Egypt’s hive of small, unregulated businesses are keeping the nation afloat
By Safa Joudeh
A particular brand of urban entrepreneurship is keeping food on the table for millions, as a hard currency crisis has crippled Egypt’s business activity in recent months.
Unregulated, untaxed businesses are operating in the shadow of the state, making up a large portion of what is broadly referred to as Egypt’s informal sector. It’s an essential part of Egypt’s fabric that has long been an integral part of the country’s cultural and economic landscape. These ventures are driven chiefly by necessity rather than opportunity—not by design, but because the nation has failed to provide them with access to capital, loans or resources.
“It is the type of economic activity that arises when earning opportunities are scarce, prices are high and the government is unable to form coherent fiscal and monetary policies to respond to the crisis,” Dr. Alia El Mahdi, a professor of economics at Cairo University who researches the informal sector, tells Newsweek Middle East.
The struggle to survive is nowhere more apparent than in the area surrounding downtown Cairo’s Ramses Square, a teeming maze of alleys that are home to unlicensed coffee shops, auto repair garages and street vendors selling anything from fresh produce to used books.
These are the businesses that keep Egypt’s economy afloat, providing the population with resources and revenue after years of political instability and mismanaged public finances that have sent unemployment and inflation rates soaring.
Among them is Hajj Ali Al Barbari’s bamboo furniture workshop, a decades old family owned business occupying the bottom floor of a building on Ramses square, the scene of a deadly standoff between protesters and security forces during Egypt’s 2013 military crackdown. Barbari’s grandson Mohamed has been running the workshop there for almost a decade.
The uncertainty of the intervening years since the 2011 revolution has impacted most segments of the economy, and business at the workshop has slowed considerably since then.
“We have survived slumps in the past, but none as bad as this one,” says Mohamed. He manages the shop that provides for his family of four and ten employees. His workers are waged laborers excluded from the formal market due to a lack of suitable education, training and social background—and who would otherwise have no means to support their families.
“Some of the workers have been with us for over 30 years,” he adds. “If I keep the business going, it’s because I know they’d have nowhere else to go.”
The workshop’s jobs are among the roughly 10 million low-skill, low-wage roles that account for 30-60 percent of the economy. They are largely unrecognized positions that offer no insurance, pension or workplace protections, but have been the only recourse for survival for millions of impoverished families across the country.
Mohamed’s showroom boasts a range of hand-crafted household furniture. Decorated with carvings and intricate latticework, his products are manufactured by labor intensive methods, but are sold at lower prices than most imported alternatives. The rising cost of raw material has raised end product prices almost 40 percent over the past four years, putting Mohamed’s elaborate designs out of reach for most in Egypt. “It’s a cycle,” he notes. “Inflation has raised the cost of living. People have less disposable income.”
Selling to international buyers, Mohamed adds, presents too many obstacles. Wood products, among many other locally manufactured goods, are a major item of import. The government has recently raised custom duties in an effort to cut imports, but export levels continue to record low rates, as there is little support from the state in kick starting the economy.
In the first place, it’s extremely tough for small business owners to obtain credit to develop production capacity and finance export operations—and nearly impossible if that business is unlicensed. Red tape is also a major hurdle, but the lack of knowledge of foreign markets and lack of proper quality inspections, doesn’t help either.
While the formal economy has been hit hard by the economic slowdown, informal businesses form up to 85 percent of small and medium sized enterprises in Egypt. Most have fewer opportunities for commercial success and access to new markets.
Recovery, says El Mahdi, begins with developing the private sector to absorb a larger portion of the work force. She blames successive Egyptian administrations that have controlled the country since 2011 for failing to implement change. “The ministers in this administration are either unimaginative or have no power to act,” she states. “The government has no clear vision for an economic recovery plan; they cannot keep altering key policies every few months or faith in the investment climate will never be restored,” she says.
The roots of the problem goes back decades. The regime of former president Hosni Mubarak was responsible for a set of policies that limited economic gains to key segments of society and contributed to a state of uneven economic growth.
Business leaders who were able to amass wealth and power under Mubarak have lost some of their influence under the current administration, but the same private-sector led growth strategy that left many Egyptians at a disadvantage is now a key element of the current Sisi regime’s national development agenda.
Set against a backdrop of ramshackle dwellings that are part of the downtown area’s Ramlet Bulaq informal settlement, downtown Cairo’s luxurious Nile City Towers appear on the Nile corniche, an imposing symbol of the stark economic divides.
Informal settlements, make up 40 to 67 percent of Cairo’s population; most live in slum cities that provide affordable shelter to internal migrants and the urban poor. Residents of these communities often live in squalid conditions without basic utilities and infrastructure.
Where the state is absent, levels of informal economic activity tend to be higher, and few of those who work in Ramlet Bulaq are able to find employment in the formal sector. A dusty street lined with vendors selling second hand products lies in the shadow of the towers. Most are low-profit street-trade enterprises that cater to the local community.
One seller in his early twenties, describes how he was pushed into the informal sector of self-employment after witnessing others graduate from college with no hope of finding regular work. He has given up on his dream of an education and a job in commerce, along with the prospects of upward mobility that come with a secure income.
“We lead temporary lives,” he says jokingly. “I’ll start a company once they upgrade the economy” He hasn’t heard—and has no way of knowing—about plans publicized in more privileged circles to finance and implement small projects, including a recent initiative of the Central Bank of Egypt, and another launched in cooperation with Abu Dhabi’s Khalifa fund.
Such efforts are only applied to a fraction of the labor force. They are highly selective, target formal enterprises and fail to represent diverse socioeconomic backgrounds. Meanwhile the neediest citizens feel that the guarantees of the current administration do not match its actions or meet the needs of the country’s large young demographic.
Decades of failed sectoral policies and state neglect gave rise to the informal sector, and worsening economic conditions since 2011 have helped it to flourish. There are simply not enough jobs available to fulfill the increasing demand for regular employment.
Meanwhile, the state is missing out on an important source of revenue. Mohammed Bahey, Chairman of the Federation of Industries Tax committee estimates that the informal economy costs the state the equivalent of $22 billion in unpaid taxes annually, roughly the size of Egypt’s budget deficit for the first half of the past fiscal year.
Taxing informal commercial profits will help increase growth rates, but for unregistered business owners, there are few incentives to enter the formal economy. Under the status quo, there are limited regulations to adhere to, few permits to obtain and no taxes to pay on commercial and industrial profit.
On the other hand, legalizing businesses entails costly registration and bureaucratic procedures, adding another financial burden at a time when many earn just enough to finance their day-to-day livelihoods. Going down this path would likely cause some of these enterprises to fold.
In a country with few social protections, inadequate public services and high rates of youth unemployment, fairer access to opportunities requires enacting national level policies that both generate growth and respond to the requirements of the poor.
Nonetheless, the Egyptian economy continues to plummet and confidence in the political leadership’s ability to bring about a swift turnaround has been shaken.
Ambitious plans to increase the flow of foreign investments into the country have been slow to materialize, while the country’s foreign currency crunch has disrupted trade and sent prices of basic goods skyrocketing, resulting in increased hardship for the country’s poor majority.
“We want the economy to get back on its feet, this will make a difference in areas where targeted programs will not,” Mohamed tells Newsweek Middle East. “We need the authorities to implement comprehensive programs to include all segments of society and the economy,” the trader in Ramlet Bulaq says.