Egypt's Informal Economy: Untapped Potential That Could Add $127 Bln to GDP

Egypt’s informal economy still accounts for 40 percent of GDP, despite government efforts to regulate it through formal integration, according to recent data from the Cabinet's Information and Decision Support Center (IDSC).

A report by the World Bank (WB) in July also reveals that informal employees make up 62.5 percent of Egypt's labor force.

As the government proceeds with its privatization program and the non-oil sector faces difficulties due to the Ukraine war, the situation is unlikely to improve.

Egypt's GDP reached EGP 9.8 trillion ($318.23 billion) in the financial year 2022/2023, suggesting that the informal economy could be valued at around $127 billion.

This significant figure is concerning given Egypt's substantial external debt and budget deficit.

The impact of informality on the economy accounts for the loss of approximately EGP 400 billion ($13 billion) in taxes annually, according to IDSC data.

"The informal economy touches on many aspects of the daily lives of Egyptians. It has nearly the same volume as the formal economy. Therefore, the integration of the informal economy is crucial to achieving an economic leap for Egypt," banking expert Mohamed El-Beih commented.

As taxes account for over 75 percent of revenues allocated for the 2023/2024 national budget, collecting more taxes from the informal economy has become a government priority.

Some say this is the wrong approach. According to Khaled Abu Shadi, an economic analyst, "To encourage participants in Egypt's informal sectors to be a part of the formal economy, the government should offer more than just taxes."

"The government should talk about serious measures to rebuild bridges with the informal economy and consider offering tangible benefits to incentivize informal establishments to legitimize their activities," Abu Shadi suggests.

El-Beih concurs, suggesting that "huge tax incentives and procedural facilities should be put in place to encourage citizens active in the informal economy to regularize their activities."

"The tax authority can enable them, for instance, to self-report their revenue and pay marginal tax for a preliminary period," adds El-Beih.

On another note, Abu Shadi cautions that the government should take great care when implementing any regularization scheme.

That sector, says the economist, "accounts for a major portion of the Egyptian labor market and economic activity in the country."

In Egypt, around 68 percent of informal workers in 2012 were still informal through 2018, while 19 percent became unemployed or left the labour force, a World Bank report said.

Another WB report stated that about 16 percent of informal salaried workers became formal workers and 24 percent of formal salaried workers became informal workers in Egypt, between 2012 and 2018.

The same report revealed that half of Egypt’s informal wage workers lost their jobs between February 2020 and February 2021 due to the COVID-19 pandemic, while the impact of the Ukrainian war pushed more people into poverty.

The report claimed that at least two-thirds of private sector workers in MENA's middle-income countries, including Egypt, are working in informal jobs as employees in low-productivity micro-enterprises with fewer than 10 workers.

Over 90 percent of working Egyptian youth are employed informally.

Underemployed and unemployed In Cairo, it is not strange to see a bachelor's degree holder working in a local coffee shop (kahwa), a job that requires no special skills and historically was mostly filled by unskilled, uneducated workers.

Other young Egyptians with prestigious degrees open small food trucks and mobile cafes, a recent trend in middle-class and upper-middle-class Cairo neighbourhoods.

WB data shows that 31 percent of Egypt's informal workers have university degrees.

According to official statistics, the annual number of university graduates in Egypt reached 505,455 in 2021.

What is the appeal of informal work? The informal sector is of course characterized by low barriers to entry.Skill and capital requirements are minimal, allowing many uneducated youths to participate. Small workshops, street stalls, carts, and kiosks can start with just a few thousand pounds.

Low overheads and the lack of taxes or regulations allow informal firms to offer cheaper goods and services.

Much of the informal economy consists of family-based and home-based work. Many women, for instance, sew clothes at home while men sell them in the market. Child labour is also common with children assisting parents or working independently.

The cost of inflation Despite the efforts of consecutive governments, nearly a third of Egyptians are classified as poor according to the latest official figures for 2019/2020.

These figures may have increased significantly since 2020, as more and more middle-income families are crushed by inflation, recorded at 13.9 percent for 2022.

Inflation is expected to average 32.3 percent in 2023, after averages of 5.2 percent and 5 percent in 2021 and 2020.

Take the example of two poor Egyptians living in the old Sharabya suburb of Cairo, Tarek and Rizka.

Tarek is a 45-year-old unskilled and illiterate man that spends the year selling seasonal foods and drinks. He sells hummus drinks in the winter and Barbary figs in the summer.

"What should I do?” he asks. “I try to earn my bread by legitimate means. I once worked in a huge restaurant for years and after it closed, I haven't found many opportunities."

Asked about what the government should do for him he said, "I need them to control prices. They are constantly increasing to unreasonable levels."

Rizka, on the other hand, no longer works. She is in dire need of a pension; at 65 years of age, she has been selling roasted corn in a poor neighbourhood for nearly 30 years since her husband died.

According to a WB report, Egyptian government assistance programs benefit 25 percent of Egypt’s poorest households and the country's social security registries cover more than 50 percent of the population.

The government's budget for subsidies and social security networks was increased from EGP 358.4 billion in FY2022/2023 to EGP 529.7 billion (around $17.1 billion) in FY2023/2024. Egypt spends 10.9 percent of its GDP on social security, according to the World Bank.

The informal economy goes digital Not all informal workers are food sellers or labourers. Egypt’s ‘gig economy’ has grown precipitously, employing highly-skilled and highly-educated Egyptians in online businesses, even on Facebook pages.

The Egyptian government imposes a 10 percent income tax on freelancers and a 14 percent VAT on each item sold online.

"The government has taken steps to regulate the online freelance sector. However, there is a much larger sector more in need of regulation; the private tutoring sector," Abu Shadi commented.

"Complicated procedures for licensing and the increase in relevant fees foster efforts to circumvent official regulations," he added.

For his part, El-Beih referred to the CBE's efforts to include the informal economy in official banking or semi-banking channels.

Egypt's financial inclusion has recently grown by 147 percent, and over 42 mln Egyptians now have bank accounts.

According to WB Financial Inclusion data from 2021, 61 percent of Egyptians lack bank accounts due to insufficient funds. Meanwhile, only 20 percent of Egyptians made or received any digital payments in 2021.

"The CBE has achieved a lot with banking the unbanked, raising the penetration rate from 17 percent to up to 42 percent,” said El-Beih.

The penetration rate refers to the percentage of the population using banking services.

“There is, however, still much to be desired concerning the full integration of informal economic activities," he added.