Turning Lagos Flows Into Bankable, Taxable Cash-Flows

Lagos’s 16% share of Nigeria’s informal economy is a direct signal about fiscal capacity, banking depth and sovereign risk. Using the IMF October 2025 baseline, Nigeria’s nominal GDP stands at roughly US$285 billion (calendar year). Headline CPI eased to 18.02% year-on-year in September 2025 after five consecutive monthly declines. The 10-year naira benchmark traded near 15.58% on 17–21 October 2025, while gross foreign reserves rose to about US$42–43 billion in September. Against that macro backdrop, locating so much unrecorded activity within one metropolis concentrates both risk and upside: Lagos holds around a tenth of the population yet drives a sixth of shadow output, compressing the federal tax base and weakening monetary transmission through unbanked cash flows.

The transmission mechanism is straightforward. Informality keeps transactions outside tax and supervisory systems, lowering the effective tax take and depriving firms of bankable histories. That raises the sovereign risk premium embedded in local yields and weakens the credit channel. With Nigeria’s tax-to-GDP ratio still in single digits and private-sector credit below 20% of GDP, the state finances itself at a nominal long rate above 15%, and banks price smaller enterprises at even higher spreads to cover information risk. Lagos’s concentration of informal trade and services therefore suppresses the multiplier from urban scale into productivity and formal employment.

Peer benchmarks underscore the gap. South Africa’s shadow economy is commonly estimated near the high-teens to c. 20% of GDP; Kenya sits around 30%. Nigeria’s broader estimate above 50% places it structurally closer to frontier markets despite deeper capital-market infrastructure. That divergence shows up in market behaviour. The NGX All-Share (NGSEINDX:IND) gained roughly 43–47% year-to-date by mid-October 2025 in naira terms, supported by bank recapitalisation and nominal earnings, yet foreign participation remains subdued because reliable financials and audited supply-chain data are sparse across the long tail of vendors and distributors. Oil near US$80–90/bbl (CL=F) and a reserves rebuild help the external account, but the domestic risk premium will not compress sustainably without demonstrable formalisation.

Policy levers are specific and measurable. Geocoded business registration, unified municipal levies, digital invoicing tied to banked payments, and eligibility for stalls, rights-of-way and logistics permits only upon proof of registration convert transactions into data. Once visible, flows become underwritable cash-flows. Assume Lagos shifts 1 percentage point of its informal gross value added into the formal net within 12 months, an effective tax yield of 7% and nominal output growth near 12%. The federal revenue impulse would equal roughly 0.08% of national GDP in year one and cumulate with each additional point, allowing lower short-tenor bill issuance and narrowing the sovereign term premium. That, in turn, tightens the link from policy rates to market rates, gradually lowering loan pricing for small firms as default uncertainty falls.

Feedback loops matter. As compliance rises and payments migrate into bank channels, FX market turnover at the Nigerian Autonomous Foreign Exchange window improves, stabilising USDNGN=X through more predictable non-oil inflows. A more credible fiscal path—demonstrated by a faster rise in Lagos internally generated revenue than in its nominal state GDP—supports duration demand from local institutions, enabling the 10-year yield to compress off the mid-15s without eroding ex-ante real returns while CPI trends lower. Lower yields reduce interest-crowding-out on private credit, reinforcing formalisation through cheaper working-capital lines and invoice discounting.

Set time-bound tests to validate this path. By June 2026: Lagos IGR growth should exceed nominal state-GDP growth by at least 200–300 basis points; average monthly FX turnover should hold above US$8.5 billion with a narrower official spread; the 10-year naira yield should compress by 75–100 basis points versus mid-October 2025. By end-2027: formalisation of roughly 15–20% of Lagos’s informal flow should lift Nigeria’s real GDP growth toward 4% from a 2025 pace near 3–3.5%, while sustaining a lower sovereign risk premium in both local duration and Eurobond curves. The 16% Lagos figure is therefore not a local curiosity but a national barometer: it quantifies whether policy can translate dense urban commerce into taxable, bankable cash-flows and cheaper capital.