Half of the business enterprises in Nepal are unregistered, unmonitored and untaxed, a new finding shows.

An analytical report on the informal sector published by the Central Bureau of Statistics recently shows that out of the total of 923,027 business establishments operating in Nepal, 49.9 percent or 460,422 firms are not registered, and are counted as informal enterprises.

According to the report, out of the 3.22 million persons employed in the country, 25.8 percent or 832,187 persons are employed in the informal sector.

These informal enterprises play an important role in the economy, especially in terms of their contribution to job creation, but are part of the economy that is neither taxed nor monitored, the report said. In addition, it also represents a sector with poor working conditions and absence of social security.

As per the International Labour Organisation, about 2 billion workers, or 60 percent of the total employed population aged 15 years and older, operate in the informal sector. Recent estimates place the size of the informal economy at about one-third of the global economy.

The informal economy has important macroeconomic consequences, the International Monetary Fund says. First, informal firms tend to be small, with low productivity, and do not contribute to the tax base. Therefore, countries or regions with higher informality also grow below their potential.

Moreover, they do not collect sufficient taxes, and cannot provide basic goods and services to the whole population, which reinforces informality.

Second, informal workers are more likely to be poor and to earn lower wages compared to their peers in the formal sector, both because they lack social protection and access to credit, and because they tend to be less educated.

Third, women are more likely than men to be not only in informal employment but also in the most precarious and low-paying categories of informal employment, in part because they lack equal access to education and health services.

In Nepal, the informal economy is far from clandestine—they are visible everywhere, says economist Bishwambhar Pyakurel.

“As more and more young people are engaged in the informal economy, it contributes to the job sector in the short run; but in the long run, they face multiple problems such as ageing without social security. The informal economy is growing in Nepal and simultaneously causing social problems.”

The report showed that among the 460,422 enterprises that are not registered, 458,258 or 99.5 percent are micro enterprises that employ a maximum of nine people.

The number of non-registered small establishments generating employment ranging from 10 to 49 persons is 2,032, which represent 0.4 percent, according to the report. The number of non-registered medium establishments engaging 50 to 99 persons is 88, and large establishments employing 100 persons number over 44.

The number of persons engaged in non-registered micro establishments is 779,913, or 93.7 percent. Similarly, non-registered small establishments employ 34,586 people, or 4.2 percent, and 5,565 non-registered medium establishments employ 12,123 people.

According to the report, among the 2.39 million persons employed in registered establishments, 46.6 percent or 1.11 million people work in micro establishments. Similarly, 27.3 percent or 653,532 people are employed in registered small establishments, 6 percent or 144,137 are employed in medium establishments, and 20 percent or 480,013 are employed by large scale industry.

Of the total 462,605 registered establishments, 47.4 percent or 219,253 are engaged in wholesale and retail trade, and motor vehicle and motorcycle repair.

Similarly, 10.9 percent or 50,566 establishments are in the manufacturing industry, 10.4 percent or 47,931 establishments are in the accommodation and food service industry, and 8.5 percent or 39,174 establishments are in the education industry.

Out of the 460,422 unregistered establishments, 60.5 percent or 278,747 firms are engaged in wholesale and retail trade and motor vehicle and motorcycle repair.

Similarly, 17.9 percent or 82,590 establishments are in the accommodation and food service industry, 10.9 percent or 53,458 establishments are in the manufacturing industry, and 8.5 percent or 30,291 establishments are in other service industries.

According to the report, there are 34,101 street businesses in Nepal, which employ 45,330 people. The report shows that 12,147 street businesses have an annual turnover of less than Rs100,000.

Similarly, 1,292 street businesses reported an annual turnover of more than Rs1 million.

The report shows that 8,728 street businesses make annual profits ranging from Rs50,000 to Rs99,999. The report shows that 1,494 street businesses run at a loss.

There are 887,667 other establishments like home business, business in a building, business in traditional markets, business in modern shopping malls, business occupying exclusively one block or one building, and others. They make up 96.3 percent of the total registered and non-registered establishments in Nepal.

Professor Puskar Bajracharya, who served as the head of the Central Department of Management at Tribhuvan University, cited political uncertainty as the key reason behind the increase in the informal sector that adversely affects the growth potential of the economy. He said bringing the informal sector into the formal sector would be challenging.

“The informal sector makes a big contribution to employment generation and poverty alleviation, so it is important to formalise this sector by assisting these firms to register at the municipality or ward level and bring all of them under the government’s safety net.”

According to him, small cash incentives should be provided to encourage them to register. “This will increase the government’s revenue to some extent.”

The impact on employment in the informal sector after the pandemic is high due to lack of job security. “The more the informal sector is extended, the more problems it will invite in livelihoods,'' Bajracharya said.

The International Labour Organisation has recommended providing workers with decent jobs and facilitating the transition of small firms to formality to support inclusive development, as acknowledged in the United Nations’ Sustainable Development Goals.

This sense of urgency has only been reinforced by the Covid-19 pandemic.

“The pandemic has crushed informal activities in countries like Nepal where large segments of the population are not covered by existing social protection schemes,” said Pyakurel.

The strict lockdowns on two occasions have destroyed the livelihoods of many people engaged in the informal sector—mainly drivers, street and market vendors, construction workers and bar and restaurant owners and workers.

“The situation of female workers in the informal sector is worse compared to males,” said Pyakurel. “The more the government fails to integrate the informal sector into the formal sector, the more it will impact economic growth.”

Pyakurel added, "The figures presented by the Central Bureau of Statistics on the informal sector on the basis of samples are not realistic, and do not represent the whole informal economy. The contribution made by women in household work is not counted in the national accounts system or the gross domestic product.”