Africa’s informal economy is worth over $1 trillion. Discover how smart policy, digital innovation, and inclusive finance can turn informal survival into formal success.
By Ethical Business News Desk
Key Takeaways
- Africa’s shadow economy is the highest in the world, averaging 42.4% of GDP, with countries like Sierra Leone and Niger above 55%.
- Informality is both a survival strategy and a structural obstacle to sustainable development, public revenue, and fair markets.
- Solutions lie in smart reform: Simplified regulation, digital innovation, financial inclusion, and public trust-building.
- The future depends on making formality feasible and rewarding, not fear-based and punitive.
In Sierra Leone, nearly two-thirds of the economy operates in the shadows. In Niger and Ethiopia, it’s over half. These are not isolated figures; they reflect a broader trend across Africa, where the shadow economy accounts for an average of 42.4% of GDP in low-income countries, according to a 2025 study by the International Monetary Fund (IMF). In contrast, wealthy nations like the United Arab Emirates (2.1%) and the United States (5%) maintain some of the lowest shadow economy rates globally.
But while these informal economic activities offer short-term lifelines to millions, they also exact a steep price: weakened institutions, lost tax revenue, and a lack of worker protections. The IMF’s new global study, based on Ernst & Young’s analysis of 131 countries, lays bare the extent of this economic underworld – and reveals Africa’s unique stake in the struggle to bring it into the light.
Africa: Where the shadow is deepest
Globally, the shadow economy represents an estimated 11.3% of GDP. But in Africa, informality is not just a feature; it is the foundation. Sierra Leone tops the global list, with informal activity making up 64.5% of GDP, valued at over $4.1 billion. Niger (56.3%), Ethiopia (50.2%), and Burundi (49.2%) are close behind. Even regional powerhouses like Kenya (38.4%) and Nigeria (30%) face significant informality, translating into unaccounted GDP worth $41.8 billion and $109 billion respectively.
This hidden economy is vast, but it is not necessarily illicit. It encompasses everything from market vendors and boda boda drivers to small-scale artisans and informal service providers; people operating outside legal frameworks not by choice, but out of necessity.
Why the shadows persist
The continent’s informal economy is the result of systemic constraints rather than individual defiance. The IMF, World Bank, and African Development Bank highlight four core drivers:
- Complex tax systems and regulatory barriers: For many entrepreneurs, formalisation means navigating bureaucracy that is costly, confusing, and inconsistent. High taxes with few benefits act as further deterrents.
- Weak institutional enforcement: In countries where governance is weak and corruption high, the cost of staying informal is low. Laws may exist, but they are rarely enforced uniformly.
- Financial exclusion: Over half of Sub-Saharan Africans are unbanked. Without access to credit or savings, small businesses and individuals depend on cash-based, undocumented transactions.
- Persistent economic hardship: With formal employment scarce, the informal sector becomes the default source of livelihood. In some countries, over 85% of jobs are informal.
As Dr. Abebe Aemro Selassie of the IMF notes, “The informal economy is not just a deficit of law; it is a deficit of trust.”
People do not engage with institutions they do not believe in.
A double-edged sword
The informal economy offers resilience but at a cost. It provides employment and income in the absence of formal opportunities, especially in rural areas and underserved urban zones. Yet:
- Tax revenue is lost: Nigeria’s $109 billion informal economy, if taxed fairly, could dramatically boost healthcare, education, and infrastructure.
- Workers remain vulnerable: Without legal protections, informal workers face unsafe conditions, wage theft, and no safety nets.
- Markets are distorted: Compliant businesses compete unfairly with those skirting taxes and regulations, discouraging formal investment.
- Data becomes unreliable: If nearly half the economy is invisible, governments cannot plan or allocate resources effectively.
Turning shadows into strength
Formalising the continent’s hidden economy will not happen overnight, but progress is already underway. Several countries are piloting successful approaches that offer valuable lessons.
1: Simplify and digitise: Rwanda leads the way with a digital-first model that simplifies SME taxation and allows mobile registration. Through e-government platforms and mobile banking, the state has reduced red tape and improved transparency.
Similarly, Kenya’s M-Pesa ecosystem demonstrates how digital financial services can create audit trails without alienating users. The government has partnered with fintech firms to link mobile money to tax records, gently nudging more businesses toward formality.
2. Incentivise participation
Ghana’s approach includes offering social protection benefits like health insurance and pensions to informal traders who register. When formality comes with tangible perks, it is no longer seen as a burden, but as an upgrade.
3. Build institutional trust
Public services must deliver for people to buy into systems. South Africa has invested in expanding unemployment insurance and introducing tiered tax incentives for formal SMEs. Morocco, meanwhile, is piloting community tax agents who assist informal workers with compliance, focusing on education rather than punishment.
4. Expand financial access
Mobile banking platforms such as MTN Mobile Money in Uganda and Airtel Money across West Africa have played a vital role in onboarding informal actors into traceable economic flows. As digital ID systems expand, countries like Ethiopia are integrating financial inclusion into national digital strategies.
The trillion-dollar opportunity
Africa’s shadow economy likely exceeds $1 trillion in value. Formalising even a fraction could unleash vast developmental benefits – from job creation to improved public services and foreign investment. But the transition must be managed with empathy, not enforcement alone.
The choice is not between informal survival and formal exploitation. It is about designing institutions that are transparent, inclusive, and responsive. As the IMF underscores, reducing informality means making formality work for the people.
Sources
• IMF (2025). Shadow Economies Around the World
• Ernst & Young (2025). Global Informal Economy Dataset
• World Bank (2024). Digital Financial Inclusion in Africa
• Kenya Revenue Authority (2024). SME Tax Reform Evaluation
• African Development Bank (2025). Formalization Pathways for African Economies
• ILO (2024). Informal Employment Trends in Sub-Saharan Africa
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Published by Ethical Business, the leading voice on sustainable innovation and inclusive growth in Africa.
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