors like construction, trade, manufacturing, transportation, and storage also “propagate poverty.”  
Informality is also rife in the hospitality sector where oral contracts fuel poverty, impeding inclusive growth and structural transformation in the process. The informality in the labour market the UNHS report directs attention to is characterised by a lack of pension (social security contributions) and lack of paid annual and sick leave. 

“Relative to those employed through written contracts, the welfare of workers with oral contracts was 30 percent lower, and conversely, for those employed on written contracts, and their welfare was 40 percent higher than those employed through oral contracts,” the UNHS report states, adding that the poor who are engaged in the informal sector are less likely to transition out of the informal sector. 

Tough tax regime
While the transition of entities from the informal to formal sector is important, the report says “bureaucratic delays and complicated regulations” have not been helpful. It recommends, for one, that the process of “the registration of business start-ups” be eased. The lowering of taxes imposed on these start-ups also can have a positive ripple effect. Yet in the next financial year agent banking, which has been offering a number of Uganda’s youth a way out of poverty, will attract a final tax of 10 percent to the agent. 

Mr John Jet Tusabe from BDO East Africa has described the new tax awaiting the green light from Parliament as a “double-edged sword.” It will likely put money in the government’s purse while making employment opportunities on the periphery of the formal and informal that much dicey. The mobile banking operator—often a youth—working for an agent is less likely to get favourable terms to work their way out of poverty.
The Urban Labour Force Survey 2015 indicates that 87.2 percent of total employment in the Kampala Metropolitan Area is informal. Females (89.5 percent) employed in the informal sector marginally outnumber their male counterparts (85.3 percent). Non-agricultural employment—like the mobile money operator that operates out of a circular canopy of cloth—contributes a staggering 86.2 percent to the informal employment opportunities. 

Defining informality
Informal enterprises are technically defined as those that employ less than five people. They are neither legally registered with Uganda Registration Services Bureau (URSB) nor with Uganda Revenue Authority (URA) for tax purposes. These include own-account workers (self-employed with no employees), employers (self-employed with employees) in their informal sector enterprises, and contributing family members. Others include roadside sellers, luggage transporters and boda boda riders.

These enterprises also incur little start-up costs and operate on a small scale with little or no division of labour. The sectors in which informality thrives are also characterised by ease of entry into markets, family ownership, use of local resources and informally acquired skills.
Informal employment influences poverty dynamics. The variance approach to vulnerability measurement also shows that informal employment is associated with a high probability that a household could become poor in a subsequent period.

Although the informal sector contributes to a larger proportion of the GDP compared to the formal sector, it does not offer decent jobs essential for poverty reduction and the formalisation pace is too slow for the attainment of a society with a large middle class. 
A dataset from the Uganda Bureau of Statistics (Ubos) shows that Uganda’s services output has grown at an average rate of 4.6 percent from 2012/13 to 2020/21. This accounts for close to 44 percent of gross domestic product (GDP). The ICT GDP growth in particular reached 11 percent over the same period. 

To the World Bank, the contribution of the services sector to total employment/job creation was at its highest in 2012 at 25.9 percent before declining to 21.4 percent in 2019. The services’ value added per worker, however, registered a 29.7 percent increase over the same period on account of increased productivity in the sector accompanied by a progressively low rate of generating new employment opportunities.  
This trend can be attributed to the increased utilisation of ICTs in the services sector, which dilutes the labour-intensive aspect of services. 
 
Difficult transition
In Uganda, the formalisation of enterprises requires registration and compliance with agencies such as the URSB for legal registration of business, URA for tax purposes, National Social Security Fund (NSSF) for social security, local government agencies for trading licences and sector-specific agencies for professional and quality regulations, among others. 

The formalisation of such businesses will largely depend on a good business environment that encourages such businesses to voluntarily transition into formal enterprises and spur growth in formal employment, the UNHS report states. It adds that informal enterprises will be less willing to undergo the transition if formalisation costs far exceed the perceived benefits. 

In its August 2022 special report titled, Assessment of informal businesses in Uganda, the Economic Policy Research Centre (EPRC) pointed out that informality endured due to Uganda’s turbulent political history and the structure of the economy that yields few jobs.
“Besides the past economic reforms, which reduced the size of the public sector, there is also a lack of political will and accountability on the government’s side,” EPRC noted, adding, “This calls for a national policy and strategy to segment businesses by the extent of informality and characteristics of the owner and business, and define the boundaries.” 

Businesses, EPRC further reasons, are not willing to formalise partly because they see no value in the taxes they pay. 
Whereas there is a steady movement of labour from agriculture to the services sector, the movement is not accompanied by growth in decent jobs, this the researchers say, has led to an increase in the size of the informal sector. 
 
Soul searching
Mr Robert Migadde, the vice chairman of the parliamentary Committee on National Economy, fears that the conditions of Ugandans deriving their livelihoods through the informal sector could worsen further due to the failure of the government to implement experts’ recommendations.
“Our work is to advise the government,” he told Saturday Monitor, adding, “We produce reports on the performance of the economy, but very few have been taken up.”

According to Migadde, the informal sector would have been paying more to its employees, but unfriendly government policies and taxation have continued to hold it in a chokehold.
“The poverty levels were not at this level. The employers who could have reasonably paid and supported the employees are now poor and unable to sustain their business and they are struggling to support poor people to give them jobs due to the heavy taxes and limited incentives they shoulder,” he said.

The Buvuma Island County lawmaker says a critical examination of the past poverty alleviation programmes has to be done to ascertain why there are not yielding fruits and develop workable options.
“A lot of money was poured into such programmes[, but they] have not yielded fruits while Ugandans continue to wallow in poverty,” he noted.
The pace at which the government is promoting the formalisation of enterprises through URSB and the Taxpayer Register Expansion Programme remains arguably too slow. Meanwhile, the working conditions of persons engaged in the informal sector remain concomitantly poor.
Since there is no explicit government policy to encourage the formalisation of employment, this is said to have slowed down structural transformation since the informal sector is associated with low productivity.

What next?
According to Uganda Revenue Authority (URA) data, during the financial year 2019/20, wholesale and retail trade contributed the biggest share (Shs4.85 trillion or 28.35 percent) of total revenue contribution. The manufacturing sector contributed Shs3.49 trillion (20.43 percent) with the remaining 18 sectors splitting 45.93 percent of the total revenue. 
The Uganda Investment Authority (UIA) reported that up to 2,107 manufacturing entities reported employing 150,685 Ugandans in the financial year 2021/22. The reported income tax turnover (tax base) has also only marginally improved. It improved to Shs22.1 trillion in 2020/21 from Shs19.3 trillion in 2019/20. It stood at Shs18.2 trillion in 2018/19.

These trends according to the UIA highlight the growing importance of manufacturing in the nation’s tax mix and employment creation. The investment promotion body also observed that many Ugandans deriving a living from the informal sector faced hurdles in accessing finance due to information asymmetry, limited access to collateral, poor record keeping, high transaction costs, and limited options for accessing patient capital. 

“The government should provide a policy environment for reducing collateral requirements and providing safeguards,” UIA noted in a memo, adding, “More incentives targeting youth should be established since they dominate the SME (small and medium enterprises) world and have proved to be more innovative and creative.”
It also pointed out that the rate of digital options is low due to digital illiteracy, high cost of data, poor connectivity, and high costs of equipment, among others. High costs and complexity of getting a product certified have also frustrated many potential businesses. 

“SMEs complain about taxes and complex tax administration, the government should reduce the complexity of the tax structure that targets SMEs to encourage formalisation, compliance, and growth including establishing free workspaces for SMEs on a three-year plan,” it recommended, adding, “Job centres should be created at local government levels to help coordinate labour market information, match vacancies with relevant skills, and provide skills to unemployed persons who wish to acquire employable skills.”