As Egypt slowly rebuilds its economy, the informal sector looms large.
By Joseph Dana | March 16, 2017
Egypt has turned a corner, and investors are returning to Africa’s third-largest economy. At least this is the estimate of leading publications. In November, the country signed a three-year, $12bn loan package with the IMF. The loan helped stabilise the economy after a period of severe crisis, partially fuelled by currency speculation, and the continued political fallout of the 2011 uprising.
Just before signing the IMF agreement in November, the government allowed the Egyptian pound to float on currency markets in a bid to attract foreign exchange. The currency quickly lost 32.3% of its value, hitting EGP13 to the US dollar before briefly jumping to more than EGP18 to the dollar in the middle of November. These wild fluctuations paved the way for an illegal market in US dollars that continues to flourish regardless of repeated crackdowns by the authorities.
Since the end of December 2016, however, the currency has gone up 15% in value, and investors are approaching Egypt with a sense of optimism for the first time since 2011. But is this turnaround sustainable over the long term?
Value of EGP vs USD (2010-17)
Source: Google Finance, 2017
Egypt’s efforts to crack down on its informal economy since the uprising shed light on its long-term prospects. In emerging markets, such as India, there have been recent pushes to formalise the economy by encouraging citizens to open bank accounts and end their reliance on cash. Such measures would revolutionise Egypt’s economy, raise significant tax revenue for the state, and re-establish state authority. But, in the current political climate, can Egypt rein in its informal economy?
Pervasive informal economy
As a largely cash-based economy, Egypt has a long history of economic activities, enterprises, and workers that do not fall under the regulation and protection of the state. After the 2011 revolution, in which President Hosni Mubarak was forced to step down, the informal economy thrived as the state weakened.
While it is extremely difficult to gauge the exact size of any informal economy, economists agree the sector makes up a large segment of Egypt’s economy. According to a report published in 2014 by the Egyptian Centre for Economic Studies, the size of the informal sector is roughly 65-70% of the entire economy, or EGP1.2-1.5trn.
Egypt’s Formal vs Informal Economy
As their country’s economy deteriorated before their eyes, Egyptians increasingly turned to the informal sector for their daily needs. Everything from food to home appliances could be obtained from informal sellers. The infrastructure was already in place for an informal economic revolution. Before the uprising, 85% of small and medium-sized enterprises, along with 10m jobs, were considered ‘informal’. The breakdown in state authority simply made such economic channels more attractive for everyone, from sellers to buyers. In fact, some Egyptians saw the spike in informal activity as a form of revolutionary entrepreneurship. People, many agreed, were taking back control over all aspects of their lives from the state run by Mubarak.
Breakdown of authority
The majority of Egypt’s population lives in major cities like Cairo and Alexandria. During the 2011 uprising, these cities became the centres of protest and fighting. With authorities consumed by the unrest, the use of public space and, by extension, the informal economy, transformed.
Omar Negati, one of the founders of the Cairo Lab for Urban Studies, Training, and Environmental Research, describes this period as the “city in flux”. He has charted how informal street vendors, who were previously barred or confined to special areas under Mubarak, began to assert themselves in post-revolution Cairo. In the city of 20m, street vendors took over public streets and created several informal open-air markets. Around Tahrir Square and Talaat Harb Street, these vendors used the breakdown in authority to sell everything from clothing to home appliances. This type of informal economic activity had a disastrous effect on traffic patterns in an already congested city, and once control was re-established under Abdel Fattah El Sisi, many of these markets were dismantled.
When the former military chief El Sisi assumed power in 2014, one of his first acts of business was to re-assert state authority in public spaces throughout Cairo. Tahrir Square, a large roundabout that became the epicentre for the 2011 protests, was declared a sterile zone so as to prevent additional protests.
“There is a distinction between informal practices in public space, which I call soft practices, such as street vendors and informal traffic organisation, and more concrete, long-term practices, such as building houses illegally on state land,” Negati said. “In terms of public space, the state has re-asserted its power and either evicted street vendors or relocated them and administered more control over traffic or informal use of public space.” While El Sisi has not been able to dismantle the informal economy, his government has shut down informal economic activity associated with the takeover of public space.
Can the state transform the informal economy?
Some consider the informal economy a boon for savvy entrepreneurs, and Egyptians struggling to make ends meet in a dire economic climate. But that hasn’t stopped the Egyptian government from cracking down on some informal activity. While the state would like to regulate more parts of the economy and receive the corresponding tax revenue, the delicate political situation has created a lack of will for a serious crackdown. While removing street vendors from public spaces in Cairo helps to establish state authority, forcing people to stop using informal labour is quite another thing, according to Timothy Kaldas, an analyst at the Tahrir Institute for Middle East Policy. “The informal economy has always been a huge feature of the Egyptian economy,” Kaldas said. “While the government uses VAT to bring that down, as of late I haven’t noticed serious efforts to bring corporate taxes and personal income taxes online in a more aggressive way.”
According to Kaldas, the government is concerned that it is pushing its citizens to the edge of their tolerance. After reports circulated the government was going to cut bread subsides, people took to the streets in protest. Given that the state will soon have to raise energy prices as part of the IMF loan package, Kaldas believes there is no appetite to crack down on the informal economy at this time. “Formalising the economy is definitely something good for the Egyptian government, and it is good for the country, it is just something that I think is pretty far away right now because there are so many other pressing concerns already putting a strain on people. And it also requires bureaucratic reforms they are not ready to do, especially with tax collection.”
Is banking the solution to informality?
India’s surprise announcement last year that it would abolish the 500- and 1000-rupee notes to force more Indians into the banking sector was watched closely across emerging market countries. The Indian government claimed the move would reduce corruption, halt money laundering, and curtail the ability of people to use illicit cash for nefarious activities. Like Egypt, India faces enormous hurdles when it comes to taxation in the informal economy. A decrease in the use of cash would impact the informal economy and bring more Indians into the formal sector. This would also increase the state’s tax revenues. Adopting a more cashless model, whereby people are essentially forced into opening bank accounts because certain cash denominations are abolished, is a long way off in Egypt. For one thing, Egypt’s banking sector is not nearly as advanced as India’s, and the bureaucracy of its tax system is in dire need of reform.
“If you don’t have to register with the tax authority, you don’t register. And it is not just because of the money, but because it is a miserable experience,” Kaldas told me when I asked if Egypt could attempt measures similar to India in trying to banish high denomination currency notes. “Egyptian tax officials assume you are lying to them, and, to be fair, many people are. But you basically have this absurd situation in which you have a largely cash-based economy and you are debating whether or not your numbers are real.”
As Egypt fulfils its end of the IMF loan package, the country will have to devalue its currency and push ahead with painful subsidy cuts. Given the reaction to perceived bread subsidy reductions, and the dire state of Egypt’s banking and tax collection sectors, it is unlikely the country will make serious moves to formalise large segments of its economy in the short term. The political chaos unleashed in 2011 still plagues the state. While investors are sheepishly returning to the country, it will take years for Egypt to establish the power needed to formalise its economy and reap the tax revenue it has lost to informal activity for decades.