Informal Sector: Brittle economic lifeline (Part 1)

THE informal sector in Tanzania is the lifeblood of the nation’s economy, providing livelihoods for mil lions and serving as a critical safety net for those excluded from formal employment.

Defined as economic activities that operate outside state regulation and protection, the in formal sector encompasses a wide range of small-scale, unregistered businesses, from street vendors and motorcycle taxi operators to smallholder farmers and artisanal miners.

Despite its lack of formal recognition, this sector is a corner resilience, contributing significantly to employment, poverty alleviation and national GDP.

Informal Sector Relevance

In Tanzania, the informal sector is not just a peripheral economic activity; it is a central pillar of the economy.

According to the International Labour Organisation (ILO), the informal sector accounts for over 50 per cent of Tanzania’s GDP and employs more than 80 per cent of the workforce.

This is particularly evident in urban centres like Dar es Salaam, Mwanza and Arusha, where informal trade and services dominate the economic landscape. In rural areas, informal activities such as small-scale farming and artisanal mining provide essential income streams for households.

Dr Jane Mtei, an econo mist based in Mwanza, explains, “The informal sector is the backbone of Tanzania’s economy.

It absorbs most of the labour force, especially youth and women, who often lack access to formal employ ment opportunities.” This sentiment is echoed by John Mwakatobe, a small-scale trader in Makongoro Road – Mwanza, who says, “Without the informal sector, many of us would have no means to support our families. It’s not just a job; it’s a lifeline.” The sector’s importance is further underscored by its role in poverty alleviation.

For many Tanzanians, especially those in rural areas, infor mal activities are the primary source of income. According to a 2021 report by the Tanzania National Bureau of Statistics (NBS), 76 per cent of households in rural areas rely on informal sector activities for their livelihoods.

This reliance is particularly pronounced in regions like Dodoma and Singida, where agriculture and livestock trading are the mainstays of the local economy.

Attributes of the Informal Sector

The informal sector in Tan zania is diverse, encompassing a wide range of activities. Street vending, small-scale manufacturing, motorcycle taxis (locally known as boda boda) and informal mining are among the most common.

In rural areas, informal ag riculture and livestock trading are prevalent. The sector is characterised by its flexibility and adaptability, allowing in dividuals to generate income with minimal capital and in frastructure. Demographically, the in formal sector is dominated by youth and women.

According to a 2022 report by NBS, 65 per cent of informal sector workers are under the age of 35 and women constitute nearly 60 per cent of the workforce.

However, these workers often face precarious condi tions, including low wages, lack of social protections and limited access to financial services. In urban areas like Dar es Salaam, the informal sector is highly visible, with street vendors lining major roads and markets bustling with activity.

Take the case of Mama Nuru of Katesh – Manyara, a 45-year-old street vendor who has been selling fruits and vegetables for over 15 years. Despite her hard work, she struggles to access loans to expand her business. “I tried to get a loan from a bank, but they asked for documents I don’t have,” she says.

Mama Nuru’s story is common among street vendors across the country, who often lack the collateral and documentation required by formal financial institutions. In rural areas, informal activities may be less visible but are no less significant.

Take, for instance, the Geita Region, where informal gold mining sustains thousands of liveli hoods and plays a pivotal role contribute by providing fi nancial literacy and entrepre neurship training to empower informal workers. in local economies.

Juma Ali, a 30-year-old artisanal miner in Geita, describes the harsh realities of his work: “We la bour for long hours, but the in come is unpredictable and of ten barely enough to get by.” His story reflects the struggles of many who depend on infor mal mining as their primary source of income.

Victor Tesha, the current Vice-Chairman of Small Scale Miners in Tanzania, underscores the importance of this sector. “For many, in formal mining is not just a job it’s a lifeline,” he explains.

Tesha’s own policies, formulated during his election campaign, aim to address the challenges faced by artisanal miners, including the lack of safety measures, fair wages and access to markets. However, efforts to formalise the sector have faced significant resistance, primarily due to the high costs and bureaucratic hurdles involved.

Many miners, like Juma, are caught in a cycle of informality, where the risks are high, but the alternatives are few.

Current Policies and Challenges

The Tanzanian government has made significant efforts to regulate and support the informal sector through policies, laws and programmes.

A Member of Parliament who preferred anonymity explained, “The Tanzania National Employment Policy aims to transform the sector by creating an enabling environment for informal businesses to operate, improve productivity and gradually formalise.

This includes providing access to training, infrastructure and market spaces, as well as initiatives like simplifying regulations, issuing identity cards to street vendors and supporting infor mal sector associations.”

Key laws, such as the Finance Act of 2020, simplify tax registration for small businesses, easing the transition to the formal economy, while the Employment and Labour Relations Act of 2004 pro vides a framework for protecting workers’ rights, though enforcement remains a challenge.

Programmes like the Tanzania Social Action Fund (TASAF) offer conditional cash transfers and skills training to vulnerable households reliant on informal activities. NGOs, such as the Foundation for Civil Society (FCS), also Despite these efforts, challenges remain.

Many informal businesses struggle to access formal financial services due to lack of collateral or credit history. Bureaucratic hurdles and high taxes also discourage formalisation.

As noted by Dr Fatma Suleiman, a development expert based in Zanzibar, “The gap between policy and implementation is significant. Many informal workers are unaware of the support available to them and those who are often find the processes too cumbersome to navigate.”

One of the key challenges is the lack of a unified approach to supporting the in formal sector. While there are numerous policies and programmes in place, they are often fragmented and lack coordination.

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This has led to a situation where many informal workers are left without the support, they need to grow their businesses and improve their livelihoods.

Economic Weight and Challenges The informal sector’s contri bution to Tanzania’s economy cannot be overstated. It is a major driver of employment, particularly in urban areas where formal job opportunities are scarce. According to the World Bank, informal businesses account for over 70 per cent of non-agricultural employment in Tanzania.

The sector also plays a crucial role in urban and rural development, pro viding affordable goods and services and supporting local supply chains. In rural areas, informal ac tivities like small-scale farm ing and artisanal mining are indispensable to household incomes, serving as the backbone of local economies. A striking example is the Lake Victoria Goldfield, which spans regions such as Mwanza, Geita, Mara and parts of Shinyanga.

Here, in formal gold mining employs thousands of individuals, pro viding a critical source of income for families and fuelling economic activity in these communities. However, these activities often come at a high cost. Miners and farmers typically work in precarious conditions, with little to no access to safety equipment, legal protections, or formal support systems.

For instance, artisanal miners in Geita and Mara frequently face hazards such as tunnel collapses, exposure to toxic chemicals and long-term health risks, all while earning unpredictable incomes. Similarly, small-scale farmers in Shinyanga and Mwanza grap ple with challenges like limited access to markets, poor infrastructure and climate related uncertainties.

Despite these difficulties, the resilience of those en gaged in informal activities underscores their importance to rural livelihoods. Their contributions not only sustain households but also drive local economies, highlighting the urgent need for policies that address their vulnerabili ties while preserving their vital role in Tanzania’s eco nomic fabric.

The informal sector also plays a critical role in urban development. In cities like Dar es Salaam and Mwanza, informal businesses provide essential goods and services to low-income communities.

From food vendors to motorcycle taxis, these businesses fill gaps left by the formal sector, ensuring that even the poorest households have access to necessities.

Rajab Simba, a 28-year-old bodaboda rider in Mwanza, faces daily challenges, including harassment from local authorities and lack of access to safety equipment. “We provide an essential service, but we are often treated like criminals,” he says.

Rajab’s experience highlights the need for better regulation and support for in formal transport operators.

Sector Challenges and the Path Forward

Despite its importance, the in formal sector faces numerous challenges. Access to finance is a major barrier, with many informal businesses unable to secure loans or credit from formal institutions. Legal and regulatory hurdles also pose significant obstacles. For instance, the process of formalising a business in Tanzania can be costly and time-con suming, discouraging many from making the transition. Infrastructure limitations further exacerbate these challenges.

Poor road networks, limited access to markets and inadequate training op portunities hinder the growth and productivity of informal businesses. As highlighted by Samuel Kinyondo, a researcher from Mbeya, “The lack of infrastructure and support ser vices is a major bottleneck for the informal sector. Without addressing these issues, the sector’s potential will remain untapped.”

Another significant challenge is the lack of social protections for informal workers. Unlike their counterparts in the formal sector, informal workers do not have access to benefits such as health insurance, pensions, or paid leave.

This leaves them vulnerable to economic shocks and limits their ability to invest in their businesses.

Informal Sector Outlook
The informal sector is poised to remain a critical component of Tanzania’s economy for the foreseeable future. With targeted policies, improved infrastructure and enhanced support systems, the sector has the potential to drive inclusive economic growth and contribute more effectively to national development.

However, achieving this will require concerted efforts from the government, private sector and civil society, particularly in addressing systemic barriers such as limited access to finance, inadequate infrastructure and regulatory hurdles.

One promising avenue for intervention is tax reform. Currently, the informal sector operates largely outside the tax net, which limits government revenue and perpetuates the sector’s marginalisation.

By designing inclusive and progressive tax policies, the government can create a pathway for informal businesses to transition into the formal economy without overburdening them.

Such reforms could include simplified tax regimes, incentives for formalisation and the use of digital tools to streamline tax collection. These mea sures would not only broaden the tax base but also provide informal workers with access to social protections and government services, fostering greater economic stability and growth.

As Victor Tesha aptly summarises, “The informal sector is not a problem to be solved but an opportunity to be harnessed. By addressing its challenges and leveraging its strengths, Tanzania can unlock the full potential of this vital sector.”

To achieve this, a holistic approach is needed one that combines technological innovation, infrastructure development and thoughtful policy reforms.

In the next article, we will delve deeper into the specific tax reform recommendations that could help integrate the informal sector into Tanzania’s formal economy, ensuring that its contributions are recognised, regulated and re warded in a way that benefits both workers and the nation.

● We want to hear from you! Share your thoughts and experiences on how Tanzania’s tax system should be reformed by reaching out to us at 0655963224 or emailing kelvinmsangi@protonmail.com.

Your input is invaluable in shaping policies that are fair, efficient and supportive of the work done by the Tax Reform Commission. Let’s work together to create a tax environment that empowers small businesses and drives economic progress for all Tanzanians. Join the conversation today!