South Africa’s hidden economy of R750 billion with no taxes

 ·28 May 2024

South Africa’s informal economy is estimated to be worth around R750 billion, hidden from many economic indicators and even the taxman.

Informal economy expert GG Alcock told delegates at the recent Biznews Conference in London that South Africa’s economy is much healthier than indicators suggest.

He highlighted a widely held misconception that South Africa suffers from pervasive poverty and inequality. This view is reinforced with photos of large townships with shacks.

The reality is that there has been a housing transformation in townships across South Africa, with impressive formal houses being built.

He added that there are more houses worth over R1.5 million in former rural homelands than in Cape Town and surrounding areas.

Alcock’s views are backed up by data from property educator Khali Masooane, who said the Soweto market has doubled in price in the past decade.

A four-room house in Soweto was valued at around R150,000 ten years ago. Today, a similar house would be valued at R400,000 to R500,000.

She said this growth is not confined to Soweto but is a phenomenon that can be observed in townships across the country.

South African townships have booming construction, back-room rentals, and spaza shop rentals sectors.

A prominent trend is that people move from their communal households into their own homes, creating a large sector of backroom rentals.

The backroom rental economy in South African townships is worth an estimated R20 billion to R40 billion annually.

The township housing market has not been the only one to experience strong growth. Numerous vibrant business sectors exist in the informal economy.

Spaza shops, taverns, fast food outlets, salons, and auto repairs are among the rapidly growing business sectors.

Alcock said there are around 50,000 out-of-home fast food outlets in townships, which generate around R90 billion in revenue.

There is a misconception that people support these outlets because they are cheaper than well-known fast-food brands like KFC, Nando’s, or Steers.

“People don’t buy this food because it is cheaper. It is generally more expensive, but people prefer that food,” he said.

The spazarette market, which offers clients products through an informal superette, is another booming sector.

A recent Nielsen survey estimated that the spazarette sector achieved an annual spend of R189 billion across 100,000 outlets.

“The growth in the informal spaza sector has been around 24% per year compared to 15% in the formal sector,” he said.

These spaza shop owners, often foreigners, pay around R25 billion in rent to South Africans who own the properties they operate from.

South Africa’s R750 billion informal economy

Informal economy expert GG Alcock

Alcock said South Africa’s informal economy is worth R750 billion annually and is one of the country’s fastest-growing sectors.

He dismissed the narrative that South Africa needs to start more businesses and create more entrepreneurs.

“The businesses and entrepreneurs exist already. We have hundreds of thousands of them but don’t recognise them,” he said.

“We do not need to start new businesses. We need to help them scale up. We need to give them the resources and support they need.”

He urged formal businesses to partner with the informal sector to help them grow and benefit the South African economy.

One of the reasons why the sector does not receive much recognition is that it is seldom counted in official economic indicators, and there is not much tax collected.

The South African Revenue Service (SARS) has virtually no presence in the informal economy.

Investec said informal businesses and entrepreneurs typically do not contribute directly to the fiscus through taxes.

Many informal businesses pay value-added tax (VAT) on purchases, but that is where the taxman’s reach stops.

UCT researcher Luvuyo Mncanca added that businesses operating in the informal economy do not want to be regulated or registered for tax.

Despite not paying much tax, it remains a valuable economic sector that creates jobs and provides food for millions of South Africans.

Alcock provided an overview of the size of different parts of the informal economy to illustrate its importance.

  • South Africans earn between R20 billion and R40 billion per year in backroom rentals.
  • The spaza shop market is worth R189 billion annually across 100,000 spaza shops.
  • Spaza shop rentals earn R25 billion per year.
  • The informal fast-food market is worth around R50 billion annually across 45,000 outlets.
  • 45,000 licensed taverns and shebeens earn R110 billion per year.
  • The taxi industry earns R50 billion per year.

He said these businesses should be celebrated and supported to further drive growth in the township and rural economies.

Read: South Africa’s economy grew slower than Zimbabwe – but Ramaphosa celebrated it

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