The African countries quietly turning informal workers into taxpayers, and winning the battle against informality

For decades, Africa’s vast informal economy has been one of the continent’s most persistent development challenges, limiting tax collection, weakening productivity, and keeping millions of workers and businesses outside the formal financial system.

• Rwanda, Benin, Tanzania, and Côte d’Ivoire are among Africa’s strongest performers in reducing informality, according to Moody’s.
• The ratings agency says countries that improved governance and institutions achieved faster declines in informal economic activity.
• Strong growth alone is not enough to reduce informality; reforms are more important than economic expansion.
• Governments that successfully formalize businesses and workers tend to strengthen tax collection, productivity, and long-term growth.

While many countries continue to struggle with the problem, a small group of African nations is beginning to show that progress is possible.

According to a new report by Moody’s Ratings, Rwanda, Benin, Tanzania, and Côte d’Ivoire have emerged among the strongest performers in reducing informality, thanks to reforms that improved governance, strengthened institutions, and made it easier for businesses to operate within the formal economy.

The findings offer a rare bright spot for a region that continues to have the world’s largest informal economy.

Moody’s estimates that the median informal economy in Sub-Saharan Africa accounts for around 36% of official GDP, compared with about 25% globally. Informal employment across the region stands at roughly 88% of total employment, making it the most informal region in the world.

The report arrives as African governments face increasing pressure to mobilize domestic revenue, reduce dependence on borrowing, and attract investment amid tighter global financial conditions.

The African Development Bank recently estimated that African countries could unlock an additional $469 billion in annual revenue through stronger tax administration, digitalization, and compliance measures without increasing tax rates. The estimate highlights the scale of resources that remain outside formal economic systems.

What separates the winners?

According to Moody’s, the countries making the greatest progress share a common characteristic: stronger institutions.

“Reducing informality can generate broad credit benefits but requires sustained reforms,” the agency said.

The report found that countries that improved governance indicators, such as rule of law, regulatory quality, government effectiveness, and control of corruption, recorded some of the fastest declines in informality.

Benin, Rwanda, Tanzania, and Côte d’Ivoire all made significant progress between 2010 and 2019, outperforming many of their regional peers.

Rather than relying solely on tax enforcement, these countries focused on broader reforms that made participation in the formal economy more attractive.

For example, Benin introduced a simplified legal status for small businesses, making it easier for entrepreneurs to formalise their operations.

The result was a gradual reduction in informality alongside improvements in governance, investment conditions, and economic performance.

Growth alone is not enough

One of the report’s most important findings is that economic growth by itself does not automatically reduce informality.

Many African economies have recorded strong growth over the past two decades without seeing a corresponding shift towards formal employment.

The Democratic Republic of Congo illustrates the challenge. Despite years of rapid growth, largely driven by mining, informality remains extremely high because that growth has not translated into broad-based formal job creation.

Moody’s argues that sustainable reductions in informality occur when economic growth is accompanied by institutional reforms.

“Over shorter periods, high rates of economic growth do not systematically lead to a larger reduction in informality as formalisation can take time,” the report noted.

That finding is particularly relevant as several African economies continue to post strong growth figures while struggling to expand their formal sectors.

According to the African Development Bank’s latest economic outlook, East Africa remains one of the continent’s fastest-growing regions, with countries such as Rwanda continuing to benefit from reforms aimed at improving the business environment and attracting investment.

Why governments care

Reducing informality is about far more than tax collection. Moody’s says countries with smaller informal sectors generally benefit from stronger institutions, more effective economic policies, and higher productivity.

Formal businesses tend to have better access to finance, technology, and skilled labor, allowing them to grow faster and create more stable jobs.

Governments also benefit from broader and more predictable revenue streams.

The African Tax Administration Forum has repeatedly argued that improving compliance and reducing leakages remain among Africa’s biggest opportunities to strengthen domestic resource mobilization.

At the same time, efforts to improve tax transparency and tackle illicit financial flows have become increasingly important as governments search for new sources of revenue.

Lessons for the rest of Africa

The report suggests there is no quick fix to reducing informality. Countries that achieved meaningful progress did so over many years through a combination of governance reforms, institutional strengthening, and business-friendly policies.

Moody’s believes recent reforms in countries such as Nigeria and Angola could eventually support similar improvements if implementation remains consistent.

However, the agency warns that gains can be reversed when governance deteriorates or reforms lose momentum.

“Reducing informality takes time, resources, and political will,” Moody’s said.

For policymakers across Africa, the message is increasingly clear. Building stronger institutions may be just as important as achieving rapid economic growth if governments want more businesses to formalize, more workers to enter stable employment, and more economic activity to move into the official economy.

As African countries search for new ways to strengthen public finances and sustain growth, the experiences of Rwanda, Benin, Tanzania, and Côte d’Ivoire suggest that governance reforms may prove one of the most effective tools available.