Policies that Help MSME Owners Initiate and Maintain Formalization
In Ghana, micro, small, and medium enterprises (MSMEs) contribute 70% of Ghana’s GDP and serve as the nation's largest employer of the working population in the country, with marked differences across regions. In fact, these businesses employ 81% of the working population in permanent positions and 86% in non-permanent positions. With increased formalization, studies suggest contributions from the informal sector could be much higher with the right actions taken toward greater inclusion.
These actions include:
Close educational, technological, and financial gaps in order to enhance business growth with mechanization that will determine scalability.
Retain more businesses as formal entities using mentor-protege development programs to avoid regression to informal practices and operations.
Increase formalization in heavily informal industries and sectors by updating institutional standards to be more inclusive.
Improve management of existing businesses by deploying business strategies that consider environmental and social governance (ESG) and sustainability metrics.
ACCESSING THE FULL POTENTIAL OF MSME BUSINESSES
To reach growth Beyond Aid, MSME owners, who own the largest portion of business in Ghana, must be engaged. MSME owners’ values align with the directive of more inclusive growth. According to research conducted by SGIs International Relations & Development Working Group, MSME owners want their businesses to grow and contribute to the future of Ghana. Similarly, a recent study from Sunyani Technical University indicates that despite years of disenfranchisement, Ghanaian MSMEs and other rural citizens want to be brought to the table as critical partners in economic growth and development policy.
Despite the alignment of these forces, MSME owners are running into roadblocks when it comes to actualizing formalization and compliance with tax payments. The first is technical assistance – understanding the right tools and practices to use for reporting while still generating cash flow, retaining revenue, and improving the standards of business operations can be complex.
Second, taking action in formalizing one’s business is not cheap. One out of 3 MSME owners has an annual household income of fewer than 30,000 GHS. This can make it virtually impossible to afford the cost associated with maintaining formalization, let alone improve business practices and operational procedures necessary for growth, investment, and to also be tax compliant.
Unfortunately, many business owners experience barriers to the performance of basic business activities daily, some of which include consistent electricity, data access, and prohibitive data costs. Many MSME owners are also not generating sufficient income from their business to maintain household expenses. The additional burden of tax payments for which the business owner cannot tangibly see returns on investment within his broader society is thus not executed.
THE GHANA BEYOND AID POLICY AGENDA CAN BRING ECONOMIC STIMULUS TO ALL OF GHANA AND HELP LOW TAX REVENUE
Digital education offers one of the most cost-effective opportunities to empower MSME owners to actualize formalization as a means to leverage private investment rather than rely solely on government funding.
Digital education appeals to business owners because they provide micro and small enterprise owners with access to resources necessary for streamlining operational procedures and increasing the performance of income-generating activities. Second, digital tools and educational training offer a voluntary option for action by using technological tools and adopting better business practices and processes rather than a regulatory approach. Presently, technological tools and relevant education training are inaccessible to many MSME owners. And, due to the complexity of formalization and associated costs, many of the same MSMEs are not tax compliant.
To support MSME owners in actualizing formalization, President Nana Addo Dankwa Akufo-Addo launched the Ghana Enterprises Agency (GEA), the GEA Grant Support for SMEs, and the National Micro, Small and Medium-Scale Enterprises (MSMEs) and Entrepreneurship Policy - a policy designed to direct the growth of the sector - helping to provide a clear policy direction and opportunities for all actors within the MSME space, to enable them to contribute meaningfully towards the development of the country, as well as funnel much needed economic stimulus to rural constituents.
Already credible private sector business programs are taking shape, such as the Pathways to Formalization Program, a program developed by She Grows It and the Ghana Inclusive Development Research Network. The National Micro, Small, and Medium-Scale Enterprises (MSMEs) and Entrepreneurship Policy would help to scale this program across Ghana.
SGI STANDS WITH GHANA
She Grows It is a founding member and current co-chair of the Informal to Formal Enterprise Working Group. It is the only business sector coalition that is working to advance formalization and compliance solutions by creating an open dialogue and sharing ideas; speaking with one voice to policymakers, and providing innovative data-driven ideas to leverage businesses and behavior of business owners as solutions to increased tax compliance.
Learn more about the Informal-to-Formal National Working Group.