Informal economy worth Rs 1.44trn: Study

The informal economy of Nepal is growing larger than the formal one. The average size of the informal economy was 42.66 percent of the gross domestic production in the past 11 years, according to a study conducted by the Central Department of Management under Tribhuvan University.

According to National Income Accounting, the average size of the informal economy was 42.66 percent between 2010/21 and 2020/21. In the fiscal year 2020/21, it was 38.66 percent. This means Rs 1,441.78bn of the total GDP is from the informal economy. The GDP size in 2020/21 was Rs 3,733.27bn.

Stating that an informal economy size of 40-42 percent of GDP is very high, it has recommended to the government a gradual reduction of the informal economy.

According to the International Monetary Fund, an informal economy ranging from 29.8 percent to 37.5 percent is considered appropriate. An informal economy beyond this size poses risks for the country. Given the changes in economic dynamics in Nepal post-2015, the study has called for the need for a detailed study to measure the size of the informal economy.

Shivaraj Adhikari, chief of the Central Department of Economics, attributed factors such as frequent policy changes and high bank interest rates to the expansion of the informal economy. “The Covid-19 pandemic has also contributed to the recent growth in the informal economy,” he added.

He underscored the need for a detailed study to obtain accurate data about the informal economy, also known as the black economy, underground economy, shadow economy, or parallel economy. “Sectors still outside the tax net are considered part of the informal economy,” he added.

The study utilized the Currency Demand Approach and National Income Accounting methods to analyze the informal economy. A comprehensive estimate of GDP covers shares of both formal and informal sectors. Under the National Income Accounting method, economic activities are measured indirectly, and some methods are not disclosed publicly. The study suggests deploying an econometric model to obtain accurate data.

Although National Income Accounting suggests that the informal economy is shrinking gradually, it expanded in the past two fiscal years. The informal economy is increasing in aspects not covered by the national accounts.

More prevalent in real estate, agriculture sectors

The agriculture sector contributes about 25 percent to GDP, but it remains outside the formal economy. The study reports that 96.48 percent of the agricultural sector (including forestry and fisheries) operates in the informal economy as most production activities are conducted by households.

Likewise, about 99.97 percent of real estate transactions in Nepal fall under the informal economy. According to the study, owned or leased properties, fees and agreements, and services received by households in their residences are not considered part of the formal economy. The study also highlights a significant amount of revenue evasion through undervaluation of properties and during land transactions. It states that land transactions have become a medium to utilize black money.

Similarly, 50.42 percent of the housing and food services sector is in the informal economy. This is primarily due to the fact that only a few family-run lodges and tea shops are registered with government institutions. Restaurants, cafeterias, and tea and coffee shops are major activities in the food service sector. Most lodges and tea shops are out of the formal economy as they are run by households and not registered with any government organization.

Prof Dr Kusum Shakya, the dean of Tribhuvan University, said that the size of the informal economy grew as almost all sectors were affected by the Covid-19 pandemic. “Many women became a part of the labor force during the covid. But this study didn’t include the contribution of women in the labor force,” she added.

Former Chief Statistics Officer of the National Statistics Office, Ishwari Prasad Bhandari, argued that the size of the informal economy is shrinking in recent years as many informal businesses are being formally registered to take advantage of government facilities.

Likewise, Associate Professor Resham Thapa said that the average size of the informal economy globally is 33 percent. “It has expanded in Nepal in recent years due to the trend of undervaluation and weaknesses in anti-money laundering measures,” Thapa added.

Economic expert Dilli Raj Khanal said that expansion of the informal economy could have multidimensional impacts. “We need to simplify the taxation system so that more businesses are encouraged to come under the tax net,” he added.