AfDB warns Nigeria’s power crisis fuels hidden costs, weakens economy

While Nigeria struggles with erratic electricity supply, businesses are quietly paying a heavy price running on generators that drain profits and deepen economic inefficiencies.

Nigeria’s chronic power shortage is imposing a significant hidden tax on businesses, with new data from the African Development Bank showing that 70.7 per cent of firms now rely on generators to stay operational. The bank also estimates that persistent electricity outages are wiping out about three per cent of annual sales for businesses across the country.

The warning is contained in the AfDB’s 2026 African Economic Outlook report, which examines fiscal policy, taxation systems, and public service delivery across Africa. It argues that weak infrastructure, particularly in electricity supply, is undermining productivity, increasing operating costs, and eroding confidence in government systems.

According to the report, the widespread use of generators in Nigeria reflects a deeper structural failure in public service delivery rather than a temporary adjustment. Across the continent, households and firms are increasingly forced to privately provide services that governments are expected to deliver, including power, water, security, and logistics.

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The bank described these out-of-pocket expenses as “parallel levies”, noting that they function like hidden taxes that reduce disposable income while raising production costs. It warned that such conditions weaken the legitimacy of taxation systems and damage the so-called social contract between governments and citizens.

“Electricity outage losses amount to three per cent of annual sales in Nigeria, and because of this, generator reliance is widespread, with 70.7 per cent of firms in Nigeria owning or sharing generators,” the report stated.

The AfDB further observed that poor service delivery contributes to rising informality and weak tax compliance, as many businesses avoid formal systems due to limited returns in public services. It added that strengthening electricity, healthcare, education, water supply, sanitation, and public administration would improve trust in government and expand the tax base.

Across Africa, the report estimates that about $469bn in potential revenue remains uncollected annually due to weak tax compliance, poor administration, and policy inefficiencies. It also revealed that more than 40 per cent of public investment spending is lost to inefficiencies, costing the continent an estimated $299bn each year.

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The bank noted that closing these gaps could unlock up to $1.43tn in additional financing for development. It stressed that Africa must sustain growth of at least seven per cent annually over several decades to create large-scale jobs and significantly reduce poverty.

“Africa must raise annual growth to 7 per cent or higher, sustained over decades, to enable large-scale job creation and accelerated poverty reduction,” said African Development Bank President Dr Sidi Tah in the report’s foreword.

The report also highlighted Africa’s reliance on indirect taxes, which accounted for 59.9 per cent of total tax revenue in 2023, and noted Nigeria’s continued dependence on extractive-sector-linked corporate taxes, underscoring structural imbalances in direct taxation systems across resource-rich economies.