Can Egypt Rein in Its Informal Economy?
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?
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.
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.
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