Executive Summary
Nigeria’s fiscal operations have continued to yield expansion in fiscal deficit amidst rising expenditure and inadequate revenue. The revenue challenge is rooted in volatile oil prices and production constraints, as well as an inefficient tax system that has consistently yielded a wide tax gap. Among other drivers of a wide tax gap in Nigeria is the existence of a large informal economy, which can be harnessed to narrow the tax gap.
Generally, the shadow economy covers all economic activities that are intentionally hidden from regulatory oversight for different reasons, including tax evasion. It is usually marked by heavy reliance on cash-based transactions, unregistered businesses, and informal employment. It is driven by high unemployment, low trust in institutions, complex tax systems, and limited access to finance. Although it provides income for millions, it also reduces government revenue, distorts policy effectiveness, and limits access to social protections. Available data indicate that the average size of the shadow economy in Nigeria was 55.1 per cent of GDP for the period from 2010 to 2020. Nevertheless, recent estimates indicate that the size of the shadow economy contracted to 30 percent of GDP in 2023, due to reforms aimed at improving the ease of doing business and promoting financial inclusion.
In addition to existing policies targeted at improving the ease of doing business and enhancing financial inclusion, the implementation of the Tax Reform Acts 2025 would simplify tax administration, widen the tax base, close loopholes for tax evasion, and encourage voluntary tax compliance, among other benefits.
This brief, therefore, recommends:
i. Simplification of business registration and tax processes using a model similar to agent banking for wide coverage;
ii. Deepening financial inclusion and incentivizing infrastructure for digital payments;
iii. Strengthening and enforcing regulations on property rights and anti-corruption measures; and
iv. Leveraging extensive use of technology and Artificial Intelligence in automating tax assessment and monitoring compliance.
Expanding the formal economy through financial, tax, and business inclusion holds enormous potential for unlocking significant tax revenue to meet growing fiscal needs and engendering economic growth and development in Nigeria.
