This chapter provides an overview of the informal economy in Egypt and discusses recent developments and legislative efforts to tackle informality from a multi-policy approach, in particular in the context of the COVID-19 pandemic. It presents economic trends and relevant regulatory and strategic frameworks, notably the Micro, Small and Medium Enterprise Law No. 152 of 2020, and efforts to expand social security coverage in Egypt over the past years. The chapter analyses informality based on available statistics on informal labour and informal businesses in Egypt, using different data sources.
Informality and Structural Transformation in Egypt, Iraq and Jordan
A Framework for Assessing Policy Responses in the MENA Region
3. Informality in Egypt
Abstract
Key messages
The informal economy accounts for a significant portion of Egypt's GDP. At the outset of the COVID-19 pandemic, it represented from 29.3% to 50% of the GDP, depending on data sources. Egypt's informal sector in terms of GDP ranks among the largest in the MENA region and slightly above the global emerging markets average of 29%.
The share of workers in the informal economy experienced a growing trend in the last decade, from 55.9% in 2012 to 66.7% in 2020, led by strong growth of informal male workers. Informality is prevalent among the two most vulnerable age categories: 90% of young workers (15 to 24 years old) and 93% of the working elderly (over 65 years old) are in informal employment. As it is particularly present among vulnerable groups, informality in Egypt is linked to higher probability of living in poverty.
Around 53% of the country’s establishments are considered informal businesses. In total, they provide 31% of the existing jobs in Egypt’s private sector and represent 12.8% of the country’s private sector value added. Furthermore, the share of enterprises starting their activities as informal businesses slightly increased in Egypt in the past decade and remained higher than in other economies of the MENA region.
Egypt's economy faced important challenges from the COVID-19 pandemic and inflation crisis, particularly impacting crucial sectors like tourism and retail and exposing the country to the vulnerabilities associated to informality. These crises highlighted the urgent need to develop effective policies for enhancing the country's business environment, competitiveness, and ensuring the protection of its extensive informal labour force to create resilience face to unexpected shocks.
In recent years, Egypt has advanced to streamline business registration processes, some following the pandemic crisis. These measures aim to facilitate business formalisation and stimulate growth of the formal private sector. Regulations such as Bankruptcy Law No. 11/2018 and Micro, Small, and Medium Enterprise (MSME) Law No. 152 of 2020 exemplify these efforts.
Over the last decade, Egypt progressed in strengthening its social security system, beginning with the establishment of the Ministry of Social Welfare and Social Solidarity in 2008. Subsequent milestones include the enactment of the Universal Health Insurance Law in 2018 and the Social Insurance and Pensions Law (No.148/2019).
3.1. Economic conditions
Egypt is one of the most industrialised countries of Africa and one of its largest economies. The country contributes the largest share (22%) of total value added of manufacturing in Africa, and the second largest share (21%) in the MENA region after the Kingdom of Saudi Arabia.1 Egypt is home to the Suez Canal, which sees 10% of global maritime traffic. Its privileged position and industrial potential place the country as a main foreign direct investment (FDI) recipient in the region. From 2015 to 2021, FDI inflows in Egypt averaged 2.56% of GDP, above the average for Africa (2.16%) and the MENA region (1.75%) respectively.2
Despite its developed industrial sector, Egypt has traditionally relied on imports, including machinery, transport equipment, and food products, to meet its domestic consumption demand and production input needs (UNCTADstat). The government has been working over the years on different policies to boost domestic production and exports to reduce the trade deficit and strengthen economic resilience (OECD et al., 2021[1]).
The public sector plays a significant role in the Egyptian economy, controlling a large number of state-owned enterprises, particularly in strategic sectors such as energy, infrastructure, and banking, but also in sectors such as food processing and manufacturing of textiles and household goods. The government is in the process of implementing economic reforms, including some privatisation and deregulation, to try and increase the role of the private sector in the economy. The private sector has a more relevant role in areas such as telecommunications, information technology, and retail. The government has aimed to encourage foreign direct investment and foster entrepreneurship to support the growth of the private sector and create more job opportunities.3
3.1.1. Growth, inequality and poverty
In the decade between 2013 and 2022, the Egyptian economy has experienced economic growth above the region’s levels. With an average annual growth of 4.6%, the wealth generated has exceeded the country’s population growth, resulting in 26% increase of GDP per capita in ten years (Figure 3.1). This is significantly higher than the average per capita growth for the MENA region in the same period (1.4%), but below the average growth in lower-middle income economies (29%) (World Bank World Development Indicators). While positive, existing growth did not ease Egypt’s heightened vulnerability due to a substantial current account deficit and elevated public debt, placing the country under significant macroeconomic challenges. Furthermore, economic growth occurred in a context of high and rising inflation, with an average annual consumer price index increase of 12% between 2010 and 2020 (CBE, 2023[2]). Both headline and core inflation have risen strongly since 2022, reaching record highs, before abating somewhat towards the end of 2023 (OECD, 2023[3]).
The COVID-19 pandemic further imposed important challenges to Egypt’s economy; in particular, it affected the tourism industry, which prior to the crisis represented over 15% of the country’s GDP, accounted for 9.5% of the total workforce (OECD, 2020[4]), and was an important source of foreign currency earnings.
The Government implemented partial lockdowns and targeted measures to limit the spread of the virus, which resulted in a slow-down of the country’s economic activity; however, unlike most of the developed and emerging economies, Egypt experienced positive growth during 2020, reflecting the short duration of the partial lockdowns and limited spread of the virus, and the capacity to rely on its internal market to maintain the economic activity afloat (OECD, 2020[5]).
The pandemic’s effect on global prices, and the impacts of Russia’s large-scale aggression in Ukraine held back Egypt’s expected recovery for 2021 and 2022. Egypt is the world’s largest wheat importer and relies heavily on Ukraine and Russia for meeting its national cereal needs; it is also a net importer of other essential basic food items, such as cooking oils.
In this context, soaring prices, fewer tourists from Ukraine and Russia and increasing investment outflows, forced Egypt to request assistance to the IMF, with an Extended Fund Facility programme signed in December 2022. The objective of the EFF is to help Egypt stabilise its macroeconomy, while maintaining its foreign reserves and implementing a debt rationalisation programme. Egypt is the IMF’s second largest debtor, behind Argentina. Under the IMF programme, Egypt is expected to reduce its current public debt (general government gross debt) from 89% of GDP to 75% by 2026, although public debt increased to above 95% of GDP in 2023 on the back of slowing economic growth and a high debt service burden.
Figure 3.1. GDP growth in Egypt, 2012-2021
Left axis: 2017 international dollar; Right axis: year-on-year growth on constant prices, percent change, and average growth
Note: GDP per capita is in PPP
Source: IMF (2023[6]), World Economic Outlook database, April 2023.
Inequality and poverty remain a challenge, affected by low labour market participation, declining employment levels and high levels of inflation. Income inequality measured through the Gini index shows a slight improvement between 2010 and 2014, but there was a sharp increase in 2015 that persists, resulting in an estimated Gini coefficient of 0.36 in 2022 (ESCWA, 2023[7]).
Measuring inequality in the country is nonetheless difficult and alternative measures to the Gini index indicate a worsened scenario when considering different information sources. According to estimates of the World Inequality Database, a more accurate Gini index accounting for pre-tax national income would reach 0.57 in 2022.
Poverty in Egypt, as measured by the national poverty line, experienced a worsening trend for most of the 2010 decade, from 27.8% in 2015 to 32.5% in 2017-184. This trend reversed at least in 2019-20, when poverty dropped to 29.7%, as announced by CAPMAS on the occasion of the International Day for the Eradication of Poverty in October 20225, partially linked to the country’s efforts to expand social benefits. During this period Egypt did see an improvement in its Human Development Index (HDI), achieving the level ‘high human development’ in 2015, mainly due to important improvement in pre-university education enrolment rates in all stages, and particularly in primary education (UNDP/Ministry of Planning and Economic Development of Egypt, 2021[8]). The progress has stalled since 2019, consistent with the global trend of the HDI, which was conditioned by the COVID-19 pandemic.
Labour force. The labour force participation rate declined from 52% in 2012 to 43% in 2020 (Figure 3.2). The average hides a significant gap between the rates of female and male participation in labour force, which were respectively 15% and 70.3% in 2020. Women’s historically low participation rate in 2020 may relate, among other factors, to the decline of employment in the public sector 6, being the public sector historically the main employer of, and most suitable job option for, Egyptian women (Barsoum and Abdalla, 2020[9]). The impact of measures implemented to contain the COVID-19 pandemic could have also pushed women to dedicate more time to taking care of family members, being forced to quit the labour market. In general, unemployment declined in the last decade, for both men and women. For women, the decrease was important and continuous over the years, with the exception of the years 2015 and 2019; this decrease reflected the lower participation of women in the labour force rather than more women being employed. For men, lower unemployment rates were observed along stable or slightly declining male employment rates. An increase in the male unemployment rate was registered following the COVID-19 pandemic, with the rate going from 4.8% in 2019 to 5.9% in 2020.
Employment. Male employment rate started to resume after 2017, following a few years of decline, but the positive trend was interrupted by the COVID-19 pandemic. The men’s employment rate was 66% in 2020, compared to 70.5% in 2012. Female employment, which had remained relatively stable until 2017, did on the contrary experience a significant drop that has continued until 2020, when it reached its lowest point in over ten years: it was 12.3% in 2020 compared to 18% in 2012.
Egypt’s labour force is defined by a majority of workers with intermediate education (37%), followed by those with less than basic education who represent 24% of the employed, and by the group of workers with advanced education (23%). Female workers with advanced education represent 40% of the female workforce, while those with intermediate education are 29% and workers with less than basic education 23% (ILOSTAT Data).
Agriculture remains the major source of employment in Egypt, providing over 20% of existing jobs, formal and informal (Figure 3.3). While it has experienced a strong decline over the last three decades, agricultural employment remains high in international comparison. Wholesale and retail trade, construction, and transportation account for over 1/3 of Egypt’s employment. Manufacturing, which provided 13% of the country’s jobs in 2020, has experienced a significant increase over the previous decades, as it partially integrated jobs from the agricultural sector (ILOSTAT Data).
75% of the formal and informal workers in Egypt are employed by medium, small and micro enterprises (MSMEs) (Ministry of Planning and Economic Development data), which account for over 98% of businesses operating in the private sector and contribute to 43% of the country’s value added (CBE, 2023[2]).
Figure 3.2. Evolution of total employment in Egypt, 2012-20
Employment to population ratio and labour force participation rate; 15 to 64 years old
Note: Total employment includes both formal and informal employment.
Source: ILOSTAT, Labour Force Statistics Database.
Figure 3.3. Employment in Egypt by economic activity
Share of employment (%), 2020
Note: Data cover formal and informal employment. Legend is sorted by largest to smallest sector.
Source: CAPMAS (2020[10]), Annual bulletin for labour force 2020.
The informal economy accounts for a significant share of GDP. According to different modelled estimates, it represented at least 29.3% of Egypt’s GDP in 2018, and up to 50% as stated in recent declarations from Egyptian economic actors (Egypt Today, 2019[11]) (Figure 3.4). Available estimates show that Egypt’s informal sector, in terms of GDP, is one of the largest in the MENA7 region and slightly above the global average for emerging markets (29%) (IMF, 2022[12]). It is worthwhile to note, however, that assessing the size of the informal economy is, by its own nature, challenging.
Figure 3.4. Estimates of the size of the informal economy in Egypt
As share of GDP
Note: Dynamic general equilibrium model-based (DGE) estimates of informal output (% of official GDP); Multiple indicators multiple causes model-based (MIMIC) estimates of informal output.
Source: Schneider Index: Medina and Schneider (2019[13]); DGE and MIMIC: Elgin et al. (2021[14]).
Concerns on the impact of the large informal economy on the productivity and competitiveness of the Egyptian economy and about the repercussions of informality on inequality and social inclusion have increased over the last two decades, becoming the centre of a series of policy initiatives (MPED, 2022[15]), as discussed further below in this chapter.
3.2. Key statistics and drivers of informality
In the analysis of the informal economy, it is important to differentiate between informal jobs and informal businesses. Informal jobs encompass various forms of employment characterised by no or insufficient formal arrangements, also existing within formal enterprises. Informal businesses can reflect businesses operating mostly beyond the boundaries of formal institutional frameworks. This section delves into essential statistics concerning both informal jobs and businesses, recognising the importance of disaggregated data to comprehend the diverse manifestations of informality. The aim is to uncover the distinct challenges and opportunities associated with each category, thereby contributing to a deeper understanding of the landscape of the informal economy in Egypt.
3.2.1. Informal workers
The share of informal workers experienced a growing trend in the last decade, from 55.9% in 2012 to 66.7% in 2020 (Figure 3.5), led by significant growth of informal male workers. Specifically, the rate of informal employment was 69% for men and 49% for women in 2020. The number of female informal workers decreased, after reaching a high point in 2017 (they represent 61.3%), to its lowest point in the decade, with only one in two employed women working informally.
This is consistent with the drop of Egypt’s female labour participation rate, which has affected in particular less educated women, who are over-represented in the informal economy, while female workers with advanced education have significantly increased their share among employed women: 20% of Egyptian women with advanced education had an informal job in 2020, as opposed to 40% of men with advanced education. Similarly, less than one in two women with intermediate education had an informal job versus three in four men. The education groups most likely to be working informally remain basic or less than basic education, with shares close to 90% for both men and women, a reminder of the link between informality and low skill jobs.
Figure 3.5. Evolution of informal employment in Egypt
Note: Panel A: Data for 2014 is not available. Name of indicators: Informal employment rate by sex; Panel B: Informal employment rate by sex and education (right graph). As of September 2023, data for 2020 are under revision.
Source: ILOSTAT, Labour Force Statistics Database
Informality is prevalent among the two most vulnerable age categories: 90% of young workers (15 to 24 years old) and 93% of the working elderly (over 65 years old) are in informal employment (ILOSTAT, LFS). Moreover, 74% of young working women are engaged in informal employment, in contrast to 92% of their male counterparts. This disparity is linked to the concentration of young working women in the public sector, where informal jobs are less prevalent.
As it is particularly present among vulnerable groups, informality in Egypt is linked to higher probability of living in poverty. This is especially true for informal private sector wage workers and self-employed outside establishments, (Figure 3.6, Panel A).
Furthermore, when considering the findings from the COVID-19 MENA Monitor survey, it shows that 53% of respondents within the two lowest income quartiles are engaged in informal work, in contrast to the 30% observed among their formal counterparts in the same quartiles (Figure 3.6, Panel B). Notably, the proportion of informal workers in the first income quartile is more than double that of formal workers. However, it is important to highlight that the survey's most prevalent demographic among informal workers belongs to the third quartile. This observation may be attributed to the survey's sampling method, which relies on mobile phone users, despite Egypt boasting a mobile penetration rate nearing 100%. Additionally, the notably high percentage of informal workers in the third- and fourth-income quartiles could suggest a substantial presence of self-employed professionals such as lawyers, doctors, accountants, and architects among informal workers.
Figure 3.6. Poverty, income and informal work, Egypt
Note: Panel A: Egypt’s national poverty line: Workers living with less than USD 1.3 per day. Panel B: Workers by income quartile: Author’s calculations using pooled data controlled by “Unique individual identifier” using the ERF (2021[16]), Combined COVID-19 MENA Monitor Household Survey (CCMMHH), Nov-2020, Feb- 2021, Apr-2021, Jun-2021, Aug 2021, Version 5.0 of the licensed data files. The CCMMHH’s sample is mobile phone users aged 18-64, covering over 2000 households and individuals.
Source: ILO (2021[17]), Regional Report on Jobs and Growth in North Africa 2020; ERF (2021[16]).
The OECD has developed the Key Indicators of Informality based on Individuals and their Household (KIIbIH) database, which uses ILO definitions of informal employment and informal sector. As measured by the KIIbIH database, in 2015 Egypt’s health insurance coverage among informal workers was relatively low compared to peer countries. While the vast majority of the country’s formal workers enjoyed health insurance, this was not the case for over 85% of the country’s informal workers, a share similar to peers like Brazil (where only 12% of the informal workers enjoyed health insurance), but significantly lower than other emerging markets with large populations such as for example Indonesia (38%) and Chile (84%). The social security reforms implemented in Egypt over the past years aimed to increase the coverage, but more data and a thorough follow-through are needed from the authorities in order to confirm the impact of the reforms.
Egypt’s informal workers are distributed relatively evenly among the country’s main economic activities, i.e. in each sector the distribution of workers between formal and informal is overall similar (Figure 3.7). There are however a number of activities where informal workers are over-represented, if compared to the formal sector. These sectors include construction, agriculture and retail trade, while education is the activity with the highest share of formal employment.
Figure 3.7. Informal employment by economic activity in Egypt, 2020
Distribution of employment by economic activity and formal status
Note: The shares add to 100 per formal (informal) employment.
Sources: COVID-19 MENA Monitor Household Survey (CCMMHH), ERF (2021[16]).
The causes of this can be partially related to Egypt’s informal firms’ difficulties with complying with the high administrative costs, as seen before, as well as the perception of having no benefits in the formalisation of their businesses.
Finally, similar to findings across the world, informal employment in Egypt is concentrated in small firms (74% of the informal jobs) and medium firms (19%) (Figure 3.8).
Figure 3.8. Informal workers by firm size in Egypt
% of informal workers, 2015
Source: OECD Key Indicators of Informality based on Individuals and their Household (KIIbIH) database.
3.2.2. Informal businesses
According to the 2017/2018 Egyptian Economic Census conducted by CAPMAS, around 53% of the country’s establishments8 (1.9 million) are considered informal businesses. In total, they provide 31% (3.9 million employees) of the existing jobs in Egypt’s private sector and represent 12.8% (EGP 239 billion) of the country’s private sector value added. The underperformance of the informal establishments with respect to formal businesses can also be observed in the share of wages within sectors. While employment in informal establishments represents a third of the total private employment in establishments, wages amount to only 11.1%.
Regarding the distribution of businesses per main economic activity, the majority of informal establishments (Figure 3.9) are classified as wholesale and retail trade (59% of all informal establishments), followed by manufacturing (14.1%), other service activities (11.2%), accommodation (5.2%) and agriculture (4.9%). In terms of value added, wholesale and retail trade contribute with 50% of the informal establishments sector value added, followed by manufacturing (18.6%) and agriculture and fisheries (10.7%).
Figure 3.9. Informal establishments by economic activity, 2018
Share of total number of informal establishments, %
Source: Egyptian Economic Census (EEC) 2017/2018 (CAPMAS, 2018[18]).
The share of enterprises starting their activities as informal businesses slightly increased in Egypt in the past decade and remained higher than in other economies of the MENA region (Figure 3.10). The most recent data (which refer to 2020) indicate that the firms that started as informal and later became formal are almost 12% in Egypt, while they are, for instance, less than 3% in Jordan.
At the same time, the share of firms that consider they are facing unfair competition from informal businesses appear to decrease over time in Egypt, differently from other countries. The distribution of formal and informal businesses across sectors could be one element helping to explain these patterns.
Figure 3.10. Businesses and informality, Egypt and selected MENA economies
Note: Formal (registered) non-agricultural companies with 5 or more employees are targeted for interview.
Source: World Bank (2023[19]): Enterprise Surveys database.
The time lapse before formally registering businesses decreased in Egypt between 2013 and 2020, the year of the latest enterprise survey conducted by the World Bank in the country (Figure 3.11). It is also possible that the difficulties related to the COVID-19 crisis were not yet reflected in the data, as opposed to Tunisia, where an increase in the delay for registration was observed in 2020.
Figure 3.11. Number of years firm operated without formal registration
Note: Formal (registered) non-agricultural companies with 5 or more employees are targeted for interview. This indicator is computed only for registered firms that did not have a formal registration when they started their operations in the country. Data for Jordan and Morocco refer to 2019.
Source: World Bank (2023[19]), Enterprise Surveys database.
The high level of tax rates was the main concern expressed by 24% of Egyptian businesses surveyed in 2020 as a reason for not formalising (Figure 3.12), a share more than double the average for the MENA region. Ease of non-compliance emerged in an AfDB 2016 study on Egypt, where employers declared the possibility of avoiding the enforcement of labour laws and payment of taxes and social insurance for employees as a driver to choose informality. In addition, informal firms indicated that “saving time and efforts” was the most common reason for remaining informal, while they did not report any perceived benefit for working formally. In recent years, Egypt has introduced a number of measures to address these concerns. These include reforms of the tax administration system by the Ministry of Finance and the Egyptian Tax Authority to facilitate tax filing and processing, including the digitalisation of invoices, and the project initiated by the OECD and the Egyptian Ministry of Finance to strengthen domestic resource mobilisation, including tax transparency, funded by the EU (OECD, 2020[20]; IMF, 2022[12]).
Companies in the informal economy typically do not have access to banking services, also because they lack proper documentation on income source. Cash-based transactions are widely used in Egypt, in the absence of legal restrictions on the maximum amount for cash transactions. It was estimated that 40% of cash-based transactions took place in the informal sector (PWC, 2019[21]). At the beginning of 2019, the Egyptian government stopped accepting cash transactions for payments of more than EGP 500, to encourage financial inclusion and at the same time transition to formalisation.
As discussed also in Chapter 6, the Central Bank of Egypt has taken several initiatives in recent years to facilitate access to finance and provide loans at subsidised interest rates (5%), which could facilitate formalisation of businesses (OECD, 2020[20]).
Figure 3.12. Top ten business environment constraints, Egypt and MENA
Percentage of firms that consider a specific business environment obstacle as the most important one
Note: Formal (registered) non-agricultural companies with 5 or more employees are targeted for interview. Data for Egypt refer to 2020; for other MENA countries, latest available year. Respondents are asked to choose the biggest obstacle to their business from a list of 15 business environment obstacles.
Source: World Bank (2023[19]), Enterprise Surveys database.
3.2.3. Drivers
A 2016 study by the African Development Bank (2016[22]) identified three important causes of informality in Egypt, notably the insufficient generation of formal jobs by the formal private sector to absorb Egypt’s growing labour force or replace the formal sector jobs being destroyed; a lack of disposition by formal private sector employers to hire certain groups of workers, due to skills mismatches or prejudice; and the possibility that educated youth had not developed enough interest for private sector work or entrepreneurship.
These drivers should be analysed in the context of the high administrative regulatory burdens and compliance costs in Egypt. The World Bank (2023[23]) and OECD (OECD, 2024[24]) point to the high regulatory burden in Egypt as a contributing factor to informality.
Analysis from the World Bank notes that the costs of starting a business and resolving insolvency in Egypt are among the highest in the region, a fact that results into a lower number of firms created and in a reduced growth potential for small firms.
The recent Economic Survey of Egypt conducted by the OECD discusses the high labour costs as one of the most important drivers of informality. It is considered that employers could prefer not to register their workers or to under-report their earnings in light of the high statutory rate of social security contribution.
The following section provides an overview of Egypt’s efforts to reform national regulatory and strategic frameworks to address informality in the country.
3.3. Overview of national regulatory and strategic frameworks
As a multifaceted phenomenon, the informal economy in Egypt reflects the nation's economic development trajectory as well as its specific socioeconomic and institutional context (Hacaltana, Bonnet and Garcia, 2022[25]). This section focuses on the role of Egypt’s regulatory framework, one of the key drivers of the persistence of informal economic activities in most economies. Addressing existing gaps and challenges in the country’s regulatory framework holds the potential to help Egypt's formalisation efforts while extending support to its broad informal labour force, especially during times of crises.
Over the past decades Egypt has been conducting different initiatives to promote significant reforms aiming at addressing such structural deficiencies. This section focuses in particular on analysing the efforts done under two key areas: business regulation, and social security.
3.3.1. Business laws
Considerable regulatory burden and compliance costs can be a driver of informality, particularly for individuals and enterprises with limited capital and low productivity, who may find the requirements for entering the formal labour market unattainable.
The recent OECD Economic Survey of Egypt defines the country’s firms operating environment as restrictive and calls for continued efforts to ease business regulations (OECD, 2024[24]). For instance, in Egypt the demanding weight of licensing obligations on businesses persists as a substantial challenge (Figure 3.13). Particularly impactful is the high cost of compliance administration on micro and small enterprises, constituting most of Egypt's business landscape and which operate with more constrained resources. Despite attempts to regulate based on firm size, historical evidence suggests its inefficacy, as this may inadvertently disincentivize the growth of smaller enterprises or trigger unintended consequences, such as underreporting revenues or staff once a critical size is achieved (Dabla-Norris, 2018[26]).
Figure 3.13. Major constraints for domestic businesses and exporters
Percentages of firms in Egypt identifying business licensing and permits as a major constraint, 2020
Note: Share of respondent firms out of 3 075 firms surveyed.
Source: World Bank (2023[19]), Enterprise Surveys.
With the launch of the National Structural Reform Programme (NSRP) in 2021, Egypt has started to take steps towards enhancing the country’s business environment, in order to support private sector-led growth, and diversify the economy. The NSRP (MPED, 2021[27]) aims to enhance economic resilience, promote employment and employability, and raise the competitiveness of the economy. The establishment of a competitive environment and the maintenance and further development of infrastructure sectors (e.g. energies, transports, ICT) should improve business access to market and finance, especially for SMEs and entrepreneurs, and stimulate industrialisation and trade. An improved environment should also help business formalisation.
Streamlining administrative processes not only benefits larger corporations but is pivotal for the prosperity of smaller businesses. The time required to obtain an operating license in Egypt was measured as a minimum of 14 days, in contrast to the nine-day average in the OECD (World Bank, 2020[28]). Recent initiatives, such as the introduction of an e-platform by the General Authority for Investment (GAFI) in August 2023, aimed at online registration of new firms, are anticipated to significantly reduce the time required for a firm to be officially listed in the company registry, potentially shortening the process to a much shorter period. To reinforce this process, Egypt could adopt the "silence is consent" principle for business registration or licensing, a practice embraced by approximately half of OECD countries in 2018. This principle implies that licenses are automatically granted if the competent licensing authority does not respond by the end of the statutory response period.
The Micro, Small and Medium Enterprise (MSME) Law No. 152 of 2020 represents potentially a positive step towards easing the business regulatory ecosystem. The law replaced the previous Small Enterprises Law of 2004 and, importantly, updated and harmonised the definition of MSMEs, based on the annual turnover and paid-up capital9. It introduced a mechanism to stimulate business formalisation. The incentives to integrate the informal sector with the formal economy include:
A mechanism for MSMEs operating in the informal sector before the issuing of the Law No. 152 to obtain a temporary licence for a period up to five years applying the principle of “silence is consent”, which replaces any approvals or other legal procedures. After receiving the temporary license, any juridical proceedings are stopped, and enterprises are exempted from paying taxes for the previous years of operation. Enterprises operating in the informal economy that obtain a temporary license are exempt from stamp duty for a period of 5 years and from registration fees (such as notary fees).
New enterprises operating after the issuing of Law No. 152 obtain a temporary license for a year – to be renewed for another year- till issuing the final license, applying the principle of “silence is consent”.
Furthermore, businesses with annual turnover below EGP 10 million can opt into a simplified tax regime that substitutes the standard income tax. For small businesses, the tax payable is determined by applying the corresponding tax rate on annual turnover (either 0.5%, 0.75% or 1% depending on the level of turnover). For micro businesses, the tax payable is determined according to lump sum amounts that depend on the level of turnover. Moreover, licensed enterprises have access to a number of generous tax and non-tax incentives.
Non-tax incentives include financial and non-financial incentives for the companies and institutions that support informal enterprises toward their transition to formalisation, for instance by providing business services.
The Law includes procedures to obtain the approval to start business activities through one-stop-shops units of the Micro, Small and Medium Enterprises Development Agency (MSMEDA) in the governorates or at the General Authority for Investment and Free Zones (GAFI). According to the Law, the size classification certificate is issued only from one-stop-shops of MSMEDA.
Other facilitations involve, for instance, the allocation of 30% of lands in industrial, touristic areas and urban communities for SMEs; 40% of public procurement goes to SMEs; exempting MSMEs from providing guarantees or security when setting building of the project until obtaining the required assets for undertaking their activities or decreasing the value of the guarantees or security required for obtaining such assets; exempting start-ups (entrepreneurs) from copyright fees, and bearing part of workers training cost.
By August 2022 MSMEDA had managed the formalisation of some 7 000 projects (i.e. informal business activities) based on the provisions of the new law (Mounir, 2022[29]). There is ongoing work by the ILO investigating whether the mechanism of incentives introduced by the Law No. 152/2020 was effective, in order to assess if modifications are necessary to improve effectiveness. This analysis is also considering the role played by (lack of) awareness about the available policy initiatives in limiting the impact of the recent law. The Law No.152/2020 should support the already positive progress made with the implementation of two pre-existing laws:
The Law No. 15/2017 on the Simplification of the Procedures for Licensing Industrial Installations, which considerably reduced the paperwork and time required to open an industrial facility, i.e. seven days to receive a license compared to up to 600 days previously.
The Bankruptcy Law No. 11/2018, which introduced a shorter timeline for procedures, added flexibilities for seeking business reorganisation and decriminalised bankruptcy (OECD et al., 2021[1]).
Continued regulatory efforts are imperative to unleash market forces and foster the expansion of the private sector. It is crucial to address existing regulatory barriers that impede the establishment and operation of businesses, hindering their growth potential. Moreover, there is still a pressing need to alleviate the overall burden of licensing imposed on firms, as the current levels are excessively high. Streamlining and reducing these regulatory constraints will not only encourage entrepreneurial activity but also contribute to a more conducive environment for private sector development in support of business formalisation (OECD, 2024[24]).
3.3.2. Legal environment for social security
In the last decade, Egypt made progress on improving the social security system. Starting with the establishment of the Ministry of Social Welfare and Social Solidarity in 2008, through the adoption of the Universal Health Insurance Law in 2018, the country has sought to develop a system that covers all its citizens (ILO, 2023[30]). The law set the basis for progressively extending the health insurance coverage to the entire population – an objective to be realised by 2032 through a mix of contributory and non-contributory elements, financed in part by indirect taxes (including on tobacco products, cars, motorway tolls and driving licences).
In August 2019, the government adopted the Social Insurance and Pensions Law (No.148/2019) that brings together public and private sector workers, as well as workers in the informal economy, under a single programme for social security. The law also increased penalties for non-conforming employers and reduced the contribution rates for both employers and employees and indexed the pension growth to inflation (Barsoum and Selwaness, 2022[31]). It expands the coverage to include seasonal workers, domestic workers, rural workers, and laborers, to help formalise them. The insurance programme includes old age, disability, death, work accidents, sickness, and unemployment.
Law 148/2019 also introduced provisions to promote the enrolment of informal workers. Self-employed workers who remain outside the formal business sector are covered by these provisions. For this category of workers, the government pays the employer’s part of social security contributions. However, these provisions apply to a limited number of specific jobs only, implying that the system does not fully capture the diversity of informal forms of work (Barsoum and Selwaness, 2022[31]). The government conducts labour inspections to verify the registration of employees, but like in other countries these take place less frequently in small firms, which explains disproportionately low social security coverage among these firms (Barsoum and Selwaness, 2022[31]).
In addition, the “Aman El-Masreen Certificate” was introduced as a three-year certificate of deposit for the vulnerable groups in the country, aged 19-59. It is managed by Banque Misr, Banque du Caire, Agricultural Bank of Egypt and National Bank of Egypt, in collaboration with the state-owned company Misr Life Insurance to provide insurance coverage to vulnerable persons, such as temporary and seasonal workers, farmers, and low-income workers (Presidency, n.d.[32]).
Non-contributory social assistance programmes are also in place. Two main cash transfer schemes are the Takaful programme targeting poor households, and the Karama programme targeting the elderly, disabled and orphans (ILO, 2023[30]). To face the impacts of COVID-19, in 2020 the Government increased the budget for the Takaful and Karama cash transfer programmes and extended the number of beneficiaries to 60 000 additional households. In September 2022, the Ministry of Social Solidarity announced that the Takaful and Karama cash transfer programmes had reached 22 million beneficiaries (Egypt Today, 2022[33]). Also, informal workers who lost their jobs were provided with a monthly payment of EGP 500 for six months (WHO, 2021[34]). Applicants had to register with the Ministry of Manpower, with the programme reaching 1.6 million beneficiaries working in multiple sectors.
Evaluating the impact of these initiatives will support Egypt’s efforts to improve the efficiency and reach of its social security ecosystem. For instance, no studies have investigated the effects of the 2019 reform on the promotion of formal jobs. It is possible that these effects may be limited due to the existence of the low earnings threshold, above which social security contributions become mandatory. This threshold might have created disincentives to increase low wages and, in turn, created incentives for employers to underreport wage earnings, in particular when the threshold does not increase as much as average wages, compromising the collection of social security contributions and the social insurance coverage for low-paid workers. Removing this threshold could therefore be positive for increasing formalisation efforts. Such efforts could in addition benefit from further reducing the rate of social security contributions, which would expand the coverage of social insurance and limit the financial burden for employers (OECD, 2024[24]).
3.4. Concluding remarks
Egypt should continue to take measures to simplify administrative procedures for business registration and promote financial literacy and financial inclusion strategies, with a view of facilitating business formalisation and formal private sector growth. This would typically include regulatory simplification; easing licensing and regulatory requirements; further strengthening, in line with the objectives of the Law No. 152, and improving the design of simplified tax regimes (Mas-Montserrat et al., 2023[35]), enhancing support for SMEs; and improving access to finance (OECD, 2024[24]). In this context, ongoing reform processes, such as the implementation of the MSME Law 152 of 2020, will need detailed impact evaluations in order to ensure that it is effective in reducing the overall compliance burden that businesses face.
Furthermore, strategic support to specific high value-added sectors can also facilitate business and labour formalisation in a context of increased competitiveness. Over the last decade, Egypt has prioritised the internationalisation of its economy by developing industrial parks, with a focus on fostering industrialisation (OECD et al., 2021[1]) and developing the investment attraction and export-oriented potential of its territorial assets. These efforts can have positive spillovers on labour conditions and livelihood of workers in the country, and can be relevant for the informal economy, as evidence suggests that export opportunities may promote the reallocation of informal workers to formal firms (Artuc, Porto and Rijkers, 2019[36]), increase wages and reduce poverty (McCaig and Pavcnik, 2018[37]).
In parallel, it is fundamental to extend legal and social protection to informal workers while improving the reach and efficiency of the system. For that aim, Egypt could further evaluate the impact of initiatives to enhance the social security system, focusing on the 2019 reform's effect on formal job promotion. Egypt could consider changes in the earnings threshold, to avoid creating incentives to underreporting, and explore mechanisms to broaden insurance coverage and ease the financial burden on employers (OECD, 2024[24]).
References
[22] AfDB (2016), Addressing informality in Egypt, African Development Bank, https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Working_paper_-_Addressing_informality_in_Egypt.pdf.
[36] Artuc, E., G. Porto and B. Rijkers (2019), “Trading off the income gains and the inequality costs of trade policy”, Journal of International Economics, Vol. 120, pp. 1-45, https://doi.org/10.1016/j.jinteco.2019.05.001.
[9] Barsoum, G. and D. Abdalla (2020), “Still the Employer of Choice: Evolution of Public Sector Employment in Egypt”, Working Papers, No. 1386, Economic Research Forum, https://erf.org.eg/app/uploads/2020/08/1598519124_314_349569_1386.pdf.
[31] Barsoum, G. and I. Selwaness (2022), “Egypt’s reformed social insurance system: How might design change incentivize enrolment?”, International Social Security Review, Vol. 75/2, pp. 47-74, https://doi.org/10.1111/issr.12294.
[10] CAPMAS (2020), Annual bulletin of Labor force survey 2020, Central Agency for Public Mobilization and Statistics - Ministry of Planning, https://censusinfo.capmas.gov.eg/Metadata-en-v4.2/index.php/catalog/575 (accessed on 30 November 2023).
[18] CAPMAS (2018), Egyptian Economic Census 2017/2018, Central Agency for Public Mobilization and Statistics, Cairo.
[2] CBE (2023), CBE Statistics, Central Bank of Egypt, Cairo, https://www.cbe.org.eg/en/economic-research/economic-reports/monthly-statistical-bulletin.
[26] Dabla-Norris, M. (2018), Size Dependent Policies, Informality and Misallocation, International Monetary Fund, https://www.imf.org/en/Publications/WP/Issues/2018/08/02/Size-Dependent-Policies-Informality-and-Misallocation-46125.
[33] Egypt Today (2022), “Takaful and Karama budget hits LE 25B with 22M beneficiaries: Minister of Social Solidarity”, Egypt Today, https://www.egypttoday.com/Article/1/119115/Takaful-and-Karama-budget-hits-LE-25B-with-22M-beneficiaries (accessed on 30 November 2023).
[11] Egypt Today (2019), “Informal economy exceeds 50% of Egyptian economy”, Egypt Today, https://www.egypttoday.com/Article/3/68388/Informal-economy-exceeds-50-of-Egyptian-economy (accessed on 30 November 2023).
[14] Elgin, C. et al. (2021), “DP16497 Understanding Informality”, CEPR Discussion Paper, No. 16497, CEPR Press, Paris & London, https://cepr.org/publications/dp16497.
[16] ERF (2021), COVID-19 MENA Monitor Household Survey (CCMMHH), Economic Research Forum, http://www.erfdataportal.com/index.php/catalog (accessed on 30 November 2023).
[7] ESCWA (2023), Inequality in Egypt: facets and challenges, https://www.unescwa.org/publications/inequality-egypt-facets-challenges.
[25] Hacaltana, J., F. Bonnet and J. Garcia (2022), Growth, economic structure and informality, ILO Working Paper, No. 69, https://www.ilo.org/static/english/intserv/working-papers/wp069/index.html.
[30] ILO (2023), Egypt, ILO Social Protection Platform, https://www.social-protection.org/gimi/ShowCountryProfile.action?iso=EG (accessed on 30 November 2023).
[17] ILO (2021), Regional Report on Jobs and Growth in North Africa 2020, International Labour Organization, Cairo, https://www.ilo.org/africa/information-resources/publications/WCMS_809435/lang--en/index.htm.
[6] IMF (2023), World Economic Outlook: A Rocky Recovery, International Monetary Fund, Washington, DC, https://www.imf.org/en/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-2023.
[12] IMF (2022), “Informality, development, and business cycle in North Africa”, Departmental Paper, No. DP/2022/011, International Monetary Fund, Middle East and Central Asia Department, Washington, DC, https://www.imf.org/en/Publications/Departmental-Papers-Policy-Papers/Issues/2022/05/31/Informality-Development-and-the-Business-Cycle-in-North-Africa-464859.
[38] IMF (2016), IMF Executive Board Approves US$12 billion Extended Arrangement Under the Extended Fund Facility for Egypt, International Monetary Fund, https://www.imf.org/en/News/Articles/2016/11/11/PR16501-Egypt-Executive-Board-Approves-12-billion-Extended-Arrangement (accessed on 30 November 2023).
[23] Lopez-Acevedo, G. et al. (2023), Informality and Inclusive Growth in the Middle East and North Africa - Overview (English), World Bank Group, Washington, D.C., http://documents.worldbank.org/curated/en/099062323201054687/P1773800417ccc08708034034fe0f9418be.
[35] Mas-Montserrat, M. et al. (2023), “The design of presumptive tax regimes”, OECD Taxation Working Papers, No. 59, OECD Publishing, Paris, https://doi.org/10.1787/141239bb-en.
[37] McCaig, B. and N. Pavcnik (2018), “Export Markets and Labor Allocation in a Low-Income Country”, American Economic Review, Vol. 108/7, pp. 1899-1941, https://doi.org/10.1257/aer.20141096.
[13] Medina, L. and F. Schneider (2019), “Shedding Light on the Shadow Economy: A Global Database and the Interaction with the Official One”, CESifo Working Paper, No. 7981, http://www.RePEc.org.
[29] Mounir, H. (2022), “7,000 projects formalised since issuance of Enterprise Development Law: MSMEDA”, Daily News Egypt, https://www.dailynewsegypt.com/2022/08/04/7000-projects-formalised-since-issuance-of-enterprise-development-law-msmeda/ (accessed on 30 November 2023).
[15] MPED (2022), Egypt’s Minister of Planning and Economic Development participates in the high-level round table on the informal economy in North Africa, Ministry of Planning and Economic Development, https://www.mped.gov.eg/singlenews?id=1253&lang=en (accessed on 30 November 2023).
[27] MPED (2021), The Annual Economic Bulletin FY2020/21, Ministry of Planning and Economic Development, Cairo.
[24] OECD (2024), Economic Surveys Egypt 2024, OECD Paris, https://doi.org/10.1787/af900de2-en.
[3] OECD (2023), OECD Economic Outlook, November 2023, OECD, Paris, https://www.oecd-events.org/oecd-economic-outlook-november-2023/en/.
[5] OECD (2020), “COVID-19 crisis response in MENA countries (COVID-19)”, OECD Policy Responses to Coronavirus, OECD Publishing, Paris, https://doi.org/10.1787/4b366396-en.
[20] OECD (2020), OECD Investment Policy Reviews: Egypt 2020, OECD Investment Policy Reviews, OECD Publishing, Paris, https://doi.org/10.1787/9f9c589a-en.
[4] OECD (2020), OECD Tourism Trends and Policies 2020, OECD Publishing, Paris, https://doi.org/10.1787/6b47b985-en.
[1] OECD et al. (2021), Production Transformation Policy Review of Egypt: Embracing Change, Achieving Prosperity, OECD Development Pathways, OECD Publishing, Paris/United Nations Industrial Development Organization, Vienna/United Nations Economic Commission for Africa, Addis Ababa/United Nations Conference on Trade and Development, Geneva 10, https://doi.org/10.1787/302fec4b-en.
[32] Presidency (n.d.), Aman El-Masreen Certificate, The Arab republic of Egypt Presidency, https://www.presidency.eg/en/ (accessed on 30 November 2023).
[21] PWC (2019), Shedding light on Egypt’s shadow economy.
[8] UNDP/Ministry of Planning and Economic Development of Egypt (2021), Egypt Human Development Report 2021, UNDP, Ministry of Planning and Economic Development of Egypt, https://www.undp.org/egypt/publications/egypt-human-development-report-2021 (accessed on 30 November 2023).
[34] WHO (2021), Build back fairer: achieving health equity in the Eastern Mediterranean Region: report of the commission on social determinants of health in the Eastern Mediterranean Region, World Health Organization - Regional Office for the Eastern Mediterranean.
[19] World Bank (2023), Enterprise Surveys, World Bank, Washington, DC, https://www.enterprisesurveys.org/en/enterprisesurveys (accessed on 30 November 2023).
[28] World Bank (2020), Enterprise Surveys 2020, World Bank, Washington, DC, https://www.enterprisesurveys.org/en/data/exploreeconomies/2020/egypt.
For further reading
Al-Ahram Weekly-Ahram Online (2021), Egypt's massive informal economy: Transitioning to formality.
ERF (2020), Ghada Barsoum and Dina Abdalla, “Still the Employer of Choice: Evolution of Public Sector Employment in Egypt”, Working Paper Series.
Krafft C, R. Assaad, K. W. Rahman, and M. Cumanzala (2020), How Do Small Formal and Informal Firms in the Arab Republic of Egypt Compare? World Bank Group Working Paper, https://documents1.worldbank.org/curated/en/324411601923707684/pdf/How-Do-Small-Formal-and-Informal-Firms-in-the-Arab-Republic-of-Egypt-Compare.pdf.
Mazloum, A. (2022), Expanding use of e-wallets in Egypt: Strengthening the social contract one transaction at a time, Middle East Institute, https://www.mei.edu/publications/expanding-use-e-wallets-egypt-strengthening-social-contract-one-transaction-time.
Medina, L., and F. Schneider (2019), “Shedding Light on the Shadow Economy: A Global Database and the Interaction with the Official One.” CESifo Working Paper 7981, Center for Economic Studies and Ifo Institute for Economic Research, Munich.
Middle East Institute (2020), Mabrouk M., Egypt’s sizeable informal economy complicates its pandemic response.
Mohieldin M. (Ed) (2022), Financing Sustainable Development in Egypt Report, Cairo: League of Arab States, https://publications.unescwa.org/projects/fsde/sdgs/pdf/Financing%20Sustainable%20Development%20in%20Egypt_Feb%2028.pdf.
OECD (2021), Social resilience: moving away from informality to formal employment and businesses, Issues Paper for MENA-OECD Government- Business Summit https://www.oecd.org/mena/competitiveness/issue-paper-session-4.pdf.
OECD (2020), Informality and Social Protection in the time of COVID-19 https://www.oecd.org/dev/HLM-Thematic-note-Informality-social-protection-post-COVID-19.pdf.
OECD (2017), Women’s Economic Empowerment in Selected MENA Countries: The Impact of Legal Frameworks in Algeria, Egypt, Jordan, Libya, Morocco and Tunisia, Competitiveness and Private Sector Development, OECD Publishing, Paris, https://doi.org/10.1787/9789264279322-en.
UNDP, Human Development Index, https://hdr.undp.org/data-center/human-development-index#/indicies/HDI.
World Bank, Poverty and Inequality Platform.
Notes
← 1. UNStats Value Added by Economic Activity, at current prices - US Dollars, data for 2021 (latest data).
← 2. UNCTAD Foreign direct investment: Inward and outward flows and stock, annual.
← 4. Targeting extreme poverty in Egypt: A national priority | The Abdul Latif Jameel Poverty Action Lab (2019); World Bank's Poverty and Inequality platform (accessed in December 2023) https://pip.worldbank.org/country-profiles/EGY.
← 6. As part of the IMF’s support in 2016, the Government of Egypt initiated a reform plan to reduce the budget deficit and public debt (IMF, 2016[38]).
← 7. According to the Schneider Index, Algeria’s informal economy represented in 2017 32% of its GDP, Jordan 14.9%, Lebanon 28.6%, Morocco 29.2%, Tunisia 35.6% (Medina and Schneider, 2019[13]).
← 8. The Egyptian Economic Census uses a sample of 471 000 operating temporarily and closed establishments. Economic activities outside the establishment are not measured. CAPMAS defines the informal sector as “production units that carry out an economic activity, (industrial, commercial, service, etc.) without administrative registration, or practicing their activities without holding a permission/ license from the concerned official authorities. In addition, they don’t have any legal entity in accordance with the necessary procedures to practice such activities”.
← 9. The new law differentiates micro, small and medium enterprises by annual turnover (Micro: <1M EGP; Small: between 1M and 50M EGP; Medium: between 50M and 200M EGP), as well as available capital classified by manufacturing and non-manufacturing sector (Micro all sectors: <50K EGP; Small in manufacturing: between 50K and 5M EGP; Small in non-manufacturing: between 50K and 3M EGP; Medium in manufacturing: between 5M and 15M EGP; Medium in non-manufacturing: between 3M and 5M EGP).