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August 16, 2022

How COVID-19 lockdowns ripped through the informal sector

By South African journalist Ciaran Ryan, first published in Dear South Africa.

The best data we have says just half of informal entrepreneurs remain in business post-COVID.

That’s despite all the hoopla from government about extending financial support to small entrepreneurs.

A more ham-fisted policy concoction could scarcely be conceived: to receive government support, informal sector entrepreneurs were expected to transition to the formal sector by registering with an alphabet soup of regulatory agencies, from SA Revenue Services (SARS) to the Companies and Intellectual Property Commission (CIPC) and municipal licensing authorities.

The take-up of this government largesse was miserable. Just 12% of informal sector entrepreneurs surveyed by the Small Enterprise Foundation (SEF) were willing to formalise their business to get some of this government money.

Small businesses shuttered by government-mandated lockdowns were promised R200 billion (US$ 12 million) in loan support to tide them through the crisis.

President Cyril Ramaphosa promised 700 000 small businesses would be assisted, but in the crucial first few months of the crisis, just 10 000 received any form of support.

Compare this with the 184 000 loans made by developmental microfinance groups in the months following the lockdown to ensure small entrepreneurs could remain in business and support themselves and their families. The loan amounts are often tiny, but enough to buy stock or equipment needed to remain in business.

The following chart from the Small Enterprise Foundation (SEF), which extends loans to small-scale entrepreneurs and has 180 000 active loan clients on its database, paints a disturbing picture: the number of its clients still in business has dropped by almost a half post-COVID.

Source: Small Enterprise Foundation (SEF)

“This is disturbing,” says John de Witt, founder of SEF. “The informal economy got hit hard by the lockdowns. We thought it would bounce back when the lockdowns were lifted, but that has not been the case.

The success of our clients depends on what happens with their customers. Initially, informal sector entrepreneurs could rely on savings, or family members, so they were able to keep going. But this could only go on so long. Remember, two million people lost their jobs during the COVID-19 lockdowns and are still unemployed. A huge majority of these are low income people, and they would be the typical customers of our clients.”

The following chart, also from SEF, shows how business value among informal sector entrepreneurs have dropped from around R5 000 (US$ 307.40) in the months immediately after the imposition of lockdowns, to the current level of around R3 500 (US$ 215.18), though there has been some improvement in recent months.

When asked for the biggest change in their lives during the pandemic, the most common responses were loss of employment, declining or closing businesses, increased cost of living, and losses of family members,” says Colin Rice, social performance manager at the SEF.

Source: Small Enterprise Foundation (SEF)

Now look at the graph below to get a sense of the financial harm caused by the lockdowns. Arrears, which used to average less than 0.3% of the loan book, has shot up to around 20%.

Informal sector entrepreneurs are unable to service their loans, and will need possibly years to claw their way out of the financial hole created by COVID-19.

Source: Small Enterprise Foundation (SEF)

“The lockdown was the devil in human form,” says 63-year-old NE Phale of Taung, who sells a variety of goods, from traditional pots, to clothes, shoes and food. She also does a bit of sewing on the side. “The lockdown badly affected me as I was not free to sell in town, or anywhere for that matter. I didn’t even go to buy stock in Durban because movements were prohibited. But things are now starting to pick up.”

Sewing clothes is often the first point of entry for women to the informal sector. Image: Small Enterprise Foundation (SEF)

When the lockdowns were relaxed, Phale says she was forced to adapt to the changing times, and expand the variety of goods she offered her customers.

Phale started her business in 2001 with capital of R500. It was slow going in the early years, but revenue and profits started to creep up with financial guidance and loans from the SEF. With her meagre income, she supports five people, among them three grandchildren.

Informal sector operators have noticed fewer people on the streets post-COVID, and those that are spending have less money in their pockets. Conditions have become especially perilous in recent months, with the Ukraine war ramping up the prices of just about everything.

TE Molapisi sells fruits, vegetables and cool drinks at the Vryburg taxi rank in North West Province, and has done nothing else for more than 30 years.

This is how she raised all her children. Her tiny business currently supports 12 dependents, and this is not uncommon in the informal sector – often seen as the safety net of last resort for those who have no other way of making a living.

When the COVID-19 lockdown was first announced in March 2020, Molapisi was forced to shut her business altogether, though some of her more loyal customers cut a path to her house to stock up on fruit and vegetables. Lockdowns smashed her income, but by continuing to sell out of her house, she was able to put food on the table for her children.

“Lockdowns created a lot of challenges because, even now, things are very expensive. That means the prices of my stock have increased, and that forced me to increase my prices,” she says.

There was never any thought of changing her product mix or line of work. The terror of surviving what seemed like a life-threatening virus was paramount.

“I never had that idea (of changing my product) because, by then, my mind was overwhelmed by COVID-19. The only thing I was thinking about was if we would come out alive from this disease.”

Shebeen owner in rural South Africa. Image: Small Enterprise Foundation (SEF)

Tebogo Motsuku of Phokeng in North West Province is a single mother with two children who was forced into the informal sector – selling clothes and other items – to support her family during the COVID lockdowns. She has aspirations of becoming a journalist but the day-to-day necessities of feeding her family prompted her to postpone her career goals and focus on putting food on the table.

It’s a story repeated up and down the country, and confirmed by several academic studies. Isaac Khambule, senior lecturer at the Department of Development Studies, University of KwaZulu-Natal, in South Africa, surveyed 75 informal workers in KwaDukuza Municipality in KwaZulu-Natal, concluding that the lockdowns amplified the precariousness of their socio-economic status.

“These challenges are also exacerbated by the lack of proactively targeted and timely interventions to cushion those in the informal economy against COVID-induced socio-economic shocks. Without necessary measures to support those in the most precarious jobs amid the pandemic’s prolonged and evolving socio-economic impact, the country is unlikely to address the high levels of poverty and unemployment,” writes Khambule.

Evans Maphenduka, the Development Microfinance Association (DMA) executive co-ordinator, insists that “unless the South African government realises and acknowledges that informal businesses are not the formalised small and medium businesses, they will not be able to come up with appropriate support packages to assist our struggling clientele.”

He believes that the government should learn from other developing nations that have specific microfinance policies and regulations, and write South Africa-specific microfinance policies and laws that recognise the importance of the informal business sector. A microfinance policy will also protect informal businesses from being harassed by municipal by-laws that are in desperate need of reform.

Perhaps most concerning is that of the roughly 1.8 million jobs lost during the lockdowns, proportionately more (21.9%) were lost in the informal economy as compared with the formal sector’s 10.8% as a share of total employment.

This disturbing trend challenges the notion that the informal sector as the employer of last resort. Another study shows that 31% of informal workers who were not completely displaced from their livelihoods could not work under the level 5 lockdown regulations, while this only affected 26% of the formally employed.

The impact on the informal economy was largely unavoidable as the general public was barred from leaving their premises and further damaged any economic prospects for those in the informal economy.

Research by SEF shows some of the challenges faced by informal sector operators as a result of lockdowns. According to Rice, many are struggling to pass on cost increases to customers, while others have closed due to an inability to source certain products.

Many entrepreneurs relied on credit sales, but have found it more difficult to collect on outstanding debts. Adding to their difficulties, new entrants to the informal sector have created conditions of over-crowding and competition.

Some cite competition from foreign-owned businesses as a barrier. These foreign-owned businesses are better organised in terms of bulk buying and tend to support each other during times of difficulty.

There are lingering barriers introduced by lockdowns, such as schools introducing restrictions on the sale of food and snacks near the school premises, and a resistance to door-to-door selling by people still fearful of viral infection.

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