Ali Almeselhi, head of parliament’s Economic Affairs Committee, said that Egypt is suffering from a real economic crisis and must recognise its existence and prepare a detailed development plan with a specified duration and cost.
Starting an economic reform programme has become inevitable.
Almeselhi said that denying the challenges of the economic situation means leaving things as they are, which will increase the deficit, increase inflation rates, and reduce the possibility of controlling the exchange rate of the Egyptian pound against the US dollar.
He said that the government at the end of the current fiscal year (FY) aims for a 4.5% growth rate. In order to achieve this rate, we must admit the existence of a crisis.
What is your assessment of the current economic situation in light of the introduction of the economic reform programme? What is required to achieve the established target?
The reform programme will be achieved only by obtaining external finance, whether by borrowing from the International Monetary Fund (IMF) or the World Bank, or by offering US dollar bonds abroad.
Borrowing for financing the internal reform programme limits banks’ abilities to finance investment projects. There must be a detailed reform programme and fixed-term responsibility, time, and costs so the programme succeeds.
The reform programme includes subsidy reduction, which leads to price increases and adds more weight on the citizens’ shoulders.
What are the procedures that should be taken to prevent public anger?
The government should not feel embarrassed about exposing the problems of the Egyptian economy. It’s better to let people know that my right hand is weak and incapable of carrying more than 10 kg, and therefore should not carry more than that.
Egyptian society has a historical sense and conscious. When they are convinced that there is a real crisis, they will start giving what they can. The question is what would they take in return.
Egypt suffers from a financing gap due to its poor savings rate; therefore, borrowing from abroad is inevitable.
The government is targeting a growth rate close to 5% by the end of the current FY through obtaining foreign direct investments and borrowing from abroad.
When will the IMF loan agreement be presented to the House of Representatives? What are the most important themes that you discussed with the government?
The government will present the $12bn IMF loan agreement to the parliament after the final approval of the IMF.
The reform programme targets two essential things. The first is increasing the foreign exchange reserves at the Central Bank of Egypt (CBE), and the second is increasing the economic growth rate. These two things should be achieved in parallel.
Increasing cash reserves at the CBE will allow the bank to control the exchange rate of the Egyptian pound against the US dollar, and to fulfil the essential obligations of the government.
Unemployment rates have increased during the past period. Does the governmental programme include solutions for controlling that problem?
Increasing the economic growth rate is very important in light of the increased unemployment and inflation indicators. If the government did not target a growth rate of at least 5% during the current fiscal year and 6.5% next year, a real problem would appear. We have roughly 600,000 graduates annually.
In order to eliminate the unemployment problem, we need growth rates of 6-7% each year. Talking about growth rates of 2-3% could present more unemployment and other consequent social problems.
Egypt is suffering from a continuous increase in the budget deficit, and the government is complaining about the increased expenditures. Is there a clear plan to control the deficit and increase the resources other than reducing subsidies?
To adjust the economic growth process and cash reserves, two things should be controlled: expenditures and revenues
Expenses processed and revenues increased through the productive capacity and economic reform programme will succeed financially and structurally in all the state institutions.
We need a detailed plan that explains the mechanisms followed to achieve the targets at specified times and finances. Through that detailed development programme, we can say that we need external financing, not internal. It does not add anything to the economy to implement the programme either through a loan from the IMF or offering the bonds abroad.
What are the first steps of the reform programme inside the state’s administrative system?
The parliament approved the Civil Service Law after the first structural reform. The law aimed to make everyone who works in the administrative system an added value and to establish rules on accountability .
The financial reform programme started by applying the value-added tax (VAT) Law. The VAT should have been applied in a later stage, but circumstances prevented this from happening. After sales tax was applied in 1991 and subjected goods for taxes, the VAT is a legislative evolution.
The VAT will cause both inflation and prices increase; therefore, some sectors should be protected and be exempt from the tax, such as basic goods, medicine, education, and health services. Social security pensions should be reconsidered, especially the weak pensions to citizens. They should increase according to the inflation indicators pensions that would result from approving the tax.
The Ministry of Finance is expecting inflation growth indicators at rates ranging from 1.5-2% due to passing the VAT Law.
Do you expect that the tax reform plan will succeed in increasing the resources of the state?
The tax system reform will increase the state’s revenues. Through that increase, a social protection system will be put in place, whether by excluding certain goods from taxes or increasing weak pensions.
The reform of the tax system is very important, because passing the VAT Law will bring the informal economy into the official economy. We should encourage the use of bills by providing incentives for people entering into the official system of the economy. The tax increase community will lead to revenue growth and the ability to efficiently finance services that are provided to Egyptians.
Parliament approved the VAT at an average of 13% during the current fiscal year to be increased to 14% during the next fiscal year. There is criticism directed towards the timing of the VAT. How would you comment on this?
There are 150 countries that have applied VAT. Any law has disadvantages and these disadvantages can be reduced. This has happened already by excluding certain goods and services from the tax.
The government aims to increase tax revenues by EGP 18bn by the end of the current fiscal year.
The reform programme must coincide with an increase in productivity capacity, whether in the public or the private sector. The Ministry of Industry has a programme for resolving factory problems, supporting them financially, and providing a suitable environment for their work.
The previous regimes avoided subsidy reduction. Do you expect the current system will succeed in reducing subsidies and controlling the consequences?
The subsidy programme cannot continue this way in Egypt.
Are citizens satisfied with the free education or free medical services? We should evaluate the matter and treat distortions that affect the economic system. There must be a cost for each service provided to the citizens by the state facilities.
The Egyptian people have invested billions of pounds in facilities and must preserve them. When service prices increase, low-income people will be taken into account, as will balance between revenues and expenditures.
The metro costs EGP 1 which is less than a tok tok would cost from one’s house to the metro station. Does it make sense?
The facilities will change if they continue working that way. The railway for example is collapsing due to its annual losses. The governmental services prices increase will be subjected to cost and revenue studies in order to stop facilities’ losses.
How will you protect low-income citizens from the negative effects of the economic reform?
It’s the time for economic reform, and we cannot walk with our eyes closed. People should know the costs of services, like what happened with electricity. When the Ministry of Electricity increased prices recently, it took into account the low-income citizens, and some segments of society are paying as low as 13 piastres per kilowatt.
The scales of justice requires supporting those who suffer, and prices should move over time according to the inflation rates, but at the same time salaries should be increased too to maintain a good standard of living.
I personally believe that subsidies are means to achieve social justice; however, subsidies for all cannot continue. Economic reform is not confined to Egypt only; Saudi Arabia for the first time in its history, borrowed, offered bonds, and implemented a reform programme.
Are we going to wait until we become like Greece or Argentina?
Does parliament have a plan to resolve the problems related to tourism because it is one of the most important sources of national income?
We seek to resolve problems faced by the tourism sector due to its ability to push the Egyptian economy forward during the current period. We have questions for the Ministry of Tourism. Have they made marketing campaigns abroad to return tourism activity to Egypt? There are billions of pounds invested in that sector, and many job opportunities can be provided.
What do you think about amendments to the Investment Law?
The investment legislative structure in Egypt requires amendments.
In the next session of parliament, which will begin in October, the government’s amendments to the unified investment law will be checked. The Economic Affairs Committee has commented on the current law, most notably saying that it works by the isolated islands mechanism and lacks integration.
The law has many referrals to the president, prime minister, and minister of investment that don’t keep the general climate safe.
We have to provide incentives to investors, resolve disputes with them.
The investment organising structure must create a clear climate. Foreign investment is attracted by the climate, not only the laws.
There are a lot of rumours about the one-stop shop system, but the fact is there is no one-stop shop.
The committee held meetings with Minister of Investment Dalia Khorshid, and investment regulation laws are being reviewed. These laws must be simplified to attract investors, and that does not mean abandoning the rights of the state.