Sunday,23 September, 2018
Current issue | Issue 1248, (28 May - 3 June 2015)
Sunday,23 September, 2018
Issue 1248, (28 May - 3 June 2015)

Ahram Weekly

Economics of the first year

Much has been done to improve Egypt’s economy during the first year of President Abdel-Fattah Al-Sisi’s term in office, but has everyone felt the change, ask Niveen Wahish and Sherine Abdel-Razek  

Egypt Economic Development Conference
Egypt Economic Development Conference
Al-Ahram Weekly

Keeping track of the economic decisions over the past year has been quite a feat, but it has been a necessary one since from the beginning of president Abdel-Fattah Al-Sisi’s term in office the economy has taken centre-stage. Moves have been made to find a balance between creating more-inclusive growth and keeping the business community, essential for the growth of the economy and new investment, happy.

In pre-electoral interviews, Al-Sisi made it clear that he would introduce austerity measures to limit the budget deficit to 10 per cent of GDP from 12 per cent the previous year. As a result, while Egypt’s economy has undoubtedly strengthened during the president’s first year in office thanks to these and other measures, the improvement may not always have been felt by the average citizen.

Runaway prices: The restructuring of energy subsidies was the hardest blow as it pushed up some fuel prices by 78 per cent, an increase that could have hurt many consumers. This was followed by an increase in the cost of piped gas to households, as well as an increase in electricity tariffs in preparation for phasing out electricity subsidies within the next five years.

These increases led to domino-like hikes in the cost of transportation and food prices, pushing the annual inflation rate in July 2014 up to 11 per cent, while the month-on-month price increase in the same month came in at 3.6 per cent, its highest since 2008. This was exacerbated by an increase in fertiliser prices in October, which resulted in pushing the prices of vegetables and fruit to unprecedented levels. Last month, a kilogram of okra (usually around LE8 at this time of the year) shot up to LE25 and a kilogram of green beans reached LE15, compared to an average of LE5.   

Though international oil and food prices declined through the course of the year, the depreciation of the Egyptian pound prevented this from being passed on to Egyptian consumers. The pound lost 6.8 per cent of its value since the beginning of the year against the dollar, resulting in an increase in the cost of imports.  

Rationalising food subsidies: The Ministry of Supply tried to cushion the effects of these increases in prices by restructuring its ration-card system through which subsidised food items are distributed to almost 70 million Egyptians.

In addition to replacing the paper cards by smart electronic ones, the ministry increased the number of subsidised items and allowed for more choice in selection. The new system also replaced the quantity-based quotas of subsidised goods with cash monthly allotments of LE15 per person.

The same smart-card system is used for baladi bread distribution in order to stop the smuggling of subsidised flour. Now bakeries can purchase unlimited quantities of flour at market prices. The government in return covers the difference between the production cost of bread and the cost of flour purchased through deposits into bakery bank accounts on a daily basis. With daily allotments of five loaves per person on the cards, queues in front of bakeries have disappeared. Consumers can also redeem unused balances of baladi bread allotments for other subsidised commodities.

Reserves back to safe levels: Increasing Egypt’s hard-currency reserves to a level safe enough to cover import payments and stabilise the exchange rate is one major achievement of this year.

In April, the last available figure, net international reserves increased by 34.2 per cent compared to the previous month to reach $20.52 billion. This marks its highest level since December 2011 and ups the imports cover from three to four months. The figure stood at $16.6 billion in June 2014 when president Abdel-Fattah Al-Sisi took office. The main contributor to the increase is the materialising of a part of the Gulf aid promised during the Egypt Economic Development Conference (EEDC) in March.

Gulf aid flows have supported the reserves since the ouster of former president Mohamed Morsi in July 2013. The Gulf monarchies have long considered the Muslim Brotherhood to be a threat to their regimes, a fact that has favoured Al-Sisi’s administration. Nevertheless, the pace of aid slowed down in the last two quarters, compared to the corresponding ones last year, as the UAE and Saudi Arabia have tried to replace aid to Egypt with investments. The decrease in grants to LE7.9 billion during July-March 2014/2015 compares to exceptional grants of almost LE51.4 billion received during the same period last year.

While the investments promised during the EEDC are not included in currently available foreign direct investment (FDI) figures, Ashraf Salman, the minister of investment, expected the figures to come in at $8 billion during the current fiscal year, compared to $6 billion the previous year. The figure for the first half of the year came in at LE2.7 billion.

Tourism has also been on the rise, with inbound tourism to Egypt increasing by 10.6 per cent in March 2015 compared to the same month the previous year. According to Tourism Minister Khaled Rami, Egypt welcomed three per cent more tourists in the first quarter of 2015 than in the same period of 2014, while reservations for the summer season were up 15 per cent compared to the previous year.

Observers expect the country’s reserves to decline slightly because of the dollar auctions the Central Bank of Egypt (CBE) organises to stabilise the exchange rate by covering banks needs of foreign currency. Prime Holding, a local investment bank, expects that the buffered reserves will encourage the CBE to hold major forex auctions of around $1 billion to meet market demands before Ramadan. The CBE left the pound to lose value against the dollar in these auctions as a kind of de facto devaluation during the countdown to the EEDC. It also introduced restrictions on dollar deposits at local banks as a means to end the parallel market. These steps stirred the reservations of importers and exporters due to the resulting lack of dollar liquidity.

Back-tracked taxes: As part of measures to tighten the budget deficit by increasing revenues, the government put in place a new tax regime in July 2014. This included higher taxes on those earning higher incomes, and an additional five per cent tax has been imposed temporarily for three years on individuals and corporations earning more than LE1 million annually, a move which has increased the maximum tax rate to 30 per cent from 25 per cent in an attempt to procure additional revenues to prop up the government budget. This is in addition to a 10 per cent tax on cash dividends and net capital gains realised at the end of each tax year.

However, in the countdown to the Egypt Economic Development Conference (EEDC) held in Sharm El-Sheikh in March, a decision to unify income taxes at 22.5 per cent lowered maximum taxes on the highest taxable brackets but also pushed taxes up for salary earners from 20 to 22.5 per cent.

According to observers, this reflected the government’s priorities, as instead of sticking to what the country’s new constitution states should be the application of a “progressive, fair and widely-based tax system,” the measures appear to add to the burdens of individual tax-payers. While the income tax on wages and salaries counts for 17.6 per cent of overall income tax yields, that paid by private companies is only 5.6 per cent.

This also means doing away with the five per cent tax on the richest bracket of the population, which had represented the degree of progressiveness in tax collection that many had been calling for after the 25 January Revolution as part of measures to achieve social justice. While officials have said that there will be more progressiveness within the maximum rate, it is not clear how. The new law imposing the new tax has not been issued, but the intention behind it is to improve the investment climate.

The same logic applies to the government’s decision to backtrack on the implementation of the capital gains tax, postponing it for two years. The cabinet decided to give in to pressure from various players dealing in the stock market by exempting them from a tax that would have been paid by a maximum of 500,000 portfolio investors, while preparing for launching the value added tax (VAT) which will be applicable to all Egyptians.

Even international organisations such as the International Monetary Fund (IMF) voiced disappointment with the decision, saying the capital gains tax was “fair” and would have raised needed revenue. The decision means that “more of the cost of reducing the budget deficit will now be paid by people who are less able to afford it,” Chris Jarvis, chief of the IMF’s mission in Egypt, told Bloomberg.

The government’s argument was that the tax would cause the market huge losses and investors would flee to other regional markets that do not have similar taxes.

 Anis Aclimandos, head of the American Chamber of Commerce in Cairo, argues that steps taken by the government to improve the investment climate should not be viewed as particularly favouring the business sector against the rest of society. “We are all in the same boat,” he says noting that “the private sector in Egypt contributes around 65 per cent of the country’s GDP.”

An eye on investment: Improving the investment climate has been at the heart of the government’s efforts in the lead up to the EEDC.

Ahead of the conference the government issued amendments and new provisions to the investment law. These provided for a one-stop shop to help investors acquire all necessary licenses, a new system for land allocation, and a mechanism for the out-of-court settlement of disputes arising between investors and the state.

“This law addressed many pillars of the doing business assessment principles used by the World Bank and is a step in the right direction,” said Mohamed Khodeir, partner and director of the Egypt office of Khodeir, Nour & Taha, in association with Al Tamimi & Co. a law firm. “Supported by well-structured executive regulations that provide more enabling implementation machinery, I believe we have a good law to work from,” he added.

The efforts of the government ahead of the EEDC bore fruit, and the conference was hailed as a success and an economic pick-up. High-level representation by countries and international financial institutions at the conference meant Egypt earned international recognition for the steps it had taken politically and economically. Some $60 billion worth of deals, mostly in the energy and real estate sectors, were agreed upon during the Conference, in addition to $12.5 billion in aid. Additionally, tens of billions of dollars’ worth of memoranda of understanding were negotiated.

While two months after the EEDC some have begun to question whether the conference was all it was made out to be, not everyone shares this view. Anis Aclimandos, head of the American Chamber of Commerce in Cairo, told Al-Ahram Weekly that “turning the economy around is a process, not something that can be done with the push of a button.” That being the case, he explained that the EEDC in itself was “only a conference” and nothing was expected of it, “these projects have to be properly studied first.”

He disagreed with those who had claimed that Egypt had lost momentum after the EEDC. “The projects that will secure the energy for investors are already underway, and these are important before we can invite investors to come.” The conference “was only a beginning,” added Mohamed Al-Sweedy, head of the Egyptian Federation of Industries. “Exaggerated optimism can backfire.”

Both businessmen believe a lot has been done to boost the economy over the past year. The main hurdles are being dealt with, Aclimandos said, in a reference to steps to cut the energy subsidies. “Nobody dared to do that before. It was a bold step,” he said, adding that other pending issues were being dealt with such as land allocation and dispute settlement between investors and the government. “There have been no perfect decisions, but we are on the right track,” he said.

Khodeir said that many of his international and Gulf clients had shown a great deal of interest in Egypt. “The steps towards legislative reforms that have been taken, along with resolving some investors’ disputes, were inspirational in supporting this positive vibe,” he said. He added that many clients were well-aware that “reform is not an overnight process to change the long-track record of, to say the least, an overwhelming bureaucracy surrounded by a forest of legislation. So they are realistic in their approach, and I know that since the right direction is there progress will eventually pick up.”

However, he said that investors value time and certainty — the time to resolve commercial disputes in the courts and the certainty of having effective implementation to secure government approval under the new investment regime. “This is yet to be tested in practice when all the enabling machinery has been completed. But the initial signals are very positive,” Khodeir said.

The credit-rating agencies seem to agree. Standard & Poor’s (S&P), an international credit-rating agency, last week upgraded its outlook for Egypt’s economy from “stable” to “positive” citing “gradual economic recovery” as the reason. S&P’s improved outlook follows that of several other agencies. Last month Moody’s upgraded the government’s bond rating to B3 with a stable outlook, rising from Caa1. In December Fitch gave Egypt a positive outlook.

Tackling bureaucracy: Aclimandos and Al-Sweedy both stress that the government needs to move faster in its reforms. Both called for executive regulations for new legislation to be issued at a faster pace and for the bureaucracy to be tackled more aggressively.

One businessman speaking on condition of anonymity said that president Al-Sisi should have used the charisma he had when he took office to tackle the country’s bureaucracy more effectively. “It needs an aggressive solution, and when he came to power he had the charisma to do it and should have done it,” he said. He added that “if Al-Sisi had used his firm grip to tackle all the country’s problems across the board he would have been regarded like Lee Kuan Yew, the former prime minister of Singapore, who turned his country into one of the richest nations in the world.” For the businessman, Egypt’s “bloated” bureaucracy and corruption are stifling to business.

Khodeir hopes the new public service law will be “one step in the right direction to address the complexities of the government bureaucracy that threaten the implementation of any good laws.” However, he added that “what needs to be done in the legislation agenda is a long-term plan, not an overnight process, but it has certainly started.”

A new Suez Canal: Another surprise in the past year was the announcement of the new Suez Canal waterway. The new canal, scheduled to be inaugurated on August 6, 2015, exactly one year since its launch, is 72 km long, 35 of which were newly dug, while the remainder was expanded and deepened with the aim of increasing the existing capacity and boosting revenues.

The Suez Canal is one of Egypt’s main hard-currency earners with an average annual revenue of $5 billion. According to Mohab Mamish, chairman of the Suez Canal Authority, the expansion of the canal is expected to bring in some $13 billion in annual revenues by 2023, compared to the current revenue of around $5 billion. The cost of the new canal, estimated at around $8 billion or LE60 billion, was collected in the record time of eight days through investment certificates opened for subscription to the public at an annual interest rate of 12 per cent.

The new waterway paves the way for the larger traffic expected as a result of the Suez Canal Area Development Project (SCADP), which is aimed at developing various regions around the Canal, namely Suez, Ismailia and Port Said, into logistical and industrial hubs. The SCADP is forecast to create one million jobs in the coming 15 years.

While the project has been hailed as the country’s long-term life-saver, the businessman who spoke anonymously to the Weekly believes it may not have been well thought-through and could even be a waste of resources. He said that opening a new waterway would not necessarily mean more vessels traveling through it, since this depended on global trade trends which are increasingly geared towards manufacturing in destination markets rather than shipping in order to avoid customs duties and shipping costs.

Furthermore, he lamented that as a result of projects like the new Suez Canal the government had been making piecemeal efforts at boosting the performance of the economy rather than developing an industrial policy to guide its investment and trade policy.

However, despite these criticisms Khodeir was not dissuaded from his positive outlook. He said that Egypt’s position today was much better than last year’s. “Some brave economic steps have been taken to cure and not postpone problems. But I would give it another four years before these start paying off with concrete results that everyone can feel,” he said.

Dealing with salaries: Another item of the budget that the government has been trying to trim is public-sector salaries and wages, which account for almost 25 per cent of government expenses.

In July, Al-Sisi passed a law setting the maximum salary of state employees at LE42,000, or 35 times the minimum monthly salary. The decision was received with criticism from people working in the state banks and oil companies whose salaries sometimes reach double or triple this figure. A Reuters story in December noted that at least 150 senior bankers had quit the Central Bank and three major state-owned banks since the cap came into force in July. The last two months have seen rumours that some companies and banks might be excluded from the decision.

Another step to contain the government’s ballooning pay roll was the introduction of a new public service law. The law, signed in March, aims at reforming Egypt’s administrative apparatus through streamlining hiring, firing and wage-settlement rules. According to the draft law, basic salaries will constitute 80 per cent of wages and promotions will depend on performance as opposed to seniority. A statement issued by the Revolutionary Socialists group noted that some of the law’s articles could open the door to the illegal movement of state workers as the criteria governing performance reports are still unclear and could give executives at various companies an upper hand over blue-collar workers.

In addition to lowering the age for early retirement, the law also states that if two consecutive annual performance reports show a worker is “inefficient,” he could be suspended from his work while keeping his right to a pension.

Taming the labour movement: After a relatively quiet period in the second half of last year, the labour movement has once again started to gain momentum.

The first quarter of 2015 witnessed almost 300 protests by workers, teachers, healthcare employees and taxi-drivers, according to the local NGO Democracy Meter, an indication that labour unrest is on the rise. The number of sit-ins during 2014, half of which was under Al-Sisi’s presidency, came in at 1,655, which is 26 per cent less than the previous year. But what is alarming in the figures is that 82 per cent of these sit-ins were in the public sector and 49 per cent of the demands behind them were to increase wages or compensation.

In a move seen by some activists as a reaction to the increase in strikes, the Higher Administrative Court banned strikes and sit-ins by public-sector employees, saying that those who take part in sit-ins on the job could be punished for impeding the ability of public institutions to deliver services. The organised labour movement in Egypt had earlier been one of the main pillars of the 25 January Revolution.

Cash for the poor: One of the main achievements of last year was the introduction of the cash-transfers programme to support the poor through two initiatives, “Takaful” and “Karama” (solidarity and dignity). Under the initiatives, the World Bank will extend $400 million to Egypt to finance the projects, which are expected to benefit 1.5 million poorer Egyptian families.

Under the “Takaful” programme, poorer households will receive monthly income support based on an incentive-system related to school attendance and utilising maternal and child healthcare services. “Karama” is an unconditional income-support programme that aims at protecting and reaching out to poorer elderly people over 65 years old and those with severe disabilities.

A World Bank statement on the deal pointed out that despite good progress in Egypt’s human development indicators over the past two decades, education and health still needed further attention, especially in the poorer regions of the country. “Around 21 per cent of Egyptian children ages 0-4 years are stunted. Inadequate feeding and childcare practices among young mothers are believed to be associated with malnutrition,” it said.

 On the education front, “while there is nearly full enrollment for children in the richest quintiles, the poorest quintile still registers enrolment rates of about 73 per cent in basic education and below 50 per cent in secondary levels,” it added.

Satisfied job-seekers: The government has tried to boost investment during this year, reflected in an improvement in the unemployment rate. This declined to 12.8 per cent in the first three months of 2015, compared to 13.4 per cent in the same period a year ago. The public statistics agency CAPMAS attributed this to an improvement in economic activities.

In February, the government announced a national plan to provide job-seekers with needed training to upgrade their skills. The government plan seeks to give training to approximately 750,000 people wanting to work in Egypt. A further 850,000 people will be trained to work abroad in a number of both traditional and new markets in Africa, Eastern Europe and Asia.

Moreover, two weeks ago, vegetables distribution vehicles -a project revealed during Al-Sisi’s electoral campaign- started to be delivered to those who had applied for it.

Eligible applicants should at least be 21 years old and not older than 45 with a valid driving license and no other job.The first phase of the project will include 2,000 vehicles paid by soft loans overt 10 years.

The social safety net plans as well as the national training program fits in the government’s plan for an inclusive growth. “The economic growth is not felt among the poor. Egypt needs a model that generates jobs all around the country,” Ghada Wali, minister of social solidarity told members of the American Chamber of Commerce in Cairo on Tuesday.

Additional reporting:
Stefan Sigaard

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