Economic Growth Challenged by Informal Sector
By Mahy Mohamed
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First Deputy Managing Director of the International Monetary Fund (IMF) David Lipton told an AUC audience that the Egyptian economy had stabilized but that the question remained “where do we go from here?”
During his lecture “The Egyptian Economy: Growth and Job Creation” on May 7, Lipton discussed the economic effects of currency floatation on growth.
The Washington-based IMF usually nances developing countries experiencing budget de cits by o ering short-term capital aid. Egypt acquired a $12.6 billion loan from the international organization in 2016, delivered in several packages, the next of which amounts to $2 billion and is expected in the summer.
Lipton said that Egypt had to deal with three main issues: a fixed exchange rate, the budget deficit, energy subsidies.
“The fixed exchange rate was not appropriate to the Egyptian economy and that was one of the main economic problems that Egypt was facing,” said Lipton.
He added that the savings the government can accumulate from cutting out energy subsidies can contribute toward bettering the country’s public education and infrastructure.
Lipton explained that high- income families can a ord to pay the full price of gasoline and that the subsidy provided by the government in Egypt over the past few years has resulted in overconsumption.
“One of Egypt’s biggest challenges is the demographics.” Lipton discussed the importance of trade to the Egyptian economy, calling it a key factor for a country’s growth.
He then tackled the problem of the informal sector in Egypt.
Because businesses in the informal sector do not pay taxes, they decrease the government’s total revenue despite contributing to the country’s overall GDP.
He used Mexico as an example of a high-population country that had similar economic problems, but which implemented adjustments to their labor law policies to encourage the entry of business to the formal sector.
“In Mexico, there were labor law reforms that allowed the country to hire every citizen to work in the formal sector and in three years, three-and-a-half million people came to work in the formal sector,” he said.
Lipton said that one way to encourage people to enter the formal sector is by reducing tax rates to incentify informal businesses to migrate to the formal sector.
Lipton explained that the tax revenue for Egypt contributes to 13 percent of the total GDP and added that this is considered a relatively low percentage.
“Creating a modern and a more dynamic econmy isn’t something easy,” he said.
The audience asked Lipton several questions about the effect of income and social inequalities on economic policies.
“We really are trying to make sure and consider the social impact and e ects of these economic policies,” he said.
Lipton also emphasized the important role of women in the Egyptian economy.
“When women have full labor rights and they are participating in the market this is not only good for the women but also, good for the whole economy and will help it grow.”
The event was organized in collaboration with the Business Association (BA) and moderated by its Vice-President Nour Beshir.
