Al-Ahram Weekly Online   18 - 24 October 2012
Issue No. 1119
Published in Cairo by AL-AHRAM established in 1875

Gentle reminder

Experts agree that comprehensive plans, not piecemeal measures, are needed to address the budget deficit, writes Mona El-Fiqi

Click to view caption
Egypt's deficit / GDP surpass emerging markets averages
source: Beltone Financial

More than three months have passed since the beginning of the fiscal year on 1 July and no clear steps have yet been taken to deal with the budget deficit. The targeted deficit of LE134 billion in the 2012/13 budget appears like a far cry given that the deficit reached LE170 billion in fiscal year 2011/12, or 11 per cent of GDP.

In the meantime, the economy is in a tight spot. Foreign reserves have fallen to well under half the levels seen before last year's uprising. Foreign reserves stand currently at $15 billion compared to $36 billion in 2010. And the government is facing a balance of payments crisis.

The government has been borrowing from local banks to try to bridge the gap in the deficit, but it is not enough. To narrow the funding gap Egypt is forced to resort to foreign borrowing and grants. Some funds have been forthcoming from the Qatar, Saudi Arabia, the US and Turkey. And Egypt has also asked the International Monetary Fund (IMF) for a $4.8 billion loan. The IMF is optimistic that negotiations for the loan could conclude by mid-November according to recent announcements by IMF chief Christine Lagarde.

To Ahmed Ghoneim, professor of economics at Cairo University, getting the IMF loan is important not for its value but because it would be a positive sign that Egypt has a strong economic reform programme. That would mean that foreign as well as local investors could trust the economic environment in Egypt and begin investing again. Ghoneim explained that foreign aid is necessary because the economy is in need of an urgent injection while internal solutions will take time to bear fruit. In fact, loans and grants would not be enough to cover the budget deficit.

A package of procedures should also be undertaken, such as rationalising some budget items, including the massive subsidies bill and state administration expenses as well as increasing revenues from taxes.The government has already started to apply some measures to help the state increase its revenues. Minister of Finance Momtaz Al-Said ordered the Egyptian Tax Authority to implement legal changes to help the state bring in billions of pounds in unpaid taxes. His instructions include activating municipal tax appeal committees and facilitating payment measures for citizens.

He said that changes would speed up collection and facilitate taxation of small businesses. The state is owed LE150 billion in uncollected taxes, according to Al-Said. And while the minister has not said that new taxes will be collected, nor that a progressive taxation system will be implemented, some experts have suggested that that is in fact what the government should do.

Refaat Al-Said, head of the Tagammu Party, is for imposing progressive taxes to increase revenues. And he is for imposing taxes on hot money invested for the short term in the stock market to make quick profits. He also suggested that the government also collect taxes on land bought and left undeveloped in order to be sold later at a higher price.But not everyone agrees with the inclination to increase taxes.

Economist Mokhtar Al-Sherif believes that "the suggestion to apply a progressive tax system would not be fruitful and it will lead investors to run to other countries in the region where there is a more investment-friendly environment." While increasing revenues, the government must also cut expenses. Subsidies is the main area where savings could be made.

Government officials announced recently that in an attempt to rationalise the annual subsidy bill, which is estimated at LE114 billion, the subsidy on 95 octane gasoline will be lifted ê" it will be sold at LE4.75 per litre. Once implemented, this move would be the beginning of a plan designed to cut massive energy subsidies that make up a quarter of government spending.

In fact, a report issued by the Shura Council this week asserted the importance of restructuring the subsidies system. This restructuring according to Prime Minister Hisham Kandil would be gradual and it would save as much as LE40 billion this year. The plan also includes a coupon system whereby a monthly limited quota of fuel at the current subsidised price would be made available to each citizen who carries an ownership licence of any means of transportation, including vehicles, microbuses or motorbikes.

Coupons for cooking gas cylinders are also part of the plan. Fuel and gas bought without coupons would be priced at market levels. But Refaat Al-Said warned: "the subsidy issue is a very sensitive one. The government should not apply any changes to the subsidy system unless it has entire control on the market to ensure prices will not increase and add to the burdens on consumers." Refaat Al-Said also pointed out that consumers are afraid that once the subsidy on 95 octane gasoline is lifted, any shortage on other gasoline products would oblige them to use the non-subsidised type.

Nevertheless, according to Ghoneim, "rationalising the subsidy system is a must, but it needs strong political will and should be coupled with measures to reduce state administrative expenses." These procedures, according to Ghoneim, should be part of a comprehensive economic reform plan that includes restructuring the wages system that ties wages to productivity.

IMF delegation coming soon

INTERNATIONAL Monetary Fund (IMF) officials reiterated this week that discussions with Egypt are soon to resume. "We are due to return to Egypt in the course of this month to pursue discussions," IMF Managing Director Christine Lagarde said this week at a press conference in Tokyo during the IMF/World Bank annual meetings.

"Fingers crossed. Let us hope that we can do that expeditiously," Lagarde said.

A delegation from the IMF had been scheduled to arrive in Cairo earlier this month to discuss the terms and conditions of a $4.8 billion loan that Egypt has requested from the international financial institution. The arrival of the delegation was delayed by the Egyptian government who said they needed more time to prepare the economic reform programme that will be reviewed by the delegation.

Masoud Ahmed, director of the IMF's Middle East and Central Asia Department, told a press briefing that the Egyptian government has invited the IMF to send a team "at the end of this month that would then begin the process of negotiations and discussions, which we are ready to do." He added that on that basis, "we hope to be able to conclude a programme in the weeks thereafter."

Ahmed stressed that the IMF stands "ready to support an Egyptian programme that would be developed by the Egyptian authorities that would address the main challenges facing Egypt, which are imbalances of the fiscal and external side, as well as laying the foundation for growth." He also stressed that the programme should enjoy "broad support, because it is important to have that support to ensure that the programme that is developed will be implemented."

The IMF foresees a relatively low growth rate for Egypt. In the past fiscal year the IMF said the Egyptian economy grew at two per cent. And in the coming year it could be closer to three per cent. "Both of these numbers are well below the historical levels of growth that Egypt has seen over the last few years, and well below the level of growth Egypt needs to generate enough jobs," Ahmed said.

Nonetheless, he added that "in the medium term, again, Egypt has a strong economic base, diversified industrial and manufacturing and services sector, a strategic location, and there is no reason why Egypt should not be able to generate the kinds of inclusive growth that would generate jobs and prosperity for people."

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