African governments must create a more supportive environment for small businesses if they hope to reduce the size of the informal economy and broaden their tax base, according to Economic Analyst Walter Nguma.<\/p>\n
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His assessment follows a recent Moody’s Ratings report which found that about 55% of Nigeria’s economy operates outside the formal tax system. The report also highlighted differences across the continent, noting that countries such as Rwanda are making progress in reducing informality, while Benin and Tanzania continue to face high levels of informal economic activity.<\/p>\n
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Nguma stated that the persistence of informality is driven by several distinct factors, including limited financial literacy, low levels of formal education, complicated tax procedures, and widespread mistrust of government institutions. He noted that many small business owners view taxation as a burden rather than a contribution to public services, particularly where concerns about corruption and the misuse of public funds remain prevalent.<\/p>\n
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According to Nguma, many entrepreneurs feel they have built their livelihoods with little or no government support and are therefore reluctant to enter the formal tax system, while fear of regulatory scrutiny, enforcement measures, and bureaucratic processes further discourages compliance.<\/p>\n
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To address these challenges, Nguma called on governments to improve engagement with small businesses, simplify tax administration, and provide greater support through access to finance and business development programmes. He argued that policymakers should focus on building trust and demonstrating the benefits of formalisation rather than relying on punitive enforcement measures. Nguma also highlighted the need for stronger links between small businesses and financial institutions, noting that many entrepreneurs operating at lower levels struggle to access the credit and support needed to grow.<\/p>\n
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Creating a more inclusive and supportive business environment, he concluded, would encourage more enterprises to formalise, helping governments increase tax revenues while supporting economic growth and job creation across the continent.<\/p>\n
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