Enhancing Business Formalization through E- Government in ECCAS

By Larissa Ntoubia and Dr. Adeline Nembot

Introduction

The Economic Community of Central African States (ECCAS), established in 1983, is essential in fostering regional development. The ECCAS promotes regional economic integration and economic development in the economic landscape of the central African region. However, the region still faces several challenges such as the predominant informal economy which is an obstacle to economic growth, tax revenue generation, and the provision of public goods and services. In Cameroon for instance, more than 90% of the workforce is employed in the informal sector and contribute more than 57% of the GDP (1). Business formalization is associated with increased economic growth, market access, job creation, and government income through taxation. However, this transition from informal to the formal sector has several challenges such as complex bureaucratic procedures, high registration cost, and lack of trust in government institutions (2). E-government is the use of digital technology to facilitate interactions between government, business, and citizens. It has the potential to eliminate the above barriers, through reducing the cost and time to interact with the government, increasing transparency, and reducing corruption. This will make it easier for business to access registration and comply with the law.

The objective of this paper is to explore how e-government initiatives can enhance business formalization in the ECCAS region. The study targets policymakers, regional organizations, development partners, researchers, and business leaders. The paper is structured in to three sections first we have; the current state of business formalization in the ECCAS region, secondly we look at the barriers to business formalization the ECASS region, lastly we examine the role of e-government in reducing barriers to business formalization, and provide policy recommendations to foster a more conducive environment for formalization through e-governance.

1. The Current State of Business Formalization in ECCAS

The Economic Community of Central African States still lags in the formalization of business, with most of its member states having high rates of informality. Overall the informal sector in ECCAS in 2023 comprised 31.7% of the GDP, about five percentage points higher than the African average of 26.2% (3). Across the ECCAS region, the informal economy dominates employment, and about of 68.6% of the labor force is employed in the informal economy as of 2023. The Democratic Republic of Congo is at the top of informal employment with 84%, and Equatorial Guinea is the least with 19% (4), making it difficult for the regional economic community to attain its business formalization goals and desired economic growth.

In Cameroon, only 12% of businesses are formalized, and small and medium businesses face intense regulatory barriers. These include 44 tax payments a year and 624 hours per year spent on compliance (5). Corruption is also a significant challenge, with the country ranking 142 out of 180 in Transparency International’s Corruption Perceptions Index for 2023. Most businesses in the country have lost confidence in the government due to bad governance. The tax system also penalizes 66% of SMEs for non-compliance, which further discourages formalization.

In other ECCAS countries, the same challenges persist. Equatorial Guinea is struggles with undeveloped digital infrastructure and high trade expenses, which are discouraging formalization opportunities. Inefficiency in public procurement as well as cumbersome business registration practices are prevalent. Rwanda, however, shows improvement in formalization, with formal businesses rising from 27,495 (2022) to 31,394 (2023), with 446,598 jobs being created (up from 274,914 in 2022) (6). Government interventions include simplified regulatory regimes as well as tax refunds, which have registered more income for the formal sector.

2. Common barriers to business formalization across ECASS

The Economic Community of Central African States faces several common obstacles to business formalization. Firstly, a major disincentive to business formalization is bureaucratic complexity. The process of registering a business in ECCAS countries is typically time-consuming and expensive. In the sub-region, starting a business entails a number of procedures that can take approximately 49.2 days this is the average time across the region, which is far above global best practices like New Zealand (1 day) (7).  Also, according to a survey by the Nkafu policy institute, in Cameroon, the major obstacles to formalization are high taxes and regulatory charges (37%) and administrative formalities (20%), indicating that bureaucracy hinders formalization. Although countries like São Tomé and Príncipe have attempted reforms through the establishment of one-stop shops for registration, implementation remains uneven across the region.

Secondly, corruption weakens public confidence in state institutions. In Cameroon, there are continuous demands for unofficial payments in order to perform business registration and inspections (8). Tax inspectors are some of the most corrupt state officials, and such activities significantly restrain SME development. Bribes serve as a “hidden tax,” increasing the cost of doing business and discouraging formalization.

Furthermore, there is a high cost of compliance in the region. Tax rates for ECCAS countries ranges between 47% and 57% of the profits of businesses, and therefore, making formalization a burden. For instance; in Chad business pay up to 57.7% of profits as taxes, which is one of the highest of the sub-region (9). These high rates discourage informal firms from entering the formal sector, where the cost-benefit transition is not an appealing one (10).

3. The Role of E- Government in Formalization

E-government simplifies the registration process. E-government websites can straightforwardly simplify business registration by establishing websites where entrepreneurs can submit applications, pay fees, and receive registration documents online. This reduces the time and cost of traditional in-person business registration processes. In Rwanda, the use of an online business registration system reduced the time to start a business from several weeks to a few days. This has encouraged higher numbers of entrepreneurs to register their businesses, leading to economic growth (11). There has been a remarkable expansion in the use of digital single windows for business registration among developing economies, from 17 economies in 2016 to 55 economies in 2021.

Further, e-government strengthens tax administration through the adoption of systems that are able to streamline tax administration to allow firms to file tax returns online, reduce errors, and increase compliance rates. This further allows governments to track tax payment more effectively. In Ghana, the use of an electronic tax filing system has increased tax compliance and reduced administrative costs for firms (12). Electronic tax filing systems are able to increase tax collection by reducing evasion as well as improving efficiency.

More Transparency, Less Corruption. E-government websites encourage transparency since they provide clear information about rules needed and procedures. This reduces space for corruption since transactions are all electronic and accessible for audit. Estonia’s extremely computerized government has significantly reduced corruption by putting every government service, from business registration to taxation, online (13). World Bank findings shows that, countries with electronic business registries have fewer administrative procedures and lower entry costs, which can reduce corruption.

Enhanced Access to Information. E-government systems provide businesses with instant access to information on regulation, market opportunities, and government services. This allows entrepreneurs to make more informed decisions and navigate formal markets more effectively. In South Africa, the government online business portal provides extensive information about how to register and conduct business, including legal requirements and available incentives. According to the UN’s E-Government Survey, there is a growing trend of e-democracy with more and more countries launching portals to make information more accessible and to include people in decision-making processes.

Policy recommendations

To enhance business formalization through e-government, a comprehensive strategy that includes investment in digital infrastructure and a dedicated budget is required. The budget of most Central African countries does not provide clear provisions for e-government formalization. In the CEMAC region, for instance, there was an 8.6% budget cut due to unpaid contributions. These contributions are mainly collected through the Community Integration Tax (TCI), introduced in 2012 to fund the regional integration process. To increase e-government budgets in Central Africa, countries have to pay their contributions; this will increase the budget and possibly the amount allocated for digitalization. Also, allocating 0.5 to 1% of GDP to this specific goal, aligning with Nigeria’s 1% benchmark, will play a major role.

Enhance Government Systems and Digital Tools. Implement strong government systems for efficient handling of digital services. This entails setting up a central team or agency responsible for handling digital transformations. Not undermining the importance of electricity and internet. A solid plan will reduce resistance towards new technology and keep digital services aligned with national and regional goals.

Also, the government and civil societies should provide government officials and the citizens with training to advance their digital skills. Organize campaigns to show business and citizens why they should seek online government services. The greater the people are educated and leverage these digital tools, the more efficiently and quicker services will be provided.

Create One-Stop Online Service Centers. Develop virtual portals that allow businesses to obtain various government services from a single site, for example, business registration, licensing, and taxation returns. This will simplify the process, reduce documentation, and increase transparency. This would contribute to improving economic growth as well as boosting cooperation throughout the region.