The Informal Economy, Tax Evasion, and Nigeria’s Fiscal Crisis (2015–2025)

Abstract

Nigeria’s fiscal crisis from 2015 to 2025 unfolded against a backdrop of weak domestic revenue mobilisation, macroeconomic volatility, and the dominance of a large informal economy. Despite its position as Africa’s largest economy for much of the period, Nigeria recorded persistently low tax to gross domestic product ratios, averaging between 6 and 8 percent, far below continental and global benchmarks. This study examines the relationship between the informal economy, tax evasion, and Nigeria’s fiscal crisis during this period, with particular attention to how informality and non-compliance constrained revenue generation and undermined fiscal sustainability. Anchored in Rational Choice and Public Choice Theory, the study interprets tax evasion and informality as rational responses by individuals and firms to weak institutions, low trust in government, and perceived inefficiencies in public spending. Methodologically, the research adopts a qualitative explanatory design based on secondary data, using content analysis of reports from international financial institutions, government agencies, and scholarly literature. The findings reveal that the scale and persistence of the informal economy significantly weakened tax revenue performance, while widespread tax evasion widened the gap between potential and actual revenue, reinforcing chronic fiscal deficits. These revenue gaps translated into adverse fiscal outcomes, including rising public debt, constrained fiscal space, and reduced capacity for developmental expenditure. The study concludes that Nigeria’s fiscal crisis cannot be understood solely through macroeconomic indicators but must be situated within the behavioural and institutional dynamics shaping compliance. It recommends strengthening institutional credibility, adopting incentive compatible enforcement, integrating informal activities through graduated formalisation strategies, and aligning revenue reforms with expenditure rationalisation and debt management frameworks to restore fiscal stability.