Egypt Pulse

How will Egypt integrate its shadow economy in its official one?

Article Summary
A study shows that Egypt’s shadow economy amounts to about $400 billion a year, prompting the government to merge it with its official economy through a series of new laws.

CAIRO — Naama al-Farmawi and her friend May Abdel-Moneim head to the Korba area in Cairo’s Misr al-Jadida district every morning, carrying sandwiches wrapped in bags with stickers that read "Naharak sa3eed" (Have a nice day) and sell them to passersby and workers.

For years, Farmawi has dreamed of running her own street kiosk, instead of selling her products on the corner of the street.

“All I need is a permit from the district to run and expand my business and preserve my rights and fulfill my [legal] duties to the state,” Farmawi told Al-Monitor.

According to a five-year study by the Federation of Egyptian Industries’ Tax and Customs Committee that was published in December, informal financial transactions in Egypt amount to roughly $400 billion per year. The study was sent to the Ministry of Finance.

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Head of the Tax and Customs Committee, Mohammed al-Bahi, said in a Dec. 4 press statement that the study aims at finding ways to integrate the shadow economy in the country’s official economy, in a bid to achieve unprecedented financial returns and to preserve society.

Bahi said that the study addresses the disadvantages of the underground economy and ways to solve them. The study also suggests solutions that include the establishment of a higher tax council, turning the Egyptian Tax Authority into a public authority, amending the value-added tax laws, unifying the tax rate, adopting a law for small and microenterprises, as well as encouraging e-payments instead of cash transactions.

Last month, the Ministry of Finance completed the preparation of the draft tax law for small and medium enterprises and will submit it to parliament for discussion and approval.

“The informal or shadow economy refers to economic activities and transactions that occur below the government’s radar without any declared taxes that should be paid. This type of economy is not part of the gross national product,” economic researcher Hussein Abdel Latif wrote in his study on the repercussions of the informal sector on the Egyptian economy. The shadow economy makes up about 60% of the total Egyptian official economy.

The informal sector is one of the most burdensome phenomena to the state and the business community within the formal economy, “not to mention that it includes all poorly manufactured, not eco-friendly and nonconforming to safety public health products. This is in addition to fake and counterfeit products that harm the national industry,” economist Khaled Rafaat Saleh, head of the Tiba Center for Political Studies, told Al-Monitor.

“One of the disadvantages of the shadow economy is the lack of insurance rights and pensions for workers,” he said.

“We should not only think about the financial return that comes from issuing permits for the activities in the informal sector and the taxes that this might generate. Before integrating the shadow economy, we ought to offer incentives for workers to work under the umbrella of the state, starting with tax exemptions for a period not exceeding three years and bank loan facilities, among other procedures,” Saleh said.

He added, “Organizing exhibitions for informal sector workers will also be an incentive for them to become part of the country’s official economy, which will help them market their products and give them a chance to develop.”

Saber Ahmed, a street vendor selling jeans, told Al-Monitor. “I wish I can stop running with my mattress and goods every time I see a security officer. I only hope that one day I can have a permit to sell my goods and have a pension for when I can no longer work.”

A plastic bottle vendor nearby overheard the conversation and joined in, saying, “I am nearing 60. I only aspire to have my own kiosk to sell my goods with dignity but this requires money that I don’t have.”

Asked about whether these bottles are suitable for human consumption, he said, “I buy them from a factory in al-Basateen neighborhood in Cairo. I have no clue.”

There are plenty of goods and products of unknown origin that are sold in the flea and street markets in Cairo.

The undersecretary of the parliamentary Economic Affairs Committee, Ashraf al-Arabi, told Al-Monitor, “The integration of the shadow economy depends on the legislation of laws that allow informal businesses to join and exit the state economy easily and to give them incentives to work under the official economy and remain there so that the state can also benefit and monitor all activities.”

“The incentives include reduced taxes and bank loan facilities,” he noted.

On Dec. 10, the Cabinet announced the government's plan to integrate the shadow economy into the formal one in three steps: the completion of a draft law on the taxation system for small and micro enterprises; the finalization of the draft law on the unified tax procedures; and presenting the draft law to the business sector and informal economy experts.

“All field studies about the informal sector in Egypt suggest that informal workers are ready to be part of the official economy, especially the ready-made clothing sector,” Yaman al-Hamaki, an economics professor at Ain Shams University, told Al-Monitor.

“The only problem facing the integration of the shadow economy is the large costs these workers could endure. But with incentive laws guaranteeing that they will have returns on the money they paid — including financing their businesses and offer them the chance to export their goods as well as reduced taxes — these workers would feel more secure to work under the state’s official economy,” she said.

Hamaki concluded, “We must consider the integration of all economic activities within the informal sector separately. The ready-made clothing sector is different from that of the street food or furniture industry. We must pinpoint the needs and problems of every sector in the most appropriate way. Integrating the shadow economy will have a positive impact on the state budget and citizens as well."

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Found in: Economy and trade

Hani Sameer is an Egyptian journalist who has worked as the editor of Al-Shorouk newspaper and the news site AraGeek.

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