- Africa’s Rising Debt Has an Invisible Driver: Economic Informality
The pace and scale of Africa’s debt accumulation pose an urgent challenge, not only to the continent and its citizens but also to global creditors and capital markets. In effect, many African governments are defaulting on social spending, as significant portions of domestic revenue are diverted to debt service. Nearly 57% of Africans, about 751 million people, live in countries where governments spend more on interest payments than on health or education. A typical government in Sub-Saharan Africa now spends about one-seventh of its revenue on interest alone. For investors, debt treatments can mean maturity extensions, coupon cuts, and principal losses. For development partners, unsustainable debt increases the need for cheaper financing, guarantees, and grants.
Yet one driver of this debt has received too little attention: economic informality. Policymakers have largely focused on global shocks, tighter financing conditions, commodity price volatility, exchange-rate pressures, and fiscal mismanagement. These factors matter, but they do not fully explain why so many sovereigns struggle to mobilise enough domestic revenue to reduce their dependence on borrowing.
Informality is often treated as a labour-market issue, but it has clear macro-fiscal consequences. Moody’s estimates the median informal economy in Sub-Saharan Africa at about 36% of GDP, compared with about 25% globally, and informal work accounts for about 86% of employment in the region. Widespread informality limits taxpayer registration, direct tax collection, and the administrative visibility governments need to mobilise revenue consistently.
Informal workers and firms do pay taxes, mostly through VAT, excise duties, and fees. Even so, the fiscal pattern is consistent: our analysis finds a moderate negative correlation (−0.33) between informality and tax revenue. The relationship with debt is not automatic, but informality intensifies every other pressure by shrinking the revenue base available to absorb shocks and finance development.
Informality links to debt through three channels. First, it narrows the tax base. Simplified regimes, presumptive taxes, and mobile-money-linked tax IDs have generally raised little revenue relative to their administrative and compliance costs, leaving governments reliant on indirect taxes and borrowing.
Second, informality holds back domestic financial markets, raising borrowing costs for governments and firms alike. Most informal businesses have their savings sitting outside the formal system, in cash, land, livestock, or savings groups, rather than in pension funds or insurance products that can finance long-term investment. Africa’s pension assets are estimated at US$450–500 billion, roughly 70% of them in South Africa. Banks fill the gap: domestic banks now hold about half of the region’s public debt, and in the West African Economic and Monetary Union (WAEMU), government debt makes up 43% of banks’ assets. The IMF warns that this sovereign–bank nexus has deepened, with public credit outpacing private credit. Domestic debt is also short-dated and costly: the median country paid about 8.8% on new domestic issuance in 2024, and Ghana’s domestic debt had an average maturity of less than three months in late 2025.
Informal firms, meanwhile, rarely keep audited accounts or hold registered collateral, so they cannot borrow on reasonable terms, let alone issue a bond. With few bankable private borrowers, banks lend to government instead. The loop is self-reinforcing: without finance, firms stay small and informal, and while they stay informal, markets stay shallow.
Third, informality weakens institutional capacity in tax administration, public investment, and debt transparency, making debt risks harder to detect and correct.
Together, these channels create a development paradox. Governments borrow to fund roads, schools, hospitals, and climate-resilient infrastructure, yet informality limits the fiscal returns on those investments and the capacity to repay. Infrastructure may boost productivity without generating proportional tax revenue, and informal workers are often difficult to reach with social protection. In Ghana and Nigeria, a narrow tax base and commodity exposure have reinforced domestic debt accumulation. Kenya, Tanzania, and Uganda have digitised tax administration, yet informality still constrains revenue mobilisation.
Because informality is structural, the response must make formalisation beneficial rather than punitive. African governments should prioritise digital IDs, mobile money integration, e-tax platforms, and interoperable business registries. Formalisation must deliver visible benefits, including access to credit, social protection, legal recognition, and simplified compliance. It should also be treated as market-development policy: linking mobile money to micro-pension products and building credit-reporting systems that capture informal transaction histories would bring informal savings into local capital markets.
Africa’s debt story is not only about external shocks or fiscal mismanagement; it is also about economic structure. Informality narrows revenue and keeps domestic markets shallow; weak revenue increases borrowing, and shallow markets raise its cost. The continent’s next chapter on debt sustainability will depend not only on creditors and capital markets but also on how effectively governments bring the informal economy into the state’s fiscal and financial architecture.
