The informal economy in Africa is sustaining livelihoods and driving economic growth across the continent. Despite its largely unregulated nature, the informal sector accounts for a substantial portion of Africa’s GDP and employment. In many African countries, informal employment contributes between 60% and 80% of total employment, underlining its important impact on national economies. The sector spans a wide range of activities, from street vending and small-scale manufacturing to agricultural production and artisanal services.
Economic Stability Amid Global Shocks
One of the defining characteristics of Africa’s informal economy is its resilience in the face of global economic downturns. For instance, during the 2008 global financial crisis and the more recent economic fallout from the COVID-19 pandemic, informal businesses proved essential in buffering economies from greater collapse. According to the International Labour Organization (ILO), 92% of total employment in sub-Saharan Africa was informal in 2020, which helped mitigate the loss of formal sector jobs during these crises.
This sector’s flexibility allows it to absorb shocks faster than the formal economy. While formal businesses often struggle with high operational costs and regulatory challenges, informal businesses adapt quickly to changing conditions, ensuring continued economic activity. In countries like Nigeria, where the informal economy is valued at 65% of the total GDP, this agility offers a critical safety net for millions of citizens.
Financial Inclusion and Informal Credit Systems
A key aspect of the informal economy in Africa is its role in enhancing financial inclusion. With formal banking systems still out of reach for many people across the continent, informal networks such as rotating savings and credit associations (ROSCAs) and microfinance institutions (MFIs) have stepped in to fill the gap. A report by the World Bank in 2022 highlighted that 55% of adults in sub-Saharan Africa remain unbanked, relying on these informal mechanisms to access credit, make savings, and grow their businesses.
These systems are not only crucial for financial inclusion but also stimulate entrepreneurship and innovation, particularly in rural areas and underserved urban communities. For instance, in Kenya, the widespread use of mobile money platforms like M-Pesa has further integrated informal businesses into broader economic networks, allowing them to thrive.
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The Future of the Informal Economy
While the informal economy is essential for Africa’s resilience, it is also important to recognise the limitations that come with informality. The lack of legal protection, access to social services, and formal recognition often leaves workers vulnerable to exploitation and income instability. Governments across Africa are increasingly looking to formalise parts of the informal sector to improve working conditions and expand tax revenues.
However, formalisation efforts must be balanced to avoid displacing millions of workers. Initiatives such as Ghana’s Informal Sector Pension Scheme represent steps toward integrating informal workers into the social security system, ensuring long-term benefits while maintaining the sector’s inherent flexibility.
As Africa’s economy continues to grow, the informal sector will remain a key driver of economic resilience. To fully harness its potential, policies that enhance its inclusivity, security, and connectivity to formal systems will be essential.
