Merchants tread fine line on officialdom



Around 80 per cent of small businesses operate outside the tax  and banking systems, including services such as rubbish collection

By Mark Huband in Cairo

Financial Times, 9 May 2001

Running down to the wind-ruffled surface of Lake Karoun 100 miles south-west of Cairo, the neat, well-irrigated fields of the Fayoum oasis have supported a mix of farmers, entrepreneurs and small industrialists ever since the pharoahs established an urban centre there, between the  Nile and the western desert.

A bicycle hire shop, a car tyre repair shop, and a barber shop complete with an elaborate barber’s chair which rises and falls at the touch of a pedal, line the donkey-filled street of one of several small villages which nestle on the northern edge of the lake.

Just as their customers meander along the street, so the shopkeepers meander between officialdom and informality. The barber shop is more or less a part of the formal economy, while the bicycle repairs are conducted on a haphazard and informal basis, and the car tyre repair shop almost disappears into the plethora of junk in which its owner operates, barely appearing to be a business at all. A growing body of research has concluded that around 30 per cent of Egypt’s gross domestic product (GDP) is generated by non-agricultural small producers in the informal sector.

According to research carried out in 2000 by the Cairo-based Economic Research Forum, Egypt’s informal sector grew by 38 per cent in 1988-98, its labour force growing from 4.7m to 6.5m people, though the International Labour Organisation puts it at 5.4m.

Other research asserts that small and medium enterprises (SMEs) make-up as much 90 per cent of the total number of enterprises in Egypt and that 80 per cent of SMEs are informal, operating outside the tax, social security and banking systems.

Of these 6.5m people working in the informal sector, 50 per cent are involved in industry or construction, and 43 per cent in commerce and services.

The character of the informal sector is representative of the multitude of social, economic and educational challenges faced by the Egyptian government, civil society pressure groups and non-governmental organisations (NGOs).

The government wants to incorporate the informal sector into the formal economy both as a means of broadening the tax base and as a means of encouraging its growth and contribution to GDP by improving its access to credit.

NGOs are keen to alleviate poverty by addressing the issue of child labour. Current research shows that the informal sector employs 65 per cent of Egypt’s illiterate and school drop-out population, a huge proportion of the population.

“For four decades the informal sector was totally ignored. The perception is terribly important when going through the planning,” says Heba Handoussa, director of the Economic Research Forum, a regional research body.

“With the concentration on big projects, the small producers are going to be ignored. Every policy legally left out any mention of the micro-enterprise sector. Thus, they had lack of access to credit, a lack of tax concessions, and a lack of training and education. There are also people who are between formal and informal. They are not paying social security, but they need to register as companies to receive electricity.”

Among the rats, donkeys and 2,000 tons of Cairo garbage, the dignified rituals of daily life are rigidly observed in Zabbaleen al-Moqattam. Outside a cafeteria, Shehata Ibrahim Shehat’s immaculate clothes, large ring and fine wristwatch contrast with the grime, the foul smell and the grinding poverty of the surroundings.

Perhaps Egypt’s most sophisticated and entrenched example of an informal economy, the Zabbaleen are a community of mostly Coptic Christian Cairenes who make their living collecting and recycling the city’s rubbish.

Without their informal organisation and teams of parents and children whose donkeys strain under the weight of their rickety carts, the city would be submerged in rubbish. The highly organised and apparently lucrative business is divided between the Wahiya, who are responsible for collecting from various Cairo districts, and the Zabbaleen who take the rubbish and recycle it.

Between them they have created a E£75m business (US$19m) that employs 75,000 people and sustains many more. Most of Cairo’s household rubbish collection is in the hands of the Wahiya, who charge EPounds 3 per household per month for the service. They then pay the Zabbaleen to take it away.

The Zabbaleens’ income is largely derived from the business of sorting what they buy from the Wahiya, 80 per cent of which is recycled, as well as from their own collection business. The rights to collect from specific districts can be bought for around E£7,000 per thousand homes, equal to one year’s income.

Within Zabbaleen families, some collect, others sort, while others have become rubbish dealers and recyclers. However, expansion of the recycling business is limited by the lack of investment capital for machines such as plastic crushers, which cost E£250,000. Their lack of access to funds is typical of the situation faced by the informal sector.

“I don’t have enough money to do anything more than basic recycling. I could never buy a recycling machine,” says Salama Naim, who earns up to the relatively handsome sum of E£1,500 a month from recycling.

“And I couldn’t go into partnership with other plastic collectors, because people aren’t co-operative. They are looking for their own business, and their own profits. When there’s been co-operation, there have always been problems.”

The government has sought to address the issue of the absence of credit as part of a more general effort to formalise the informal economy and improve access to credit for the SME sector. Through the Ministry of Economy and Foreign Trade’s SME Unit, attempts have been made in the past three years to tailor aspects of reform policy to the needs of the vast pool of small, medium and informal businesses, in particular by encouraging the state-owned banks to provide credit.

Even so, credit to the broader SME sector amounts to only around 7 per cent of total bank lending, while up to 90 per cent of small enterprises have never obtained a bank loan and around 70 per cent have never applied for one, relying instead on family finance and borrowing from individuals.

Meanwhile “the continuous influx of small firms, in all sectors of the economy by all segments of society is considered a healthy phenomenon and a crucial barometer for social and economic well-being”, economist Alia el-Mahdi recently wrote.

Despite the failure so far to improve the status of these enterprises, they “make various indispensable contributions to the economy,” Ms el-Mahdi wrote.

Most analysts agree that they should now be more effectively harnessed to the broader economic reform process, if the private sector is to replace the diminishing state sector and sustain growth at a level adequate to meet the need to create 815,000 new jobs annually.

© Financial Times