Seeking additional tax revenue, Egypt tackles informal commerce

Egypt’s informal economy includes more than 50% of overall economic activities.
Saturday 14/09/2019
People shop at a popular market in downtown Cairo. (Reuters)
Off the books. People shop at a popular market in downtown Cairo. (Reuters)

CAIRO - Egypt’s economic planners are searching for ways to integrate the informal economy into the formal sector to derive additional tax revenue.

Egypt’s informal economy includes more than 50% of overall economic activities. These untaxed transactions deprive the treasury of an enormous amount of money each year.

In May 2018, Egyptian President Abdel Fattah al-Sisi urged informal labourers to legalise their status, offering tax exemptions for five years.

Sisi’s attempt to reduce informal trade is likely fuelled by a looming financial crisis. Egypt’s 2019-20 state budget, which began in July, allocates 1.58 trillion Egyptian pounds ($99.3 billion) at a deficit of 445.1 billion pounds ($27.8 billion). Sisi’s government wants to collect $51.9 billion in taxes, which it is hoping to bring in from economic activity currently off the books.

“Incorporating all these economic activities into the formal sector is becoming an urgent matter,” said Mohamed Badrawi, a member of the Economic Committee in parliament. “These activities can bring in urgently needed revenues for the state treasury.”

Hundreds of markets, thousands of factories and tens of thousands of shops and restaurants operate outside the formal sector. Billions of dollars are circulated every year as part of economic and business transactions without documentation or registration.

In 2018, the Federation of Egyptian Industries, the guild of the nation’s manufacturers, published a study stating that informal economic activities constituted 60% of the Egyptian economy.

The government recently submitted a bill to parliament that would require heads of small projects to register with the government. The legislation would provide incentives to the owners, such as health and social insurance, tax exemptions and access to bank loans.

“The bill will also help the owners of these projects to expand their businesses,” said Rashad Abdo, an economics professor at Cairo University. “When they become part of the formal sector, these owners will also serve the national economy by paying taxes.”

Egypt’s parliament earlier amended a law that makes registration necessary for the thousands of street food carts. Parliament has changed the law regulating the work of private limited and share-holding companies. In July, parliament approved a measure making it necessary for all shops to seek registration and licensing.

The Federation of Egyptian Industries study said that tax revenues from informal economic activities could generate $84 billion a year if they become part of the formal sector.

However, this is why those involved in the informal economy do not want to register their businesses, economists said.

“These people do not want to pay taxes,” said Yumn al-Hamaqi, a professor of economics at Cairo University. “This is the crux of the whole problem.”

Tax evasion is widespread in Egypt, depriving the government of billions of dollars per year.

The problem is compounded by the informal sector, which unfairly competes with the formal one across nearly all industries. Apart from skipping out on taxes, informal businesses pay no health or social insurance and often underpay workers.

In addition to hurting informal workers and undermining the formal sector, this costs Egypt a “huge amount of investment,” said Khaled Qandeel, chairman of the Economic Committee at the liberal Wafd Party. “This is why the government is very keen on merging informal activities into the formal economy.”