The informal sector has long been recognised as the engine powering Africa’s economy. Often overshadowed by the formal economy, this sector plays an indispensable role in shaping livelihoods, providing employment, and driving economic growth.
Characterised by small-scale operations that exist outside formal regulatory frameworks, the informal economy includes a wide range of activities such as street vending, informal transport services, subsistence farming, and small artisanal work. In Africa, this sector accounts for a large percentage of employment and a significant share of GDP, making it essential for the continent’s socio-economic stability.
Employment: The Lifeblood of the Informal Sector
Across Africa, the informal sector is the dominant source of employment. According to the International Labour Organisation (ILO), over 85.8% of jobs in sub-Saharan Africa are found in the informal economy. In West Africa, informal employment reaches as high as 95% in countries like Benin and Togo.
This sector absorbs the labour market’s most vulnerable segments, particularly women and young people, who have limited access to formal employment. Women constitute 75% of informal workers across the continent, especially in agriculture and trade.
Youth unemployment remains a significant challenge in many African nations, but the informal sector has alleviated some of this pressure. With formal job creation lagging behind population growth, the informal economy provides essential livelihoods for millions of young people who would otherwise remain unemployed. For instance, in Kenya, informal jobs make up 83% of all employment, while in Nigeria, around 80% of the workforce is engaged in informal activities.
Contribution to GDP
In addition to employment, the informal sector makes substantial contributions to Africa’s Gross Domestic Product (GDP). In Nigeria, Africa’s largest economy, the informal sector contributes approximately 65% of the country’s total GDP. In Tanzania, it accounts for nearly 48% of GDP, while in Kenya, it contributes about 33%. Across sub-Saharan Africa, the informal economy generates around 40% of total GDP, highlighting its critical role in driving economic output.
Informal businesses, although often small and fragmented, play a crucial role in providing goods and services that are otherwise inaccessible or unaffordable for many. From roadside food vendors to small-scale artisans, informal entrepreneurs fill essential gaps, supplying local communities with everyday necessities and fuelling local economies. Their contribution becomes even more vital during economic downturns when formal sectors shrink, and the informal economy acts as a buffer against rising unemployment and poverty.
Challenges: Formalisation and Regulatory Gaps
Despite its contributions, the informal sector faces several challenges. Informal workers typically lack access to social protections such as health insurance, pensions, or unemployment benefits. Without formal contracts, many are vulnerable to exploitation, unsafe working conditions, and job insecurity. Furthermore, in many African countries, informal workers struggle to access financial services, which hampers their ability to expand their operations or integrate into the formal economy.
The lack of regulatory frameworks also presents obstacles. Governments often struggle to tax or regulate informal businesses, leading to a significant loss of potential revenue. The International Monetary Fund (IMF) suggests that improving tax collection from the informal sector could increase government revenues by up to 5% of GDP in some African countries.
The African Continental Free Trade Area (AfCFTA) and Future Projections
Looking ahead, promising developments aim to unlock the informal sector’s full potential. The African Continental Free Trade Area (AfCFTA), which came into effect in 2019, offers significant opportunities for informal traders.
The agreement seeks to reduce trade barriers and boost intra-African trade, benefiting the millions of small-scale traders who operate informally across the continent. AfCFTA is projected to increase intra-African trade by 81% by 2035 and could lift 50 million people out of poverty through enhanced economic opportunities.
Additionally, the Pan-African Payment and Settlement System (PAPSS) aims to lower the costs and complexities of cross-border payments. Currently, African businesses incur an estimated $5 billion annually in third-party currency conversion fees. PAPSS allows traders, including those in the informal sector, to transact in local currencies, removing a significant barrier to formalisation and regional trade expansion.
Drive for Formalisation
Formalising the informal economy has become a priority for African policymakers. By providing informal businesses with access to credit, technology, and financial services, governments can unlock productivity gains and improve working conditions. Simplified tax regimes and regulatory frameworks could also encourage informal businesses to transition into the formal economy, thereby enhancing their capacity for growth and innovation.
The World Bank estimates that formalising informal enterprises could expand Africa’s tax base by 15–30%, contributing to a more inclusive and resilient economy. Countries like Rwanda have made progress in formalising their informal sectors through streamlined business registration processes and financial inclusion programmes. Other nations are likely to follow suit as the benefits of formalisation become more apparent.
Africa’s informal sector is undeniably one of its most valuable economic assets, providing employment to millions and contributing significantly to GDP. While it faces notable challenges, particularly in terms of regulatory and financial inclusion, the sector’s resilience and adaptability position it as a key driver of economic growth in the coming decades.
With the implementation of AfCFTA and ongoing efforts to formalise informal enterprises, Africa’s informal sector holds vast potential to contribute to sustainable development, poverty reduction, and inclusive prosperity across the continent.
