Egypt's massive informal economy: Transitioning to formality

Nahla Abul-Ezz, Thursday 23 Sep 2021

The government is encouraging the informal sector of the economy to formalise through various initiatives and incentives

 40 per cent of unregistered labour works in sectors such as construction, blacksmithing, plumbing,
40 per cent of unregistered labour works in sectors such as construction, blacksmithing, plumbing, and carpentry

Egypt’s informal economy largely operates outside the formal tax and social-security system, meaning that in addition to its unfair competition with the formal sector, it is also able to offer goods and services at lower prices since it avoids paying taxes and other fees.

However, the informal economy’s days may be numbered as the government is taking various initiatives and offering various incentives to help the informal economy to formalise.  According to a former head of the Egyptian Tax Authority (ETA) speaking on condition of anonymity, the ETA has been approaching businesses in the informal sector making it in their interest to formalise.

Such businesses must either register with the tax and insurance system, thus joining the formal economy, or risk being charged with tax evasion, he said. The ETA moves, started in 2017, have led to an increase of tax revenues of LE700 billion, with a larger target this year.

However, other measures may also be required in order to encourage people to join the formal sector of the economy.

According to Ihab Dessouki, head of the economics department at the Sadat Academy for Administrative Sciences in Cairo, workers should receive incentives to join the formal economy. There should be moves to reduce complex administrative procedures that may discourage people from working in the formal economy, he said.

The government has tools that can be used in this regard, he added, and these should be publicised as widely as possible. Among such tools are priority in joining the universal health insurance system for people who leave the informal sector to join the formal economy, the offer of social-security insurance, and the legal licensing of workplaces.

Workplaces could also be upgraded through the provision of bank loans and offers of advice on business practices.

Existing commercial and industrial complexes could be expanded with a special focus on youth-led projects, Dessouki said. “Young people should be encouraged to invest in the industrial and agricultural sectors, which will result in the country producing more products to international standards and thus increasing exports,” he added.

“This kind of involvement on the part of young people will reflect positively on GDP figures, raise economic growth rates, decrease unemployment, generate jobs, and increase tax revenues,” Dessouki said.

According to the Central Agency for Public Mobilisation and Statistics (CAPMAS), Egypt’s informal economy is estimated to represent 50 per cent of the total economy, producing goods and services valued at LE3 trillion and employing four million workers.

A study by the Tax and Customs Committee of the Federation of Egyptian Industries revealed that the state loses some LE400 billion in uncollected taxes and other revenues.

Such figures indicate that it is imperative to integrate the informal sector into the formal economy, said Mohamed Al-Bahi, a member of the board of the Federation of Egyptian Industries.

The government has already passed legislation intended to improve the economic environment, including by allocating loans worth LE200 billion at low interest rates to small and medium-sized enterprises (SMEs), he said. This campaign has created two million jobs.

It has doubled the amount allocated to the private-sector financing initiative to LE200 billion, and Law 152/2020 on developing micro, small, and medium-sized enterprises encourages informal-sector business owners to access the formal sector and benefit from services in the financing, marketing, and training fields.

The lack of integration between the formal and non-formal economic sectors in Egypt has been a challenge for years and is an obstacle to economic development, Al-Bahi said.

Economic analyst Mohamed Negm said that this lack of integration is a global and not only a local problem, however. He said that some 26 million Egyptian workers work in the formal sector, but that 40 per cent of unregistered labour works in construction, blacksmithing, plumbing, and mechanics’ workshops, as well as grocery stores and unlicensed food production facilities.

There are some 10 million workers working in micro, small, and medium-sized enterprises with annual total wages estimated at LE120 billion, Negm said, together producing goods and services worth LE1.2 trillion.

There are also other good reasons for business owners to join the formal sector, since taxes for those coming in from the informal sector have been reduced from 22 per cent to one per cent of profits with five-year exemptions, he added.

*A version of this article appears in print in the 23 September, 2021 edition of Al-Ahram Weekly

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