Access to Finance, Business Registration Awareness Key for Tongan Informal Sector Assistance
By Sarah Boxall, PSDI Economic Empowerment of Women Expert
The informal economy exists in all countries, and is particularly prevalent in the Pacific region. Estimates of the size of the informal economy in the Pacific range from 40-50% of economic activity in Polynesian countries, up to 60-85% in Melanesian and Micronesian countries.
Despite its size and importance in providing livelihoods to large numbers of people, the approach of most Pacific governments towards understanding the size and value of the informal economy has been piecemeal. Little data on the informal sector in the Pacific exists, and its contribution to gross domestic product is often understated.
Recognizing the important role of the informal sector in employment creation, production, and income generation, Tonga’s Ministry of Trade and Economic Development (MTED) commissioned a national informal business survey in 2021. The purpose of the survey was to map informal business activities in Tonga and identify constraints to business growth and formalization, ultimately informing government programs and business services.
Through support from the Asian Development Bank’s Pacific Private Sector Development Initiative (PSDI), local firm Survey Statistical Solutions Management Tonga (SSSMT) undertook the survey across the main islands of Tongatapu, Vava’u, Ha’apai, and ‘Eua. The Tonga Informal Business Survey 2021 report contains data on 2,301 informal business activities across 1,519 households. Given the prevalence of women in the informal economy, all survey data was sex-disaggregated to identify similarities and differences in the opportunities and constraints faced by men and women operating informal businesses.
The report was endorsed by Tonga’s Cabinet on 6 May 2022, with a handover ceremony between representatives of MTED and SSSMT taking place on 1 June 2022.
From left to right: Distaquaine Tu'ihalamaka (CEO, Ministry of Trade and Economic Development [MTED]), Hon. Dr. Viliami Uasike Latu (Minister, MTED), Helen Toli (Project Manager, Survey Statistical Solutions Management Tonga), Lorraine Kauhenga (Deputy CEO, MTED) and 'Eva Liava'a (Senior Policy Analyst, MTED).
The survey found that most informal businesses in Tonga focused on two main types of activities—agriculture and small-scale manufacturing. Some 50% of all informal economic activity took place in root crops, mat production, tapa making, and ta’ovala manufacturing (see Chart 1). Within the sample, there were differences between men and women-owned businesses, with women more likely to be engaged in small-scale manufacturing and men predominantly focused on agriculture.
Chart 1: Informal businesses in Tonga by type.
Around 80% of informal businesses reported making a profit, with women-owned businesses more likely to report mid-to-small profits, compared with men reporting highly profitable businesses. The survey gathered data on the impact of COVID-19, with 40% of businesses reporting a drop in sales, 12% reporting increased sales, and 48% reporting no change (see Chart 2). The vast majority (94%) of respondents reported earning a better income as the primary reason for starting their business, with a preference for self-employment as the next most common reason.
Chart 2: Impact of COVID-19 on sales.
The most common reason respondents provided for not registering a business (see Chart 3) was: (i) a lack of awareness they needed to register their business (60%), followed by (ii) not understanding the process for registration (15%), (iii) perceiving no benefits to registration (10%), and (iv) prohibitive cost (10%). There were differences in the views of men and women business owners, with women significantly more likely than men to report seeing no benefit to registration or finding the process difficult.
Chart 3: Reasons given for not registering the business. Y-axis = percent.
Around three quarters of businesses said they failed to keep business records, with 6% using receipts and 1% using invoices as business records. When asked about business finances and capital, 69% indicated they had a bank account, but the vast majority (83%) also used this account for personal and family finances. For business startups, over 30% reported using no funding sources, with 30% using savings and a further 20% using family funds. Very few respondents indicated using institutional funding sources such as banks or government loans. For ongoing business capital, 70% indicated they had not used a bank or financial institution for a business loan, with 13% securing finance through South Pacific Business Development, a microfinance provider, and 6% through the Tonga Development Bank (see Chart 4).
Chart 4: Bank or financial institution used for business loans. Y-axis = percent.
When questioned on the most common barriers to operating a business, the most common responses were insufficient funds, lack of market information, and lack of trade opportunities. Women-owned businesses were more likely to report multiple barriers to operating a business. Respondents were asked about business needs, with 75% of businesses rating access to finance as the most acute need, followed by business startup toolkits and training. Women-owned businesses reported financial support as their most important need, while men indicated the provision of tools and equipment as their greatest need.
Armed with robust data on Tonga’s informal businesses, MTED now plans to review policies and assistance packages to support the growth of businesses in the informal sector. PSDI will continue to support MTED to encourage the formalization of businesses through consideration of alternative business entities that better meet the needs of operators, including women.