The recently published final report of the Economic Census 2024 conducted by Bangladesh Bureau of Statistics (BBS) reveals that nearly two-thirds of the country's economic units are unregistered and operate in the informal sector. As per the report, there were 11.7 million economic units in the country as of 2024, of which only 3.3 million were registered. In other words, just 28 per cent of the country's economic units operate within the formal economy. Meanwhile, 7.6 million units, or 65 per cent, operate without any registration, while registration was not mandatory for the remaining 0.8 million units, accounting for 7 per cent of the total.
An economic unit refers to any place or establishment where economic activities or business operations are carried out, either on a permanent or temporary basis. These activities include the production, distribution, marketing and sale of goods and services. In addition to formal businesses operating from shops and commercial establishments, the BBS Economic Census also counted makeshift shops located on footpaths, in marketplaces and along roadsides as economic units. Businesses required to obtain a trade licence, Business Identification Number (BIN) or other official registration documents, but are operating without them, have been categorised as unregistered. Meanwhile, small-scale household operated shops or other economic activities, mostly centred in rural areas, for which such registration is not required, were placed in a separate category rather than being classified as unregistered or informal.
Experts have rightly voiced concern over the large size of the informal economy and stressed the need for bringing these enterprises into the formal sector. This is important for several reasons. First, business registration and licensing are essential for the long-term growth of economic units. Formalisation gives businesses greater credibility, enabling them to access bank credit, government incentives and other forms of institutional support that can help them expand and become more productive. At the same time, formalisation offers businesses greater legal protection. While extortion and rent-seeking by criminal groups is a challenge for many enterprises, businesses operating outside the formal system are all the more vulnerable as they lack legal recognition.
Second, formalising the informal economy is essential for improving labour standards and protecting workers' rights. At present, most workers in the informal sector operate in an unregulated environment where labour laws are rarely enforced. According to the Bangladesh Bureau of Statistics (BBS), around 13.5 million workers are engaged in the informal sector. Bringing these workers and enterprises under the formal regulatory framework would help ensure compliance with labour laws, improve working conditions and extend legal and social protections to millions.
Third, a large and pervasive informal economy represents a significant loss of potential tax revenue for the government. At a time when the government is under mounting fiscal pressure, increasing revenue collection is crucial. But when nearly two-thirds of the country's economic units operate outside the formal system, it not only deprives the government of an important source of revenue but also places a disproportionate burden on compliant businesses that are already registered and paying taxes. Formalisation of the informal part of the economy could go a long way towards widening the tax base and increasing revenue mobilisation.
It is estimated that Bangladesh's informal sector, or shadow economy, accounts for about one-third of the country's gross domestic product (GDP). This phenomenon, however, is not unique to Bangladesh. Every country has an informal economy, but its size varies depending on the quality of governance, institutional strength and the level of socio-economic development. In high-income OECD countries, the informal sector typically accounts for only 10 to 15 per cent of GDP. By contrast, it expands to around 35 to 40 per cent in much of Sub-Saharan Africa and Latin America. In Asia, countries such as Japan, Singapore, China, South Korea and Vietnam have managed to keep informal economy between 10 and 15 per cent of GDP. In Indonesia and Malaysia, it stands at about 24 per cent, while in Pakistan and India it ranges from 35 to as high as 50 per cent of GDP. These differences are not cultural; they are a reflection of institutional incapacity.
The BBS study found that a majority of informal economic units belong to the SME sector. Many entrepreneurs operating informally aspire to scale up their businesses but deliberately avoid registration for fear of the costs it may entail: bureaucratic hurdles, high corporate and personal income taxes, audits, penalties and other compliance requirements. Many believe that formalisation would significantly increase their cost of doing business. Thus they steer clear of the formal system not because they are unwilling to comply with the law, but because they believe that the system penalises compliance.
So, if the government wants to expand the formal economy, it must begin by reforming the system itself to make formality attractive, not punitive. Simpler rules for establishing and operating a business and lower tax rates will encourage more entrepreneurs to formalise their enterprises. Once the system becomes hassle-free and entrepreneurs see the tangible benefits such as easier access to credit, legal protection and government support, many of them will formalise their businesses.
In fact, most small businesses operating on footpaths and roadsides already pay a price to stay in business, not just to the government. Securing and retaining a space for a roadside shop or stall often depends on an organised system of extortion involving an unholy nexus of politically influential individuals, local musclemen and corrupt officials. Just imagine how much money is made by selling onetime possessions for so many shops and stalls, and then by collecting daily tolls. Unregistered battery-run auto-rickshaws are yet another example of how informality thrives at the expense of the government exchequer. This parallel system not only deprives the government of huge amount of revenue but also perpetuates corruption. If the government can rehabilitate these businesses in designated areas, provide them with legal recognition and protection, these small-scale entrepreneurs would be more than willing to pay taxes and contribute to the government exchequer instead of financing an illegal system.
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