8 - 14 November 2001
Issue No.559
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Al-Ahram Weekly Online 8 - 14 November 2001 Issue No.559 |
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Facing the music
The government is announcing economic measures to counter the effects of the global downturn. Gamal Essam El-Din reports
The economic shocks following 11 September's terrorist attacks are putting Prime Minister Atef Ebeid's government to the test at a time when the country is still grappling with a longstanding market recession and liquidity problems. Predicting a serious global downturn, the government has adjusted its forecast for the gross domestic product (GDP) growth rate for 2001/02 from 5.5 per cent to 3.5 per cent.
Last Wednesday, only a week before parliament was scheduled to hold its opening procedural session following the summer recess, the government unveiled a package of economic measures aimed at buffering the shocks of the downturn and boosting demand. Some elements of this package need parliament's approval, while others require coordination between the Ministry of Economy and Foreign Trade and the Central Bank of Egypt (CBE).
Leftist and Islamist members of the opposition criticised the government for taking more than a month to face up to the harsh economic realities resulting from 11 September and adopt measures to steer the domestic economy through the storm.
The government's package comprises measures in the areas of fiscal, monetary and industrial policy.
On the fiscal front, the government will submit a proposed amendment to the unified tax law to the People's Assembly. The government anticipates that the measure should be effective by February, meaning that it will be in force when Egyptians file their income taxes by the end of March.
Many deputies had called for an amendment to the unified tax law (no. 187 of 1993) in May as parliament was wrapping up its work before the summer recess. Deputies critical of a government bill that aimed at imposing a five per cent levy on the sale of new cars, said they would not vote for it unless the unified tax law was modified to reduce taxes on personal income.
The proposed amendment applies to income from five source categories: industrial and commercial, self-employed professions, real estate, salaries and corporate businesses (such as holding and joint stock companies).
Chairman of the Taxation Authority Talaat Hammam, addressing members of the American Chamber of Commerce (AmCham) last week, said the amendment provides for tax cuts on personal incomes, ranging from 10 per cent to 20 per cent. "These cuts, which are aimed at reducing tax burdens on limited-income brackets and thus addressing social inequalities, are anticipated to inject LE3.3 billion [$800 million] into the market to spur demand and increase consumer spending," Hammam said.
But no sooner had the government announced the main features of the bill than people in the business world began to raise objections on the basis that the reductions were too little. One AmCham member said that corporate taxes should not exceed 10 per cent, "to promote domestic investment rates, boost exports and prevent capital flight."
Other businessmen drew attention to the fact that an eight per cent tax break given as a special privilege to export-oriented businesses was reduced to two per cent in the proposed amendment.
Strangely enough, some businessmen criticised the breaks given to families in the proposed amendment, suggesting that they would increase the budget deficit.
MPs are expected to ask for larger tax cuts on personal incomes and breaks aimed specifically at helping families. "National Democratic Party deputies were sharply criticised by the public for rallying behind the sales tax law in May and are now quite anxious to improve their image by passing laws aimed at effectively increasing incomes and spurring market spending," said Atef El-Ashmouni, an outspoken NDP deputy.
Leftist MPs cautioned the government against being too responsive to businessmen concerning amendments to the unified tax law. "These businessmen are trying to exploit current conditions to extort additional privileges from the government," Abul-Ezz El-Hariri, a deputy of the leftist Tagammu Party, said. El- Hariri plans to present a parliamentary interpellation (a question that must be answered) involving Ahmed Ezz, chairman of parliament's Budget and Plan Committee, who is also an industrialist engaged in the production of steel. El-Hariri alleges that Ezz received hefty bank loans without providing sufficient collateral.
Concerning monetary policy, Prime Minister Atef Ebeid announced last week that the government intends to reduce banks' reserve requirement to 12 per cent from 14 per cent of their total deposits. The government had already reduced bank reserve requirements in early October to 14 per cent from 15 per cent and allowed banks to include treasury bonds in their liquidity calculations. Ebeid also announced that the discount rate will be reduced from 11 per cent to 9 per cent.
Commenting on these moves, Abdallah Tayel, chairman of the People's Assembly Economic Affairs Committee and chairman of Misr Exterior Bank, told Al-Ahram Weekly, "These measures have so far injected LE4.8 billion into the market. Last week's reductions, once implemented, could provide the market with additional liquidity of LE8 billion."
Businessmen called for the lending rate to be reduced from 11 per cent to seven per cent. "It is good that the government is responsive to the demands of the business community, but we should not expect it to deal with all demands at once," Tayel said.
Economy Minister Youssef Boutros Ghali told the NDP Economic Committee, "We are really serious about cutting interest rates and boosting liquidity, but these decisions should be thoroughly analysed by government and CBE economists to determine their effects on monetary policy and banking revenues." Ghali predicted that the mortgage law, passed by parliament in June, will provide a tremendous stimulus for the construction sector. "This law, coupled with reductions in interest rates, is envisioned to give a great boost to demand, especially in the real estate market," said Ghali. He announced that the banking and credit law will be modified to simplify the offering of mortgages by banks.
Increasing domestic industrial output figured prominently on the government's new anti-recession plans. Many members of the board of the Federation of Egyptian Industries believe that the global economic downturn is a golden opportunity to cut imports by at least $3 billion and to increase exports to Arab countries.
At its meeting last week, the cabinet ordered government ministries to depend on local goods wherever possible. "The decision to cut interest rates on bank loans is directed at the industrial sector. Added to this, the customs law will be amended to give a competitive edge to domestic industry," Ebeid said.
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