If you spend sufficient time studying emerging markets and developing economies, you’ll observe that large segments of economic activity are informal, i.e. unrecognised, unregulated and unstructured.
Economic activities in informal sectors have fallen globally since 1991, but Sub-Saharan Africa and Latin America (and the Caribbean) still had the highest informal levels between 2010 and 2017. The IMF identifies Nigeria as having the largest informal economy in SSA; when calculated as a share of GDP between 2010 and 2014, this figure is 65%.
More recent data suggest Nigeria’s informal sector remains significant and vital to the economy.
Even though accurately sizing the informal sector is complex, researchers using econometric methods estimate that Nigeria's informal sector share of GDP was between 55% and 67% between 2018 and 2019. Whichever figure we choose, the point is Nigeria’s economy is built on informal activity.
A large informal sector is concerning when considering that an informal economy is also a “shadow economy”—policymakers, business leaders, and investors do not have proper visibility into transactions in this segment of the economy. Visibility is important because it helps with proper planning for service delivery, such as infrastructure and safety nets, and enables investors to get a true sense of economic potential in a country.
This article will discuss why a large informal sector is an issue and how it affects businesses. We will also discuss why digitising the informal sector is a pathway to bringing these players into the formal economy under the financial inclusion umbrella.
First, we start with understanding the informal economy.