Tuesday,21 May, 2019
Current issue | Issue 1126, 13 - 19 December 2012
Tuesday,21 May, 2019
Issue 1126, 13 - 19 December 2012

Ahram Weekly

Suspended not cancelled

Controversial new changes in the tax system have been put on ice till heat in the streets cools down, Sherine Abdel-Razek reports

Al-Ahram Weekly

It was revealed Sunday afternoon, highly criticised in the evening and scrapped late at night.

“President Morsi was informed Sunday midnight of public discontent and shock that the new taxes stirred so he immediately decided to halt it. He also commissioned the cabinet to conduct a social dialogue to secure public consent before [their] implementation,” said presidential spokesperson Yasser Ali Monday.

The tax increases approved by Morsi, who has legislative power in the absence of a parliament, were to be imposed on many goods including cigarettes, soft and alcoholic drinks, cement, fertilisers, oil, water and electricity. The move also included an extra tax on mobile phone calls, a new formula for property taxes and modifications to income taxes.

The decree covering the new taxes was published in the official gazette 6 December but only revealed Sunday. The increases triggered furious critique on Sunday night talk shows and social media networks because of the timing amid political tension over the constitution and a prospective referendum due 15 December. President Morsi scrapped the decree by a post put on his facebook page on Sunday at 2am.

According to Ali, the new taxes are a part of a reform package aimed at tightening both the budget and balance of payments deficits. The plan is understood to be a prerequisite for acquiring a $4.8 billion IMF loan.

“The tax amendments and [their] reversal are tightly related to Egypt’s dire fiscal conditions and reform measures agreed upon with the IMF. [I] believe the president’s decision to revoke the law is part of public opinion management following recent events,” commented Hani Geneina, head of research at Pharos Securities, in a research note.

Morsi’s insistence on holding a referendum on the constitution that most liberal forces reject, but Islamists support, triggered rival protests between the opposition and Morsi supporters. The confrontation escalated to deadly clashes that took the lives of eight on Wednesday.

Ali underlined that the decision was just a suspension and not a cancellation. He said the decisions were anyway supposed to be implemented in July 2013 stressing that no taxes are being implemented for the time being.

However, some items witnessed substantial increases since Sunday. “I bought a soft drink can LE0.5 higher than last week and the kiosk owner told me that this is because of the new taxes,” mid-aged taxi driver told Al- Ahram Weekly on Tuesday, “but it was only this kiosk” said the driver who asaid he bought another can on the following day with the regular price.

Geneina finds the idea of postponing the taxes to mobilise public support “alarming”. “It raises concerns over the government’s ability to execute reforms amid the current social rift. While the government has been successful in raising natural gas, gasoline and electricity prices without noticeable opposition, it is apparent that raising the prices of selected goods and services that are consumed on a day-to-day basis (such as cigarettes) may prove to be much more difficult going forward, unless consensus is achieved.”

The move also raises doubts about the fate of the IMF agreement especially after the government asked the IMF to postpone the loan till next month due to political circumstances. The IMF executive board was supposed to meet 19 December to decide on the loan, which was agreed at the technical level on 20 November.

Simon Kitchen, a strategist at EFG-Hermes, told Reuters Monday he thought the IMF would be understanding, given Egypt’s circumstances. “Egypt has already made some small reforms on electricity and fuel pricing in the past few months, so they are moving in the right direction, and the agreement is for 22 months,” he said.

“But the IMF will be looking for these tax reforms to be reinstated once the political temperature has cooled.”

A lot of opponents to the decision feared that imposing taxes on such a wide array of goods would eventually push prices up and reduce purchasing power and thus further slow the economy.

Egypt’s inflation rate in November declined to its lowest level since March 2006 to reach 4.1 per cent. Abu Bakr Al-Guindi, head of the Central Authority for Public Mobilisation and Statistics, cited weak purchasing power as a factor in the economic slowdown.

Prime Minister Hisham Kandil’s government said it plans to rein in the budget deficit to 8.5 per cent in the financial year that ends June 2014 by better targeting subsidies and expanding the tax base.

Geneina expects these decisions to be approved by the Shura Council (the upper house of parliament) later this year, if the draft constitution is approved and the Shura Council assumes legislative responsibilities.



IMF loan on hold


EGYPT has asked the International Monetary Fund (IMF) to delay approval of a $4.8 billion loan for a month, Prime Minister Hisham Kandil said on Tuesday. The IMF board was due to meet next week to review the loan request. Kandil attributed the need for the delay to domestic political circumstances. However it is not only political unrest that could have negatively affected the board’s decision but also the retraction by the government on its decision to implement planned taxes increases. Although the government had denied that the tax increases were correlated to the IMF loan, they would have been a demonstration that the government is taking moves to increase its revenue. The government has said that it hold off on the decision to impose the taxes until it carries out a national dialogue on the issue. Egypt is facing a gaping budget deficit which reached 11 per cent of GDP in 2011/12.

Delay of the loan will have its negative reverberations on market confidence in the Egyptian economy. The government had been eager to sign the loan to assure investors and other donors about its economic plans.

“The Egyptian authorities have asked to postpone their request for a Stand-By Arrangement with the IMF in light of the unfolding developments on the ground,” an IMF spokeswoman said in a written statement. She added that nonetheless the Fund remains in close contact with the authorities, and stands ready to continue supporting Egypt during the ongoing transition and to consult with the authorities on the resumption of discussions regarding the Stand-By Arrangement.

The Egyptian government had reached a staff-level deal for a standby agreement with the IMF late November. But the deal is only considered final after it is approved by the IMF board. This is the second time that Egypt puts off an IMF loan. In the summer of 2011 Egypt military rulers at the time turned down a $3.2 billion loan for fear of indebting future generations.

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