Prime Minister Sherif Ismail and the government have promised a litany of political and legislative reforms that would be implemented in the short term to develop Egypt’s economy and pull it out of its poor state.
Debates over the Civil Service Law, the value-added tax, the investment law, as well as the budget deficit, trade balance, inflation, unemployment, and national debt are the main problems currently facing Egypt.
These are problems that could change Egypt’s future if they are fixed, but if they are not, it may only get worse.
There are no signs to tell us that the cabinet would be able to apply the reforms correctly. But this time is not like before, since if the government failed this challenge, it would result in serious consequences, which the country will not be able to bear.
If Egypt does apply its stated reforms appropriately, the investment climate would get better. Direct foreign investment would be pumped into the country, providing jobs that would decrease the unemployment rate. With more people working, demand will grow, which would lead investors to produce more for exporting their products, which would then fix the deficit in the balance of trade and create new sources for foreign currencies.
All of these steps would alleviate the budget deficit, ending Egypt’s main problem that has plagued it for decades.
Deficits in budget, trade balance likely to fall in coming months: expert
The most important indicators in Egypt are still recording budget and trade balance deficits. The annual budget for the current fiscal year (FY) 2016/2017 is expected to record a deficit of 9.5%, as opposed to 11.5% last year.
The total general expenditures of the budget amount to EGP 949.6bn and revenues amount to EGP 635.3bn, with a cash deficit of EGP 314.3bn, while the total deficit amounts to EGP 323bn, an equivalent of 9.9% of the gross domestic product (GDP).
The size of the GDP by the end of the next FY is estimated at EGP 3.2tr and the targeted growth rate is 5.5%.
Government sources said the allocation of wages in the draft budget amounts to about EGP 229.4bn, with a growth rate of 5% compared to the current FY 2015/2016, marking an increase of EGP 11.4bn.
The interest allocations during the next FY register 32% of the public expenditure. Allocations of subsidies, grants, and social benefits declined by 10%, compared to the current FY to a record EGP 209.3bn.
The sources attributed the decline to the government’s will to restructure the subsidy programme on petroleum products in light of the announced strategy, in addition to a decline in oil prices ($40 per barrel).
It’s important to mention that the International Monetary Fund (IMF) mission chief to Cairo Chris Jarvis explained that the budget deficit has to be cut to about 5.5% over the timeline of the funding programme.
On the other hand, the value of the trade balance deficit in the third quarter in 2015/2016 amounted to $9.85bn instead of $9.15bn in 2014/2015.
Imports recorded $14.1bn instead of $13.9bn in the year before, while exports decreased to $4.2bn compared to $4.7bn.
Omar El-Shenety, CEO of Multiples Group, said that both the budget and trade balance deficits are likely to fall in the coming months, adding that the main reason for this is the IMF loan.
He explained that the IMF agreement would force the government to decrease its payments to achieve the target of cutting the budget deficit to 5.5% through cutting subsidies of electricity, water, oil and gas, and transportation.
The value-added tax (VAT) also aims to increase the government’s financial resources, El-Shenety added.
He believes that the IMF loan would help the government control the budget deficit, despite the potential harmful effects it may have.
Devaluation of the Egyptian pound, the US dollar shortage, and import restrictions would decrease the rate for importing, he noted.
El-Shenety said that floating the Egyptian pound would improve exports, yet it would lead to imported products being overpriced, which means that the deficit in the trade balance is likely to decrease.
Recently approved VAT will increase prices across the board
On 11 August, the International Monetary Fund (IMF) announced that it had reached an initial agreement with Egypt to lend the country $12bn over a three-year period. And as a condition for Egypt to receive the loan, the IMF asked the government to institute legislative reforms, such as applying value-added tax (VAT), a measure which parliament approved at the end of August.
The application of VAT has occupied the thoughts of most Egyptians recently, as it would increase the price of almost every product, with the exception of some exempted goods.
Prime Minister Sherif Ismail said on 17 August that the purpose of VAT is to obtain more revenues for the state, estimated at around EGP 32bn.
This figure will be directed towards social security and the support of low-income citizens, the prime minister explained.
“Egypt’s rich are able to provide their needs easily,” he said. “They have to take on more.”
The prime minister noted that the government is committed to a 14% VAT rate, refuting rumours about the parliament’s desire to cut it down to 12%. However, when approved by parliament on 28 August, the VAT was set at 13% for implementation in October, and will increase to 14% next year.
The Ministry of Finance agreed in a recent meeting with the Budget and Planning Committee on 21 August to exempt more goods from VAT, bringing the total exempted goods and services up to 57.
The new goods include international education, special needs cars, medicine, and recycled waste. Moreover, the government is considering exempting textiles from the tax, according to the sources.
Minister of Finance Amr El-Garhy said during a meeting with parliament’s Coalition in Support of Egypt that the law will have a limited impact on inflation, ranging between 1.5%-2.5%.
On the other hand, the minister said that cutting the rate down to 12% would impact the targeted inflation rate.
Eman Negm, an economist at Prime Holding, said that the inflation rate would record a percentage of 11.5% by next year due to VAT’s application, among other factors.
She believes that VAT should not increase inflation, adding that the purpose of applying it is to reduce the burden, not to raise it.
In order to decrease its negative side effects, the government must control the local markets to prevent even greater increases in prices, she noted.
From another point of view, Mohamed Fared Khamis, head of the Egyptian Federation of Investors, said that the federation accepts VAT despite its reservations.
Civil Service Law: revised, yet has the same problems
On 25 July, the House of Representatives approved the revised Civil Service Law, which it had previously rejected in February. Parliamentary speaker Ali Abdul Aal announced the government-proposed bill will be sent to the State Council for review.
The parliament approved two long-debated articles, which regulate an annual incentive, and the appointment of temporary and seasonal employees or workers, state-run newspaper Al-Ahram reported.
The State Council’s department of Fatwa and Legislation will review the bill for wording and the constitutionality of articles.
On another note, the parliament also approved an annual salary increase of 7%, instead of 5%.
Labour unions have rejected the new percentage, as it does not account for the rate of inflation in accordance with the Central Bank of Egypt’s (CBE) estimates.
Members of parliament seem to be divided over the decision. Several MPs rejected Abdul Aal’s decision, suggesting that the annual increment should be increased from 7% to 10% to account for inflation and economic conditions.
The 25-30 Alliance has rejected the law, and criticised the method by which it was approved, without electronic voting, according to a statement from the coalition group comprised of independents.
The statement included comments by workers who will be most affected by the law, with a focus on certain articles─particularly Article 37, which determined the annual salary increase as 7%. This is not equal to the inflation rate as per the CBE’s estimations.
The alliance demanded that Article 32 be amended, which discusses equality among workers, as well as Article 72, which gives temporary workers the opportunity to be permanently employed.
Fatma Ramadan, a former rights researcher at the Egyptian Initiative for Personal Rights, told the independent news outlet Mada Masr that the law creates division amongst employees, according to the first article of the law.
She emphasised that the problems that were the reason the law was rejected before, are the same in the revised version. However, the government claims that the new law is different, through rearranging some articles or creating new ones that mean the same.
Ramadan believes that the revised law has positive points, such as identifying specific work hours for employees, which were not clear in the old version. She also said that obliging the Labour Committee to announce the outcome of workplace conflicts is the correct thing, adding that the law needs to be revised so that it may be more fair.
She stated that there are articles that were made worse when compared with the old version, such as Article 58 of Law 18, and articles 60, 62, and 68, which give the employer the right to tighten the grip on workers, and gives them the ability to prevent them from being promoted.
Removing obstacles for investment is only solution to reduce unemployment rate
The unemployment rate witnessed a decrease of 0.2% in the second quarter (Q2) of 2016, down to 12.5% when compared to 12.7% in the first quarter (Q1) of 2016, according to a press release by the Central Agency for Public Mobilization and Statistics (CAPMAS) issued on 15 August.
Aliaa Mamdouh, a former economist at CI Capital Holding, said that the government must work hard to provide jobs for the unemployed, adding that focusing on creating jobs through investment projects would create demand, which would in turn help private sector investors increase their production.
The local market is suffering from inflationary recession, she emphasised, adding that people now try to spend their money on the most important things, such as food, medicine, and education.
Mamdouh believes that attracting foreign investments through a reform investment climate is the only, and most effective solution for the government to decrease the unemployment rate.
The unemployment rate for men declined from 8.9% in Q1 2016 to 8.5% in Q2 2016, while it recorded 9.3% in Q2 2015. The unemployment rate for women also slightly decreased from 25.7% to 25.6%, and recorded 24.1% in Q2 2015.
According to the budget for fiscal year (FY) 2016/2017, the government is aiming to decrease the unemployment rate by 1% to reach 11.5%-12% in FY 2016/2017, and 9%-10% by FY 2019/2020.
Recently, the government has been cooperating with China to develop projects which aim to boast plentiful job opportunities for the near future, including the New Administrative Capital, the new Suez Canal, and the Suez Canal Economic Zone, as well as the 1.5m acres land reclamation project.
As for the 1.5m acres land reclamation project, Reem Abdel Halim, a professor of economics at Cairo University, described it as overestimated. The government should only develop the agriculture sector in parallel with the industrial sector through the establishment of quality controls and authorities that allow industry to raise its own efficiency, she said.
The government has spent a lot of foreign currency on large-scale projects that were either unimportant or did not achieve the desired result, Abdel Halim said, referring to the Suez Canal Development Project, which hardly returned the desired goals. According to her, the only positive project is the National Roads Network, which should be followed by a large sub-road network to link cities and governorates to each other, and to help spread local production, which would provide jobs.
On the other hand, the poor economic situation prevents investors from increasing their work in Egypt. Chairperson of Middle East for Clothes and vice president of 15th May City Investors Association Abdel Ghany Al-Abasiry said the Egyptian market is currently undergoing a state of inflationary recession that threatens all local production, which unfortunately resulted in him decreasing the size of his staff. The reason behind the recession, he added, is the US dollar shortage—which caused a price hike of at least 25%.
After 6 months in office, Investment Minister has not brought about achievements
The investment climate has not witnessed positive improvements since the current Minister of Investment, Dalia Khorshid, took office in March. The investment draft law has not been passed, and the one-stop shop system has not been applied. After nearly six months in office, investors are still suffering from poor economic conditions and enduring an unattractive investment climate.
In July, the 2016 World Investment Report said that the Egyptian government amended its investment law in order to foster an environment that encourages foreign direct investment (FDI).
Through the creation of alternative “out-of-court forums to settle investor-state disputes and grant incentives for investment in specific sectors or regions”, Egypt aims to facilitate FDI.
While efforts to amend laws and policies are present, the national security threat of accepting FDI in Egypt remains an obstacle for foreign investors. The defence industry, critical infrastructure (electricity cables, water pipes, etc.), and the purchase of land in security zones are most affected by the FDI limitations and procedures for review in Egypt.
Chairperson of Middle East for Clothes and vice president of the 15th May City Investors Association, Abdel Ghany Al-Abasiry, said the Egyptian investment climate is investment-repellent. He added that the government must apply the one-stop shop as soon as possible because the more time Egypt spends without it, the more investments it loses.
He believes that the current conditions, in which investors must ask more than nine governmental agencies for licences and permissions, wastes a lot of time and money, which is not acceptable.
It takes more than two years to obtain an operating licence, which is insane, he stated.
In a meeting with parliament members, Minister of Industry and Trade Tarek Kabil said on 7 August that investors’ licences take more than 634 days, which is a disaster, adding that the government is working on decreasing this time-frame.
Al-Abasiry said the government must understand that investments are the only solution to helping the country overcome its current economic challenges.
Inflation expected to increase further
Egypt’s core inflation rate climbed to its highest level in seven years in June, underscoring the challenges confronting the government as it grapples with a foreign currency shortage.
Annual core inflation, which excludes vital items such as food, reached 12.3% in June, up from 12.23% in May, and the highest since February 2009, according to the Central Bank of Egypt’s (CBE) website.
The market also expects a significant increase in the inflation rate during the upcoming period after the application of the new increase in electricity prices and the upcoming application of the value-added tax (VAT).
The Central Agency for Public Mobilization and Statistics (CAPMAS) revealed on Wednesday that the general index of consumer prices recorded an increase of 0.7% in July, compared to a 0.78% increase in June. The annual inflation rate was fixed at 14.8% in July without much change, compared to June.
Aliaa Mamdouh, a former economist at CI Capital Holding investment bank, said that inflation is no longer imported, and it’s likely to rise in the coming months. She added that the inflation rate will not drop in the coming months due to the increase in electricity prices, which is expected to increase inflation rates during the upcoming period as it will result in increased expenses for the production of goods and services.
Mamdouh also believes that applying VAT would increase the inflation rate by 1-1.5%. The government is likely to establish this by the winter, since it cannot be established now due to the already high rate of inflation, she noted.
She added that the inflation rate will not fall unless the government implements more reforms to improve the economic climate by supporting the industry sector, increasing exports, and reducing the unemployment rate.
The economist believes that the lack of production increased the inflation rate.
Mamdouh stated that Egypt needs foreign investment to refresh the market, and, unfortunately, the government has not removed the obstacles that are preventing investments. She sees that the government must focus on fixing problems such as licences and permissions─this must be a priority in the current period.
Egypt’s inflation is not all imported, says Eman Negm, an economist at Prime Holding, adding that imported inflation accounts for 50% of the rate because of the foreign currency crisis, which will probably increase due to the expected floating of the Egyptian pound. The other half is domestic inflation, she added, expecting that the rate will not fall in next month due to the new school year, as people will need to buy new clothes and other items. She predicts that the rate is expected to record 11.5% by next year.
Negm said that applying the VAT should theoretically not raise inflation. She explained that the tax’s purpose is to reduce the burden, not to increase it.
The government must control the local markets to prevent a greater increase in prices, she emphasised.