Unlocking Nigeria’s Economic Potential: The Imperative of Formalising the Informal Sector 1. Introduction: Nigeria’s Informality Challenge Nigeria, Africa’s largest economy by population, continues to grapple with the challenge of a vast informal sector. According to the African Development Bank’s (AfDB) 2025 African Economic Outlook, Nigeria loses approximately $8.8 billion annually to tax leakages attributable to its large informal economy. This figure reflects the country’s urgent need to formalise its informal enterprises and expand the tax base to ensure sustainable development financing. 2. Anatomy of Nigeria’s Informal Economy The informal economy comprises street vendors, smallholder farmers, artisans, market traders, ride-hailing drivers, and small-scale manufacturers—many of whom operate outside formal regulatory and tax structures. Despite their significant role in employment generation and micro-level economic output, these informal actors remain largely untaxed, undocumented, and disconnected from public infrastructure and credit systems. AfDB estimates that, across 46 African countries, Africa forfeits around $125 billion annually in tax revenues due to the informal sector—a burden most visible in the continent’s largest economies: South Africa: $20.4 billion Algeria: $16.3 billion Egypt: $15.6 billion Nigeria: $8.8 billion 3. Fiscal Implications: Nigeria’s Debt and Revenue Crisis Nigeria’s public debt is projected to reach 47% of GDP by the end of 2025, up from 41.5% in 2023. This is partly due to the country’s increasing dependence on borrowing to meet fiscal obligations amid declining oil revenues and rising inflation. However, the more pressing concern is Nigeria’s debt service-to-revenue ratio. The AfDB projects that 75% of federal government revenue in 2025 will be spent on servicing debt—a fiscal imbalance that severely restricts expenditure on public services and infrastructure. “Debt interest and amortization payments are not necessarily tied to the size of GDP but are made from government revenue.” — AfDB African Economic Outlook 2025 This stark reality underscores the need to increase domestic revenue mobilisation, especially by expanding the tax net to include informal businesses. 4. The Path to Formalisation: Lessons from Other African Economies Formalising informal businesses is not a novel ambition, but its execution has been largely ineffective in Nigeria. Nevertheless, peer African countries have adopted pragmatic models worth emulating: Kenya’s iTax system has digitised taxpayer registration, return filing, and payments, making compliance easier and less intimidating. Tanzania’s presumptive tax regime uses turnover-based thresholds to assess tax, eliminating complex record-keeping requirements for micro businesses. Rwanda’s e-taxation infrastructure allows for simplified digital filing and has contributed to improved voluntary compliance. These examples show that ease, clarity, and trust in governance are central to formalising the informal sector. 5. Nigeria’s Current Efforts and Gaps Nigeria has taken some reform steps, including: The digitisation of tax processes through platforms like TaxPro-Max by the FIRS. Ongoing tax reform under the Presidential Fiscal Policy and Tax Reforms Committee. Introduction of simplified tax regimes under Presumptive Tax Schemes (PTS) by sub-national governments. However, implementation is fragmented and compliance remains low due to: Fear of over-regulation. Lack of incentives to formalise. Limited awareness and poor trust in government institutions. Absence of real-time data integration across ministries and agencies. 6. Strategic Recommendations for Nigeria To reverse the $8.8 billion revenue leakage and boost economic resilience, Nigeria should adopt a multi-dimensional strategy that includes: a. Introduce a National Simplified Tax Regime Design and implement a unified presumptive tax regime targeted at informal businesses with annual turnover below a defined threshold (e.g., N25 million), using flat or graduated rates. b. Leverage Technology and Data Integration Deploy a nationwide e-tax system, integrating data from CAC, NIMC, BOI, SMEDAN, and commercial banks to create a single source of truth for taxpayer identification and tracking. c. Use Incentives, Not Threats Encourage formalisation by offering business support services (access to microcredit, free bookkeeping tools, training, and government contracts) to registered informal businesses. d. Collaborate with Informal Sector Associations Engage unions and cooperatives (e.g., market women’s associations, okada/keke unions, trade groups) as intermediaries for tax education and registration drives. e. Improve Tax Morale through Visible Benefits Publicly ring-fence and track tax revenues from informal sector formalisation, reinvesting them in visible community projects such as health centres, road repairs, and market stalls. 7. Broader Macroeconomic Context: Inflation and Growth Inflation rose to 33.2% in 2024, driven by fuel subsidy removal and exchange rate depreciation. Interest rates climbed to 27.5% as the CBN sought to tame inflation. Despite these pressures, GDP growth improved slightly to 3.4%, buoyed by non-oil sectors. Yet, Nigeria’s real economic transformation depends not just on monetary policy, but on structural fiscal reform that broadens the tax base and reduces the need for unsustainable borrowing. 8. Conclusion: Formalisation is a Fiscal Necessity Nigeria’s informal sector has long been a double-edged sword—providing livelihoods for millions but simultaneously limiting the country's tax revenue and economic planning capabilities. As the AfDB rightly points out, transitioning informal enterprises into the formal economy could unlock over $8.8 billion annually, helping to bridge Nigeria’s fiscal deficit, reduce borrowing, and fund critical infrastructure and services. The choice before Nigeria is clear: either institutionalise informality or formalise it to drive inclusive growth. To this end, effective policy design, targeted technology deployment, and institutional collaboration are essential. Olatunji Abdulrazaq CNA, ACTI, ACIArb(UK) Founder/CEO, Taxmobile.Online