The ‘sleeping giant’ at the heart of PNG’s economy

Policymakers in Papua New Guinea are accelerating efforts to regulate the informal economy, after an audit found that it accounted for around one-fifth of GDP.

The “National Informal Economy Audit Report 2018”, the first such study by the Department of Community Development and Religion, released on September 10, valued the informal economy at PGK12bn ($3.5bn). This is equivalent to approximately one-fifth of GDP and some 60% of non-resource GDP.

The audit also found that 80% of the adult population was employed informally, and that informal work generates 90% of household income.

See also: The Report – Papua New Guinea 2018

Opportunities for development

While the extent of the informal economy poses challenges in terms of tax collection, among other areas, government officials noted that the audit highlights significant opportunities to drive economic development.

“[The] informal sector is a sleeping giant in the economy,” Michael Kumung, deputy secretary of the Department of National Planning and Monitoring, told media following the report’s release, adding that about 49,000 small and medium-sized enterprises (SMEs) had participated in it.

Efforts to formalise large sections of the economy would bring considerable benefits to the country, particularly in the field of tax income.

Prime Minister James Marape has underlined the importance of boosting revenue generation. During a public address in mid-September, he outlined plans to lift annual tax revenue to more than PGK15bn ($4.4bn) over the next two years, up from less than PGK10bn ($2.9bn) in recent years.

In a country with a limited revenue base and significant infrastructure needs, additional tax revenue would be crucial in funding projects designed to drive economic development.

Formalisation to benefit financial inclusion

Another expected benefit of a more formalised economy is an increase in financial inclusion.

Only a quarter of the population has access to formal bank accounts and services, and the majority of those engaged in informal employment conduct their transactions in cash.

While this figure has risen from 15% a decade ago, it remains well behind most regional counterparts. For example, the World Bank reports that the percentage of Indonesians using formal financial services stands at 48.9%.

The development of digital services and alternate forms of financial services such as mobile money has helped to bridge this gap, although progress has been slow. As of mid-2018 an estimated 9.2% of the population had access to some form of digital wallet.

Low rates of financial inclusion have long been identified by business and government figures as significant barriers to growth.

It is hoped that an increase in participation in the formal economy will naturally lead to an increase in participation in the formal banking system.

On top of granting greater financial security to individual customers, banking services provide entrepreneurs and SMEs with expanded access to credit, which can in turn drive small business growth and support economic development.

Building the informal economy

The new audit will help the government identify sections of the informal economy to target for formalisation, and builds on previous efforts to strengthen informal avenues of economic activity.

Despite being a critical element for national growth, for many years the informal economy has received little to no government support.

The most recent legislation on the subject, the National Informal Economy Policy 2011-15, highlighted the positive contribution that informal activity makes to the overall economy, and underlined the need to maximise participation in various segments of the informal economy. However, it did not call for widespread formalisation.