Bangladesh's shadow economy is too big to ignore

Walk through any neighbourhood market in Dhaka, and you will pass dozens of small shops, street vendors, and daily wage workers who exist entirely outside the government's economic radar. No tax registration, no regulation, no official record of their income.

This is Bangladesh's informal economy, and it is not a marginal phenomenon. It is the engine room of the country's economic life, and the government cannot reach its growth ambitions without confronting it.

The informal economy consists of economic activities that go undocumented, untaxed, and unregulated by the state. It includes small enterprises, street vendors, daily wage labourers, and unregistered shops all operating outside the government's legal and fiscal framework. Because these businesses sit outside the tax net and beyond regulatory oversight, their contribution to the economy goes largely unmeasured, and therefore unaccounted for in policymaking, even though that contribution is enormous.

Globally, the informal economy accounts for an estimated 25 to 35% of GDP and absorbs roughly 58 to 60% of the world's workforce, close to two billion people, according to tracking by the World Bank Group and the International Labour Organisation (ILO). Bangladesh sits well above that global average. The Labour Force Survey 2024 found that 58 million people in Bangladesh are informally employed, out of a total employed population of 71.7 million, a share of roughly 81%.

Agriculture illustrates the scale of the problem starkly. The sector contributes only 11 to 12% of national GDP, according to the Bangladesh Bureau of Statistics (BBS), yet it employs nearly 38 to 40% of the population. Its footprint in direct tax revenue collected by the National Board of Revenue (NBR) is negligible by comparison. The BBS estimates that around 97% of agricultural employment in the country is informal, a reflection of an economy still built on smallholder farming, daily wage labour, and unpaid family work, largely without contracts or legal protection. In recognition of this reality, the interim government kept annual agricultural income up to Tk5,00,000 tax-free, a threshold notably higher than the standard individual tax-free limit of Tk3,75,000, an acknowledgement that formal taxation and rural livelihoods do not yet fit together cleanly.

Retail tells a similar story, but with a sharper edge of tax avoidance rather than structural exclusion. Many small shops operate on a cash-only basis specifically to avoid registering for a Tax Identification Number (TIN). The NBR's VAT Intelligence and Investigation Directorate has reported that up to 88% of such shops exist entirely outside the tax system, and a separate NBR survey found that 60% of shops in the capital pay no taxes at all. Unlike agriculture, this is less a matter of poor farmers lacking formal infrastructure and more a matter of active evasion by businesses that could plausibly be brought into the tax net with the right incentives and enforcement.

What makes Bangladesh's informal sector particularly difficult to formalise is that it is not merely an administrative gap; it is, in places, actively protected. Grassroots extortion, tender manipulation, and informal levies on transport, local markets, and construction sites are frequently linked to local and national political patronage networks. Local musclemen and grassroots activists collecting these levies often do so under the cover of political affiliation, which can function as a shield against law enforcement. This dimension deserves far more independent scrutiny and reporting than it currently receives, since it suggests that parts of the informal economy persist not because the state cannot see them, but because certain actors benefit from the state not looking too closely.

It is tempting to treat the informal sector as simply a governance failure to be cleaned up. That framing is incomplete. For millions of Bangladeshis, informal work is not a loophole; it is their only viable entry point into the labour market, offering flexibility and livelihood where the formal sector offers neither jobs nor accessible capital. Any push toward formalisation that treats informal workers as tax evaders to be punished, rather than as an underserved population to be integrated, risks doing more harm than good.

The government has set a five-year plan aimed at turning Bangladesh into a trillion-dollar economy by 2034. That target is difficult to reconcile with a tax base that excludes the majority of the working population. Bringing informal economic activity into the mainstream, even partially, would expand domestic revenue, reduce the state's reliance on debt and aid, and stabilise public finances. It would also let the government extend disaster relief, microcredit, and skills training to workers who are currently invisible to the systems meant to support them.

The author is a student of Department of Mass Communication and Journalism at University of Dhaka

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.