Formalizing Africa's Informal Sector Through the AfCFTA: An Opportunity for Economic Transformation

Written by
Funke Aderonmu
Sept. 11, 2023

by Funke Aderonmu, MPA '24 for Annotations Blog

At the African Union’s (AU) 36th Annual Summit, member states declared 2023 as “The Year of AfCFTA.” AfCFTA, or the African Continental Free Trade Area Implementation, represents the world’s largest free trade area, covering 55 countries and an estimated 1.3 billion people, and aims to create a single common market for trade across Africa.

Whether the AfCFTA delivers maximum impact will depend on its effect on an often overlooked but integral feature of African economies–the informal sector. The informal sector involves economic activity that is not registered, regulated, or protected by existing legal or regulatory frameworks. In Africa, 85% of the population is engaged in informal labor, making it the region with the largest share of workforce in the informal sector. In Sub-Saharan Africa alone, the informal sector employs 90% of the labor force and accounts for as much as 62% of GDP. Furthermore, informal cross-border trade, which consists of individuals who buy and sell goods in unregulated markets and traders who bypass import and export processes, accounts for 30-40% of trade in the region.

Evidence suggests that a larger informal economy is linked to higher poverty and income inequality, along with smaller declines in poverty over time. Informal workers are less likely to have labor protections, decent quality jobs, or access to social protection programs. Women and youth make up a disproportionate share of informal traders in Africa, often due to limited incomes and formal employment opportunities. Notably, countries with a larger informal sector tend to also have lower levels of trade openness.

Formalizing the informal sector can yield several benefits for regional trade, such as stronger safety, health, and quality standards for traded goods; improved access to financing for informal firms; revenue and data collection to develop better trade infrastructure and procedures; and better working conditions and protections for informal workers.

If the AfCFTA is to fully achieve its aims of trade, growth, and poverty reduction, the informal economy demands serious attention from policymakers. Supporting and formalizing informal cross-border transactions would accelerate trade, spur economic growth, and reduce poverty. Fortunately, an initiative of the AfCFTA, the Pan-African Payments and Settlements System (PAPSS), holds great potential for uplifting and harnessing the dynamism of Africa’s informal economy.

Women in Africa walking along the streets of a market

The AfCFTA and Intra-African Trade

Effective since 2019, AfCFTA has been lauded as an engine for regional economic growth and integration in Africa. Currently, there are generally low levels of intra-African trade (just 15% of the continent’s total trade activity), but AfCFTA is expected to have boosted intra-African trade by 81% by 2035, spurring 9% income per capita growth and lifting 50 million people out of poverty. 

To achieve these outcomes, the AfCFTA contains five main mechanisms: 1) rules of origin that determine which goods and services can be traded duty-free under the agreement, 2) tariff concessions designed to reduce tariffs across member states, 3) an online monitoring mechanism to report non-tariff barriers to trade for the purpose of eliminating them, 4) the African Trade Observatory, a portal hosting information and statistics on trade opportunities, and 5) PAPSS, which will facilitate cross border payments in local currencies. 

Unpacking the Pan-African Payment and Settlement System (PAPSS)

PAPSS was designed in 2019 by the African Export Import Bank (Afreximbank) to provide a single continent-wide system for processing, clearing, and settling cross-border payments. Essentially a digital finance platform, PAPSS facilitates cross-border payments through a series of steps. First, a buyer issues payment instructions in their local currency to their bank or payment service provider. The provider then transmits these instructions to PAPSS, which verifies the instructions and forwards them to the seller’s local bank. Lastly, the seller’s bank transfers the payment funds to the seller in their local currency. PAPSS processes payments in about 120 seconds and makes currency settlements within 24 hours of a transaction. After a successful pilot in six countries, PAPSS was launched for commercial use in 2022, with plans to reach all five major regions of Africa by 2023. 

PAPSS reduces costs associated with cross-border payments by eliminating the need for third-party currency conversions. Such conversions are estimated to cost Africa $5 billion USD annually; currently, 80% of intra-African payments go through Europe or the United States before reaching the intended recipient. PAPSS reduces these transaction costs, offering a boon to regional trade. 

If the AfCFTA is to fully achieve its aims of trade, growth, and poverty reduction, the informal economy demands serious attention from policymakers.

By reducing the need for third-party currencies in cross-border payments, the resulting cost savings make PAPSS a more financially viable option for small scale traders. Unlike mobile money operators like M-PESA and TerraPay, which facilitate small-scale person-to-person transactions and have low transaction limits, PAPSS can facilitate business-level and person-to-person transactions. The variety of transactions possible under PAPSS will prove beneficial for small- and medium-scale informal traders engaging in retail transactions that may not be feasible with money transfer operators and mobile money platforms. 

Making PAPSS Work for the Informal Trade Sector

To ensure PAPSS reaches the informal sector, the AU, AfCFTA Secretariat, and Afreximbank should address the following priorities in implementation: 

  • Low-Cost Services: PAPSS services should be provided at a low cost to informal traders. Evidence from East and Southern Africa suggests high costs pose a barrier to digital cross-border payments uptake among informal traders. 
  • Financial Inclusion and Accessibility: As a high share of informal traders lack bank accounts or access to banking services, registering non-bank service providers on PAPSS will be necessary for reaching these traders. Additionally, service providers will need to offer their services in a variety of languages and simplify their documentation requirements since many traders vary in education and digital literacy levels. In 2022, Afreximbank partnered with MFS Africa, a fintech company, to expand the reach of PAPSS to 320 million users, including many without bank accounts. Similar partnerships can be formed with other fintech organizations and service providers that serve un- and under-banked customers.
  • Awareness and Education: PAPSS Chief Executive Officer Mike Ogbalu has identified acceptance and adoption of PAPSS as a major obstacle to full implementation. Accordingly, PAPSS leadership should partner with stakeholders such as regional economic community trade information desks, traders’ associations, NGOs, financial service providers, and other actors to better inform traders about the system and its benefits. 
  • Operational and Regulatory Alignment: PAPSS will need to bridge gaps in interoperability along with regulatory, legal, and operational discontinuities among African countries. For instance, member states may have different regulations concerning which products are permitted for direct currency transactions under PAPSS, which could leave traders of certain goods unable to use the platform. Afreximbank and AfCFTA leadership should provide guidance to help countries harmonize and coordinate regulatory and operational parameters for coherent implementation across Africa. 
  • Security and Consumer Protection: In the informal economy, the challenge to advance productivity and reduce costs without enabling illicit trade and transactions remains pertinent. Consequently, Afreximbank must put in place safeguards to ensure compliance with illicit trade restrictions, anti-money laundering laws, and other regulations concerning security. Afreximbank should also bolster consumer data privacy and financial protections for users, particularly for non-commercial users who may more likely be informal traders. 


As African policymakers seek to advance the AfCFTA, integrating the informal sector into formal intra-African trade should be a necessary part of implementation. PAPSS holds significant potential for improving and formalizing informal cross-border trade, but for its benefits to reach the informal economy, PAPSS must be a) made available at low cost, b) accessible to individuals who are underbanked, c) widely known and adopted among relevant financial institutions, d) coherent and standardized in its regulations across member countries, and e) secure against illicit activity and data privacy violations.

Headshot of Funke Aderonmu MPA 24
Meet the Author: Funke Aderonmu

Funke Aderonmu is an MPA '24 student at Princeton University's School of Public and International Affairs, where she studies international development. Prior to Princeton, she worked for the USAID Bureau for Resilience and Food Security supporting programs to reduce global hunger, malnutrition and poverty. Recently, Funke spent summer 2023 in Rwanda researching policy innovations to strengthen the role of youth in African food systems. She is passionate about developing evidence-based and equitable policy solutions to combat poverty and promote inclusive economic development in Africa and globally. Funke holds bachelor's degrees with honors in international relations and economics from the University of California, Davis.