IMF Africa report draws parallels to Zim informality

A new report by the International Monetary Fund (IMF), on the state of Africa’s informal sector, paints a perfect resemblance to the situation in Zimbabwe, offering key insights into Africa’s informal sector, impact on employees and possible solutions to address the challenges.

The IMF captured dynamics in Africa’s labour market in a report titled “The Clock is Ticking, Meeting Sub-Saharan Africa’s Job Creation Challenge” presented recently by Athene Laws and Faten Saliba from the fund’s African Department.

The IMF noted that many informal sector workers in Africa, Zimbabwe included, were trying to build better lives for themselves and their families in very difficult circumstances.

The report dissects the challenges in the sector and proffers some solutions on how best African countries can free the citizens from “the trap” of the informal sector jobs, and use it as a stepping stone to better, more rewarding and productive jobs.

Some of the challenges, the multilateral lender noted, included the lack of skills, unreliable electricity, limited access to finance, stiff competition, low incomes and absence of social security protection, among others.

Laws said while the rest of the world grappled with population decline, Africa’s demographic numbers were booming.

“By 2023, 1 in 2 entrants into the global labour market will come from Sub-Saharan Africa. This growing population will require jobs. The region has to create up to 15 million jobs annually by 2030,” she said.

She said, according to the IMF report, 80 percent of these needed jobs will be in fragile, conflict-affected and low-income countries.

This comes as job creation in Africa continues to lag demand, with only a third of the needed jobs being created in Sub-Saharan Africa.

The figure drops to only 22 percent in fragile and conflict-affected areas and 11 percent in resource-intensive jurisdictions.

“As a result, economic growth in Sub-Saharan Africa has been relatively less effective at reducing poverty,” Saliba said, adding that a third of the informal sector workers earn less than US$1,90 per day.

She said underemployment was extremely high, particularly in rural areas, with three in four workers not having a wage job.

“In most countries, public sector employment is the most stable, lucrative route to a good job, but this public sector is already large and does not have the capacity to create the number of jobs needed for the future,” she said.

Laws said there were three main challenges to creating enough good jobs namely “turning informality from a trap to a stepping stone”, bringing down barriers to private firm growth and transforming the structure of the economy to create more labour demand and high productivity sectors.

This comes after an earlier report from the World Bank, which asserted that Zimbabwe is home to one of the world’s largest informal economies, where about three-quarters of all employment is informal.

In its analysis, the World Bank found that Zimbabwe’s informal economy was heterogeneous with respect to poverty levels, estimating that about 34 percent of all the informal workers were extremely poor.

The World Bank noted that most of those informally employed work without formal contracts in low-earning activities and without social insurance benefits.

“How can the well-being of informal workers be feasibly improved?”, the World Bank queried in a study findings report released in September 2024.

The bank said this was a timely question after the Covid-19 pandemic and the macroeconomic challenges (inflation and exchange rate instability) have disproportionately impacted informal workers, exacerbating their vulnerabilities.

An important first step for policy-making and programmes, the World Bank said, targeting informal workers, was recognising that informality is normal.

The Bank said this approach should involve removing the informal economy’s negative connotations and recognising that Zimbabwe’s informal economy is likely to continue to grow as the formal economy is unable to absorb new entrants.

The premise “informal is normal” also recognises that formalisation, which was considered the traditional ‘solution’ to informality in the past, is by no means a panacea, the World Bank said.

The multilateral lender said the challenge in Zimbabwe was, therefore, to shift policy discussions away from formalisation and towards identifying ways to improve the well-being of informal workers”.

“We approach this goal in two ways: (i) understanding the size, characteristics, challenges, and opportunities of people in the informal sector in Zimbabwe; and (ii) developing policy recommendations for the Zimbabwean context by drawing on international experiences and lessons learned.

“Using the 2017 Poverty, Income, and Expenditure Surveys (PICES) survey data, we estimated that about 73 percent of all Zimbabwe’s workers are informal out of which 71 percent are communal and resettlement farmers.”

The productivity of informal jobs is highly constrained, affecting those who already have limited access to finance, markets, skills, and land ownership.

“Income is, therefore, lower in the informal economy, particularly for women, while working conditions and access to social protection are poor,” the World Bank said.

Informality as a stepping stone

According to the IMF, Given its ubiquitousness, the informal sector is a critical source of employment for sub-Saharan Africa, especially where formal opportunities are scarce.

It said a key transformation required for the region is helping the workforce climb up the job ladder, moving out of subsistence and lower-tier informality to higher-tier informal employment and formal jobs.

Sub-Saharan Africa outpaces other low- and middle-income countries in new firm creation per working-age adult (World Bank Entrepreneurship Database).

Despite this promising start, firm growth remains elusive, with most businesses remaining small, low in productivity, and unregistered, often run by sole proprietors.

This results in a large number of micro firms but a shortage of medium and large firms, which are essential for job creation, as seen in other regions (Abreha and others 2022).

African firms cite access to finance, electricity, and informal sector practices as their biggest growth obstacles, the IMF said, far surpassing those faced by global comparators, citing a study by the World Bank.

“For example, securing an electricity connection in Nairobi takes about 92 days, more than double the average for other countries with similar incomes,” the IMF noted.

It also said across the region, frequent power outages significantly reduce firm sales, productivity, and employment (World Bank Enterprise Surveys).

Small firms particularly struggle to access the working capital required to scale their enterprises, often resorting to informal lenders.

After overcoming initial hurdles, the businesses face challenges in expanding due to limited domestic demand and restricted access to international markets.

“Despite these barriers, a significant portion of formal businesses originate from small informal enterprises, indicating that informality can serve as a stepping-stone,” the IMF said.

The global trend towards more capital-intensive and skilled manufacturing means that sub-Saharan Africa may not be able to rely on industrial production to deliver employment-rich development.

This, alongside other technology trends such as Artificial Intelligence, has sparked a debate on the best approach for structural transformation in the region and beyond.

Some experts suggest bypassing manufacturing to focus on high-productivity services, drawing parallels to India’s IT and telecommunications success, where rapid growth occurred without a significant industrial base.

Other sectors such as tourism, agro-business, logistics, and renewable energy also offer significant job potential and can help diversify economies and create resilient employment opportunities.

Investing in infrastructure supportive of the informal sector, such as accessible market areas, can stimulate higher-tier job creation.

To help lower-tier informal workers, particularly the self-employed, gain access to credit to grow their businesses, IMF said policies should leverage innovative fintech solutions catering to the informal sector.

“In rural areas, land reforms can enable self-employed farmers to use land as collateral for loans.

Expanding safety net programs can also help manage risks and uncertainties, including climate shocks.

“In addition to these improvements, encouraging formalization through reducing bureaucratic barriers, providing incentives and following up with legal enforcement will help scale the next rung of the job ladder.”

To facilitate youth entry into the labour market, IMF said possible strategies included job matching services, re-engaging long-term unemployed, and promoting youth entrepreneurship through access to finance, training, and mentorship.

Addressing the barriers to firm-level growth in the private sector is essential for increasing meaningful employment opportunities. Policies should address the specific constraints firms face, the IMF said.

It said improving the investment climate could attract more foreign direct investment while developing local capital markets could increase the available financing by converting savings into investment capital.

Further, fostering financial inclusion through the development of mobile banking, microfinance, and financial literacy would improve funding access to predominantly small and medium enterprises.
Prioritizing basic infrastructure:

IMF said roads, electricity and internet were essential to private sector operations, as such developing cost-effective transport systems and digital infrastructure in urban areas was essential.

High costs for cellular and internet services in sub-Saharan Africa impair mobile banking and online marketplaces, vital for many businesses.

Other necessary interventions include supporting structural transformation and productivity growth key for generating quality jobs, requiring country-specific approaches to transition to higher-value-added sectors.

The IMF said this includes maintaining macroeconomic stability, fostering competition, and committing to broad-based economic reforms.

In the context of tight fiscal space and restricted administrative capacity in many countries, priority must be placed on cost-effective, easily implementable, and high-return measures.-ebsinesseekl