Informality and Taxation in Morocco: Challenges for Revenue Mobilization

Abstract

The informal economy represents a major challenge for developing economies due to its economic, social, and fiscal implications. Although several studies have estimated its size in Morocco, existing estimates mainly cover periods prior to the COVID-19 pandemic and do not assess the potential for revenue mobilization associated with its formalization.

This article seeks to answer the following question: to what extent could the gradual formalization of part of Morocco’s informal economy contribute to broadening the tax base and improving public revenue mobilization? To address this issue, the study estimates the size of the informal economy in Morocco using a MIMIC (Multiple Indicators Multiple Causes) model over the period 1996–2024 and then evaluates the potential for revenue mobilization associated with its gradual formalization through a scenario-based approach.

The results show a decline in the estimated size of the informal economy before the COVID-19 pandemic, from 39.9% of GDP in 1996 to 32.61% in 2019, followed by an increase reaching 35.98% in 2024. The analysis of determinants highlights the positive effect of the tax burden and unemployment on informality, while government effectiveness and economic openness contribute to reducing it.

The fiscal assessment is based on three scenarios corresponding to assumptions of integrating 10%, 15%, and 20% of the informal economy into the tax base. The results indicate a theoretical revenue mobilization potential ranging from 0.61 to 0.84 percentage points of GDP under the conservative scenario, 0.91 to 1.26 percentage points of GDP under the central scenario, and 1.21 to 1.69 percentage points of GDP under the high scenario over the period 2002–2024. These estimates do not represent actual revenues that can be immediately collected, but rather the potential associated with a gradual formalization process.

Classification JEL: E26, H20, H26

Paper type: Empirical Research