Photo: UNDP Moldova

Since the onset of COVID-19 pandemic, the problem of informal economy has worsened due to the growing financial constraints and high vulnerability of businesses and individuals practicing informal activities, as revealed by the study “The phenomenon of informal economy and employment in the context of COVID-19 pandemic”, conducted by Expert-Grup and commissioned by UNDP Moldova. The study analysed informal activity and employment in the Republic of Moldova, the dynamics over the past years, in particular in the context of COVID-19 pandemic, as well as people’s and businesses’ perception of this phenomenon.

Employees who work informally are more exposed to crisis due to the lack of social and legal guarantees, which results in a higher likelihood to be dismissed and, for those who lost their jobs — difficulty to get unemployment benefits and emergency loans or any other form of support, as their previous income was not declared.

According to the survey, about one third of companies pay salaries under the table, and an average of 30% of salaries are not reported. The highest perceived share of under-the-table salaries is found in HoReCa (Hotels, Restaurants and Catering), where 44% of respondents believe that these practices are very spread, being present almost in each company, and other 30% believe that the practice is spread to a certain extent. In addition, two thirds (62%) of the interviewees claim that enterprises from their industry resort to informal payments in order to survive, whereas one fourth of them believe that companies choose consciously to make informal payments in order to get richer. 1200 people and 600 legal entities participated in the survey.

The informal economy, which according to authors’ calculations based on official data, constitutes about one fourth of the entire economy of the Republic of Moldova, has increased slowly over the past years, in particular on the account of the constructions sector that expanded due to public infrastructure investments (in particular, roads). Thus, during 2015 - 2020, the fiscal losses generated by the non-observed economy grew from MDL 8.9 billion up to MDL 15 billion annually. Reported to the Gross Domestic Product, these losses had an increasing trend, from 6.1% in 2015 to 7.3% in 2020.

“Improving the overall quality of life for people while leaving no one behind is not possible without improving the quality of public services, enabling and boosting economic productivity and business competitiveness, enhancing the quality of social protection and the efficiency of public institutions. All of these are directly related to the informal economic activity in the country which, as a matter of fact, represent almost a quarter of the entire economy of the Republic of Moldova,” says Dima Al-Khatib, UNDP Resident Representatives to the Republic of Moldova.

The low financial education and poor public awareness of the importance of taxes are important factors that foster tax evasion. People engaged in informal work either have a low fiscal morality, or do not understand the difference between net and gross salaries, and what taxes should be paid on salaries.

The study’s authors recommend that the Government offers informational, budgetary and policy support to encourage formalisation of economic activities. The main measures can be grouped in five major objectives, intended to overcome the preconditions and fundamental reasons of informal economy:

1. Discourage cash transactions by subsidizing the costs of installing and performing credit card payments for SMEs, prohibit salaries in cash and promote financial education among the population.
2. Decrease the compliance costs by providing direct Government support for formalising enterprises, simplify the fiscal reporting requirements for small companies and use subsidizing and business support mechanisms to encourage the transition from informal to formal sector.
3. Increase the cost of non-compliance, by strengthening the State Labour Inspection and integrating the “day workers” in agriculture into the fiscal and social protection space via a voucher mechanism or decrease the salary taxes and contributions deducted at source.
4. Support the population’s fiscal morality by a volunteer declaration program, as well as a fiscal and financial education campaign for the population.
5. Increase the employees’ bargaining power in relation to employers by strengthening the trade union organisations and promoting more actively the employees’ rights.