The Pusher Formal Sector

One of the macroeconomic headaches of Ethiopia is a low domestic revenue. It has sunk the nation into debt stress and strained the adequate allocation of resources into critical parts of the economy. This lacklustre mobilisation of resources to support development or at least sustain recurrent government budgets has led the authorities to tighten their grip on businesses suspected of tax avoidance and the implementation of new taxes.

The authorities are barking at the wrong tree. The Ethiopian private sector may be hiding some tax Birr, but it will not be enough to fill the gap between the amount of tax that is collated in Ethiopia, and the growing federal annual budget.

Instead, one of the major culprits is the sizeable informal sector the nation is hosting, which according to a 2014 International Monetary Fund (IMF) report stands at close to 40pc of gross domestic product (GDP). It is conceivable that this sector is growing in size as the cost of doing business – from monetary to regulatory hassles – gets worse and many are pulled away from the formal sector of the economy.

The Addis Abeba Trade Bureau has the right idea. Last month it began assigning slots in marketplaces to street vendors in all the districts of the city. The vendors would not be made to start paying taxes soon. Although there is a fee to take part, the vendors will trade much the same manner they did on the streets, albeit in a controlled environment.

This is a laudable effort by the Bureau. It is better than forcing them from the streets by the police because at least they are working, and providing a service to consumers, usually at a lower price. What the Bureau has done is remove one of the most significant monetary costs to doing business, which is the access to land.

Coming at a time of double-digit inflation, such a measure is only laudable. As the price of living increases and consumers begin to look for cheaper goods and services, the informal sector is bound to grow in size, channelling resources away from the public coffer.

Still, that gesture is too little to make the sort of difference the authorities want it to. Attacks on legitimate businesses are too recurrent. The push factors in the formal sector outnumber the pull ones.

Poor regulatory quality is one of the drawbacks here. There are too many examples of this. One is the central bank’s directive for letters of credit (LC) to match the price of items. This created massive delays for importers whose items could not be approved yet by commercial banks.

Another is a recent system by FMHACA that necessitates laboratory testing of every import. It has doubled, in some cases tripled, the price of foods and beverages. This has created yet another strain on importers in the formal sector.

Both of these recent measures by the authorities have been made in good faith. The former helps save foreign currency while the latter will protect consumers against harmful products. But both point to a great shortcoming on the ability of the government to formulate and implement policies and regulations without menacing businesses.

The implementation need not be this costly. Communication between different levels of the government to whom a new rule is relevant must streamline their communication to smoothen the transition as much as possible.

Another headache for businesses is the inefficiency of the public sector. Streaming tax administration is one crucial factor here as is making the judicial process efficient. For the latter, setting up a separate court dedicated to hearing commercial cases, with prosecutors with deep knowledge of the commercial law, can be a good start.

Reducing the tax burden on citizens, especially on employment tax, ought to help in reducing the size of the informal sector too. It is often the case that many are employed in both sectors for the sake of not being able to cope up with the cost of living.

The informal sector exists because the formal one presents too many hassles, and the tax burden does not measure up to the cost of living. As long as the status quo persists, the informal sector would continue to be attractive, and employment opportunities, such as street vending, will be channelled there at the expense of the formal one.


By Christian Tesfaye
Christian Tesfaye ( is Fortune’s Op-Ed Editor whose interests run amok in the directions of both print and audiovisual storytelling.

Published on Apr 15,2018 [ Vol 18 ,No 938]



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