The informal sector plays a central role in Eswatini's economy, contributing an estimated 38.4 per cent of the country's gross domestic product and accounting for approximately 61.9 per cent of total employment. This significant contribution highlights both its importance as a source of livelihoods and the structural challenges it presents to economic development. According to the African Development Bank's Eswatini Country Report 2026, the informal sector's substantial size constrains the country's ability to mobilise domestic revenue and finance development priorities.
The African Development Bank argues that bringing even a portion of the 61.9 per cent of workers engaged in informal employment into the formal economy could substantially increase tax revenues without necessarily increasing tax rates. Eswatini's domestic tax revenue stands at approximately 15.8 per cent of GDP, which the bank attributes in part to a narrow tax base, substantial tax expenditures, and weaknesses in enforcement capacity. With a significant share of economic activity taking place outside the formal tax net, revenue growth is constrained, limiting government's capacity to finance development priorities without increasing tax rates.
Informality is particularly prevalent among young people, women, and rural populations, reflecting limited opportunities in the formal economy and the dominance of small-scale, low-productivity enterprises. The report notes that while the informal economy provides livelihoods for a significant proportion of households, its scale also constrains the country's ability to mobilise domestic revenue and finance development priorities. A large proportion of informal businesses operate outside formal financial systems, limiting their access to credit, insurance, and savings products.
The African Development Bank recommends a gradual and incentive-based approach to formalisation, reducing the costs of entering the formal economy while providing tangible benefits to businesses and workers that formalise. This approach is necessary to encourage informal businesses to transition into the formal economy. Formalisation could support structural transformation by enabling small businesses to move from subsistence and low-productivity activities towards more productive commercial operations.
Formalisation could also improve productivity and expand access to finance without raising tax rates. Registered enterprises are better positioned to access finance, markets, and business support services, potentially allowing them to expand, improve productivity, and create employment. The report identifies informality as a constraint on financial intermediation and productivity, making it difficult for financial institutions to assess the creditworthiness of informal businesses and provide financing for expansion.
The dominance of cash-based transactions in the informal sector reduces financial transparency and limits the development of credit markets. Many informal enterprises are absent from formal credit registers and lack verifiable financial records or collateral. This makes it challenging for businesses to access credit and expand their operations. In contrast, formalised businesses can access finance, markets, and business support services, enabling them to grow and create jobs.
The African Development Bank's recommendations aim to address the challenges posed by the informal sector and promote economic development in Eswatini. By formalising the informal sector, the country can broaden its tax base, improve productivity, and expand access to finance, ultimately supporting long-term fiscal sustainability and economic growth. The bank's report highlights the need for a comprehensive approach to address the root causes of informality and promote formalisation.
Key points
- Formalising Eswatini's informal sector could increase tax revenues without raising tax rates.
- The informal sector contributes an estimated 38.4 per cent of Eswatini's GDP and accounts for approximately 61.9 per cent of total employment.
- A gradual and incentive-based approach to formalisation is recommended to encourage informal businesses to transition into the formal economy.
