Abstract. Full Text Article available at: http://www.indianjournals.com/ijor.aspx?target=ijor:ijrss&volume=3&issue=2&article=013The main objective of this study was to assess the informal sector and its contribution to the Tanzanian economy having Arusha municipality as the case study. The study attempted to find out the level of contribution the informal sector is making to the economy by looking at a number of factors, which were entrepreneurial skills, capital, production technique, and legal status. The study employed mainly qualitative approach in data collection and analysis after which the researcher identified a number of factors that affect contribution of informal sector to the economy. They included lack of permanent centers for doing business, lack of entrepreneurial skills, absence of market, market pressure resulting to low commodity prices, too high taxes established as well as unstable weather conditions. It also went further into suggesting the possible recommendations/policies to the government and policy makers in order to improve the current situation that included provision of entrepreneurship training, establishment of permanent business places, formation of small groups for easy accessibility to loans and education pertaining to formalities in obtaining those loans from financial institutions.