ABUJA, Nigeria (VOICE OF NAIJA) – Nigeria is forfeiting an estimated $8.8 billion in potential revenue each year due to the size of its informal economy, the African Development Bank (AfDB) has revealed in its 2025 African Economic Outlook report.
The report highlighted that although informal businesses play a critical role in employment and economic activity, much of the income generated within this sector remains outside formal taxation frameworks, leading to significant losses in public revenue that could otherwise fund development initiatives.
According to the AfDB, informal enterprises ranging from street vendors and smallholder farmers to micro and small businesses account for a major portion of Africa’s economic activity, yet are largely untaxed.
The report stated, “By analysing data on informal output relative to formal output, tax revenue as a share of GDP, and nominal GDP across 46 African countries, the estimated forgone revenue amounts to approximately $125bn for Africa.
This estimate would be even higher if data from all African countries were available.
“Moreover, the impact could be dynamic: as informal enterprises transition into the formal economy, they would gain access to better conditions that support business growth, further expanding the tax base and increasing overall revenue potential.
“The largest estimates of forgone revenue are concentrated in the continent’s biggest economies: South Africa ($20.4bn), Algeria ($16.3bn), Egypt ($15.6bn), and Nigeria ($8.8bn).”
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The bank emphasised that formalising the informal sector could unlock as much as $125.3 billion in additional revenue across Africa, significantly bolstering the continent’s development financing capabilities.
The report further noted that the informal sector is “limiting growth while formal sector growth boosts economic growth,” stressing the benefits of integrating informal enterprises into the formal economy, including improved access to resources and greater contribution to tax revenues.
While acknowledging the difficulty in taxing informal businesses due to their irregular and undocumented operations, the AfDB pointed to examples like Kenya’s iTax system and Tanzania’s presumptive tax model as frameworks Nigeria could adapt to enhance compliance and strengthen its revenue base.
The AfDB has noted that Nigeria is making strides in tax reform, including the digitalisation of tax administration systems.
However, the report observed that compliance remains low, undermining the effectiveness of these efforts.
Beyond the significant revenue losses linked to the informal economy, Nigeria is also grappling with increasing debt service obligations.
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The AfDB projects that about 75 per cent of government revenue will be allocated to servicing debt in 2025.
The report also revealed that Nigeria’s public debt is expected to reach 47 per cent of GDP in the same year.
“Debt interest and amortization payments are not necessarily tied to the size of GDP but are made from government revenue. So, despite debt-to-GDP ratio being low, a country can still face a high debt burden if substantial shares of revenues are channelled towards debt service payments.
“Nigeria presents a classic case in point. In 2025, the country’s public debt was projected at 47 per cent of GDP. In contrast, threequarters of federal government revenues were projected to be spent on federal government interest payments,” says the report.
The AfDB explained that countries with limited revenue-generating capacity are most vulnerable to debt service pressure.
It warned that rising global interest rates and continued currency depreciation pose serious risks to fiscal sustainability.
Across the continent, debt service payments are forecast to reach $89 billion in 2025, with more than half owed to private creditors.
The report added that while interest payments as a share of government revenue might slightly ease in 2025 and 2026, the projection is subject to uncertainty on the path of interest rates and exchange rate fluctuations.
For Nigeria, high debt servicing costs are significantly constraining the government’s ability to invest in essential infrastructure and social services.
In response, the AfDB urged the country to boost domestic revenue mobilisation by modernising its tax system and addressing existing loopholes.
It also highlighted the need to reduce aid dependency and enhance the efficiency of public spending to maintain fiscal space and mitigate debt risks.
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Nigeria’s economic growth improved slightly to 3.4 per cent in 2024, up from 2.9 per cent in 2023, driven by growth in services, agriculture, and industry.
However, inflation spiked to 33.2 per cent, fuelled by surging fuel prices and exchange rate depreciation.
In an effort to curb inflation, the Central Bank of Nigeria raised the policy interest rate to 27.5 per cent.
Meanwhile, the country’s public debt surged from 41.5 per cent of GDP in 2023 to 52.3 per cent in 2024, driven by expanded borrowing and a weakened naira.
Despite these pressures, the fiscal deficit narrowed slightly to 3.9 per cent of GDP, supported by improved non-oil revenue performance.
The AfDB concluded by reiterating the importance of formalising Nigeria’s vast informal economy as a critical step to unlocking much-needed revenue to support sustainable growth and development.