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International bonds issued in all markets, country minus guarantor: Dimian - Daily News Egypt

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International bonds issued in all markets, country minus guarantor: Dimian

Government received offers from abroad to finance Suez Canal project but opted to finance it domestically, say finance minster

Minister of Finance Hany Kadry Dimian. (DNE Photo)
Minister of Finance Hany Kadry Dimian.
(DNE Photo)

Following the announcement of the growth rate registered in the first quarter (Q1) of fiscal year (FY) 2014/2015, Daily News Egypt sat down with Finance Minister Hany Kadry Dimian to discuss the economic progress, taxation laws and the future of issuing international bonds.

What’s your comment on the first quarter of the fiscal year’s growth rates?

The improvements in the Egyptian economy indicators have not just started during the Q1 of this fiscal year. The government has been witnessing improvements in various indicators, not just growth, for almost a year now. For FY 2013/2014’s Q1 registered around 1% and the growth rates continued to escalate until it reached 3.5% during Q4 FY 2013/2014. The current fiscal year’s Q1 registered [an increase in] growth rate of 6.8%. Part of that growth, we know, was due to the base effect of last year’s corresponding quarter, which resulted in the elevation of the growth rate.

Aside from this point, let’s examine to what this growth is attributed. It’s attributed to various sectors including the manufacturing sector, the tourism sector, especially during the Q1, the construction sector and the telecommunication sector.  This sector variety has a high multiplier effect, whether on exports or the economic competitiveness abilities or the production.  These are the same sectors that resulted in high growth rates prior to the economic crisis in 2008.

We have also witnessed that markets have started to read the potentials of the Egyptian economy that will allow it to grow. Since August 2013, prior to the growth rates we’re talking about, we have seen the credit default swap (CDS) market indicator dropped from 900 basis points to 260 basis points in the latest reading from it, which was between August 2013 until August or September 2014. At the same time, the capital market index reached levels that were higher than those reached in 2008. It is true that this figure was through a lower trading volume, but the trend is what is more important at the current period. The same trend happened to the deposit rates.

I started noticing this instantly when it reflected on the performance of collected taxes, especially the sales taxes. The improvement is still not at the same level, but it was noticed.

The Egyptian economy is dynamic and economic growth is happening through a variety of channels. It is gaining confidence at a high capacity. When we discuss announcing new mega projects, you see desire from investors, who are sometimes supported by their governments to be present in the investment opportunities we announce. The potential is not just from the size of the Egyptian market but from the change in managing the Egyptian economy. You’ve always sought to have financial balances and growth rates. Now you have a development path and are announcing mega projects that have social, developmental and political feasibilities. Whether  talking about the Suez Canal Development project, the Golden Triangle, agricultural projects or development of industrial ports, it’s helping to make a notable shift in the economy that has a developmental aspect.

There is also a new Egypt with regards to politics. The country is heading to democracy with a constitution that has reconstructed the policies between governmental institutions.

Another path was social and came in the form of reformulation of the social security pension programme to allow it to shift to the conditioned monetary support.  One of those conditions for examples is that if you a child over six years old, he should be registered in school. It always has conditions that will make it more than just monetary support. It will rather be a way to develop human resources in Egypt.

Ministries are also attempting to place their budgets basing them on development programmes. In scientific research, for example, a programme can be placed based on cooperation between different research centres. This leads the development to take a unified path.

We are also seeking to change facilitate legislative processes for investors through the” one window” project. Instead of having 50 or 60 procedure to be dealt with, investors would seek only one place. This is not an easy procedure because you’re not just changing bureaucracy; you’re changing the mindset of institutions and the whole process. This will lead to link the investment process with the implementation process.

You’re not just talking about growth that took place over a quarter of a year, but rather a process of shifting the economy from one path to a completely different one. I believe that the previous path was not adequate to lead the country to grow economically and socially.

You’ve discussed several, mostly infrastructural, projects. Isn’t the government worried that increasing the number of projects announced might lead to Egyptians raising their expectations?

First of all, I will disagree with you in the higher expectations point. The highest expectations that I have been hearing about is much less than the potential of this country. The people are still talking about improving the current economy of the state. We are however seeking to make a shift in the Egyptian economy.

Do we have fears? The answer is no. These investments are all private sector ones. The government has taken the initiative only. The government needed to make policy changes and announce projects, and it introduced change in economics, taxation and financial policies that were very strong and confident. This was due to the belief that the people are supporting the regime.

The projects and programmes seek to complete those policies. We wanted to build confidence in this economy and in its future, so you had to do that with actions and not just speeches. The government announced various projects that tackle different sectors and development targets, testing the confidence in the economy.

Take the Suez Canal Development Project, for example. It has a patriotic aspect to it of course, but we viewed it as chance to study how we’d finance it. The government had an opportunity to finance the project from funding from abroad but it chose to fund it domestically. Banks could’ve also financed the project covering the needed value in several hours, but the government decided not to.

The result was obtaining $8.5bn in eight days. This was amazing and this is the opinion of anyone who follows up on the state of Egyptian economy. Around 40% of that figure was supplied from sources outside the banking system. That was not just due to the high interest rates but a confidence that something bigger is on its way.

The government should take the initiative to change the path of the economy not just improve it. All the projects that were announced were open to the private sector, whether it’s new and renewable energy, roads, PPP or even agricultural sectors.

The informal sector remains a conundrum for the government. Some believe that steps increasing taxes were taken while the informal sector remained a challenge. How do you plan on solving this conundrum?

There will not be additional increase in taxes. We’ve reached the highest level of taxes that we could reach. For example, the wealth tax is temporary and ends in three years. What we’ve worked on was the expansion of the tax base to be fairer.  The tax burden in Egypt is much less than the figure it’s being promoted with. Taxes have reached 25% while the tax tranche is 5% but actually they don’t add up to 30%. The law in Egypt, especially for new investments, offers a lot of discounts, especially during the first years of business, to add up to a tax burden that is less than 20%. We should be looking at the effective tax rate rather than the nominal tax rate.

There are still some sectors that were not included in the tax base. We have defined the most significant one and decided to place them in the tax base. Having financial balances is important for the economic stability for Egypt. Anyone who seeks to invest wouldn’t put his money in a high risk environment. We’re trying to minimise the risk and maintain stability and economic benefits.

We are not targeting a specific tranche and the vertical taxation pressure that was created will be terminated in three years.

As for the informal sector, we are trying to work on various and different aspect. For example, when it comes to taxes, we aim to place as simple taxation system that targets small and micro-businesses. It will be a system that targets target and indirect taxes. The taxes will be minimal with low expenses and will be very direct to try and attract the micro-businesses to enter the formal sector without challenging them with high financial burdens.

Another direction is changing up that cash system that we have. The economy allows any on to seek any amount of cash from the bank and exit or place any amount of cash no matter how big it was. This cash economy doesn’t exist anymore and is no longer satisfactory and is also not required. Controlling the economy that is outside the visible channels is to not allow transactions outside those visible channels. Transactions worth billions are made on a daily basis in the national economy, but they’re outside the banking system. There should a new vision.  If you question whether or not the country seeks to take taxes from low-income people, the answer is no, the country is not targeting to tax low income Egyptians. The government is seeking to organise the economic system and to regulate the exemptions levels. Exemptions are made to protect those who need it, until [revenues] witness graduation and enter the taxation system or leave the choice options, such as what we are attempting to do with the added value tax.

The added value tax is not new, but it is a development for the sales taxes that already exist. For small business, there is a limit for registration and if [revenues] exceeded this limit it enters the tax base. This choice is given to allow business to gain some benefits.

What are those benefits?

It’s the deduction of the tax from the business inputs. I imagine that it would be more for the industrial than the commercial businessmen. Industrial businessmen have production inputs that can be deducted from the revenues to avoid double counting.

Will the added value tax see the light before parliament?

I have no comment for that question. We have a three-path plan; the political, the social and the economic. The three paths can’t be separated.

 Will the possible reconciliation with Qatar lead to the delay of the $2.5bn payment that should be made before the end of this month?

The Central Bank of Egypt is aware of its commitments and is dealing with cash in and outflow according to a set programme. That programme includes all the commitments and how to deal with any pressures. I’ve answered within the limits of what I want to answer.

What are the primarily impressions of the International Monetary Fund (IMF) delegation?

The delegation is here to write a report, that we consider is a confident certificate of the Egyptian economy. The IMF will not say that the progress happened with unprecedented creativity; however, the report will entail the progress in the economic and social environment in an objective way.  It will discuss the point of strengths and the challenges. This is the confidence certificate.

You’ve previously announced that Egypt will issue $1-$1.5bn in 2015. Have you specified the market in which those bonds will be issued?

The market of issuance will be international and not in just one market. We did receive some proposals to issue in specific regions or private issuance but it is an opportunity to stimulate the market to pay attention to the Egyptian economy. The challenge that will face this issuance is that it’s the first in a long time and we lack a yield curve to measure how the market will perform. It is a beginning. We will issue a tender to select who shall manage the issuance.

Will Egypt have a guarantor to issue those bonds?

No we don’t have. We will issue those bonds as Egypt.

Following the 30 June uprising, Egypt received various aid packages from Gulf countries and international bodies – is there a record for those aids?

During FY 2014/2015 is around $2.5bn dollars and those are the pledges that we had. They include $1.5bn from Saudi Arabia in terms of petroleum products and $1bn cash from Kuwait.

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