In 2014, Uganda topped the list of the world's most entrepreneurial countries, according to the Global Entrepreneurship Monitor report. Some 28 per cent of adults owned or co-owned a new business. But this isn't necessarily good news, as few countries have a more extensive informal economy than Uganda.
Informal businesses and workers aren't regulated by authorities. They avoid taxes and social contributions as well as compliance with standards. For this reason, operating outside the formal economy is often seen as cheating. But informality isn't always a choice. Particularly when people lack the skills and qualifications for formal employment or cannot access public and financial services, informal activities are a safety net. However, informal businesses tend to stay small, with low productivity and limited access to finance, slowing economic growth. Informal work is also associated with high inequality. Informal workers are more likely to be poor and lack social protections. Even workers with similar skills tend to earn less in the informal sector than those in the formal sector.
The International Labour Organization estimates that nearly 83 per cent of employment in Africa is informal. In 2022, Uganda's Economic Policy Research Centre found that the informal sector had an "untapped potential revenue of 407 billion Ugandan shillings" (around $110 million).
Andrew Walusimbi, of the Uganda Small Scale Industries Association (USSIA), explains why the country's informal economy is flourishing: "To simplify business formalization, the government introduced the taxpayer register expansion programme (TREP), which brings several organizations together: Uganda Revenue Authority (URA), Uganda National Bureau of Standards (UNBS) and Kampala Capital City Authority (KCCA). When someone registers their business with UNBS, URA will want taxes, such as income tax, while KCCA will want operation licences paid for. Manufacturers must get a quality mark. For a new business, these tax obligations are overwhelming and push people to work from home, hiding away from formalization of the business."
The struggle for formalization
One in five Ugandans cannot read or write, thus can't read available information on formalization. From the consumers' point of view, there's little difference between formal and informal businesses. But a formal business has strict obligations, which often make production costs higher. Walusimbi says: "ultimately, people with formal businesses may not sell much because their prices are higher, yet Ugandans are looking for cheaper products."
Juliet Wavamunno, a financial adviser at Naama Financial Services in Kampala, says access to affordable capital for informal businesses is difficult. One client, an events manager, needed a loan but was missing books of accounts, keeping a list only of income but not expenses. "Banks cannot lend to them or offer overdrafts because the businesses don't have proper accounts. They end up getting financial services from loan sharks who charge exorbitant interest rates," she says.
Ugandan businesses also face increasing competition from imports, which rose more than 40 per cent during 2020. "The cost of production doesn't favour local producers, who seem to lose out against cheaper produce that's flooded the market," Walusimbi says.
Hope for change
The government is responding, offering workshops to teach business owners about taxes and proper bookkeeping. The Uganda Export Promotion Board (UEPB) guides businesses to become "export-ready", which should make formalization easier, and digitalization will make the processes cheaper and faster. However, as recent statistics showed that the number of businesses opened in 2022 was lower than in 2021, it would seem that Uganda's informal economy is going to persist a while longer.