Nigeria and South Africa are among countries losing big on forgone tax revenues that could be used to finance developmental projects and boost growth as the nations’ informal economy are largely non-formalised.
More than one in five working-age Africans are engaged in starting a new business, with more than 75 percent of youth planning to launch their own ventures within the next five years, according to the African Development Bank (AfDB).
Yet lack of transitioning into the formal economy is causing the continent with the largest youth population a whopping $125 billion in additional revenue for 46 African countries, funds that could be utilised for development financing, including investment to strengthen business capital.
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“The largest estimates of forgone revenue are concentrated in the continent’s biggest economies: South Africa ($20.4 billion), Algeria ($16.3 billion), Egypt ($15.6 billion), and Nigeria ($8.8 billion),” AfDB said in its 2025 economic outlook.
“This estimate would be even higher if data from all African countries were available.”
The African-focused lender revealed that high regulatory burdens, a weak entrepreneurial ecosystem, and other structural barriers have pushed the majority of business activities into the informal economy, making it a reservoir of untapped economic potential.
The Abidjan-based development bank however urged for formalisation, stating that it is key to unlocking the economic potential of the informal sector.
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In Africa’s most populous nation, lack of formal employment has pushed many young people, majority of whom are between the ages of 18 to 30, to the streets, owning a kiosk with a Point of Sale machine, rendering services to prospective customers who need cash or getting a car for ride hailing business.
While their ‘hustles’ are largely run on personally sourced capital, they could gain access to better conditions that support business growth, further expanding the tax base and increasing overall revenue potential if they were formalised.
Nigeria is however on the rounds of assent to its much-anticipated tax reforms bills which are expected to overhaul its tax laws, some that date back to the country’s colonial past.
Africa’s biggest oil producer is seeking to harmonise its tax laws in a push to stimulate needed growth, lower fiscal deficit, improve its tax as a percentage of gross domestic product ratio and make the economy more competitive.
The country’s tax-to-GDP ratio is one of the lowest globally at 10 percent in 2023, but unofficial data suggests that it has increased to 13.6 percent with the authorities targeting 18 percent in the next two years.
Efforts by the government are also expected to lower debt servicing as a percentage of revenue from 97 percent in 2022 to 50 percent on renewed fiscal management.
