Egypt’s sizeable informal economy complicates its pandemic response

Trying to gauge the effects of the pandemic on Egypt’s economy is like watching a pipe slowly drip water on the ceiling. You have no way of knowing how bad it’s going to be, but you can tell it’s bad news and getting worse by the day.

Egypt isn’t alone in this, of course — every country in the world is taking one hard knock to its economy after another. And in fact, Egypt did have factors that may have cushioned it more than other emerging economies at the onset. In an attempt to weather the storm, the government tried to balance careful spending that would enable it to keep its credit rating up so it could borrow at favorable terms down the line with measures to mitigate the damage to its citizens. It shored up its foreign exchange reserves, providing a buffer that enabled it to roll out measures to protect the country’s most vulnerable, including an EGP 100 billion stimulus package. In addition, the Central Bank promptly slashed interest rates by three percentage points, exempted non-performing loans and late payments from fines, removed ATM withdrawal fees for six months, and told banks to provide credit lines for companies to finance salaries and capital. And in an attempt to shield a population with rising poverty rates, it extended the cash cover exclusion period for some foodstuff for 12 months. The tourist industry, which employs about a tenth of the population, has come in for special support, on both the employer side, in the form of two-year credit facilities, and the employee side, in the form of a decree forbidding the dismissal of any employees during the crisis.

However, one of the most complicated factors of the equation has been Egypt’s sizeable informal economy. An estimated 63 percent of all Egypt’s labor belongs to this class; it accounts for almost 50 percent of all non-agricultural employment and a staggering 30-40 percent of the country’s economy. This is a higher figure than that of other regional economies and it’s one that tends to react to socio-political change or upheaval. Specifically, the size of this sector grew during the implementation of the economic reform and development program of the 1990s, again after the global economic crisis of 2008, and once more after the Arab Uprisings of 2011. In the latter two cases, the sector propped up its “formal” counterpart. Unburdened by the bureaucratic restrictions that so often stifle the country’s economy, the informal sector was significantly more flexible, responsive, and motivated. The formal sector often leaned on it in the form of subcontracting and goods and services delivery. It also absorbed a whopping 1.6 million workers during those two crises.

However, there are significant costs and risks associated with the flexibility that comes with operating outside the formal sector. The lack of any insurance meant that even under stable circumstances, these workers had to put in longer hours for diminishing returns and are extremely vulnerable to external threats. The size of the market means that it can provide an invaluable foil to the formal sector but it also entails greatly reduced job stability, since the high numbers mean declining demand and severe internal competition. If a laborer is not running their own business, then the tendency to view informal employment as a means of making a livelihood until formal employment comes along often stifles social advancement.

In light of the above, the lockdown conditions, imposed in an effort to prevent the spread of the virus, have meant that demand for the services of informal market laborers has declined, leaving them with no means of making a living and no form of insurance or savings to fall back on. This immediately impacted their ability to pay rent, further complicated by the demographics of Egypt’s rental market. Many of the poorest of these laborers in impoverished areas rent from owners who are not much better off than they are, creating a downward spiral of lost income. While the government announced an EGP 500 monthly stiped for informal labor at the beginning of the pandemic, that represents around half the average salary for these laborers, and it applied to those who’d already been signed up with the government. Again, while hotlines and online sites were immediately set up to try help people sign on, poverty is usually inversely proportional to education and it’s unclear how much of the target market was able to benefit.

Under these circumstances, the need to work is likely to supersede the need to shelter in place to avoid the virus. If one cannot feed one’s family, then health is unlikely to be the major concern. And that, in turn, is likely to seriously impede Egypt’s efforts to battle the pandemic.

 

Mirette F. Mabrouk is a Senior Fellow and the Director of MEI's Egypt Program. The views expressed in this piece are her own.

Photo by MOHAMED EL-SHAHED/AFP via Getty Images