The main objective of the article is to study the interaction between COVID-19 pandemic and the informal economy and its impact on the Algerian economy using SIR epidemiologic model. The article expands SIR model to count for economic decision made by individuals and the availability of treatment. The results show that counting for the size of informal economy is critical when analyzing the impact of COVID-19 pandemic on the Algerian economy. It is noted that the policy of optimal containment augmented the severity of the recession from 2.15% to 7.87%. Nevertheless, it saves the lives of 8300 people. Based on the best containment policy, the study suggests that starting reducing containment policy on 14\06\2020 is too early because in this period the optimal containment policy was not optimal, and as result of this decision the number of infected individuals started to increase again.