For many years, South Africa has been facing considerable challenges related to the high unemployment rate, poverty, and inequality. As an alternative to alleviate the amount of joblessness, people have shifted to the creation of their informal employment through infiltration in the informal economy to generate income and livelihoods. This study seeks to examine the significance of the informal economy regarding its contributions and constraints to the local economic development with a focus on the Thembisile Hani Local Municipality in South Africa. Research results revealed that the informal economic sector is significant in contributing to employment creation, poverty reduction, income generation, vibrant local economic development, capacity building, and mentorship. Although the informal economic sector suffers from the lack of infrastructure, capital, relevant skills, security concerns, and excessive regulations. The study also established that the entire Government is accountable for maintaining informal economy businesses through appropriate management, good governance, and suitable backing programmes.