After two years of the IMF-backed reform programme economic indicators are improving but the economy remains sluggish, and more reforms are necessary to tackle the underpeformance.
How do you assess Egypt’s economic reform programme after two years of implementation?
Egypt’s economic reform programme with the International Monetary Fund [IMF] kicked off in November 2016 and began showing results within its first year of implementation.
The latest indicators are encouraging, inflation has fallen to almost 12 per cent after hovering around 30 per cent, foreign exchange reserves climbed from $15 billion to $44.5 billion, the budget deficit has halled to 8.4 per cent of GDP and unemployment has dropped to 10 per cent.
The IMF and the European Union agree that the economic reforms have improved the trade balance by reducing imports and boosting exports, and note that the floatation of the pound helped Egypt’s tourism sector generate higher revenues and encouraged remittances from Egyptians working abroad.
In its own report on the reform programme the Budget Committee noted that new laws on investment, bankruptcy and bidding procedures had led to an influx of direct foreign investments.
And recent discoveries of oil and natural gas, particularly the Zohr Field, mean Egypt will be in a position to reduce the budget deficit.
Critics argue the reforms have hit ordinary Egyptians hard as subsidies have been reduced and inflation skyrocketed, and that the rise in foreign debt could prove problematic. Many have suggested the government should halt the implementation of the last stage of the programme. Do you agree?
I agree that those on limited incomes have shouldered the brunt of the economic reform programme. The floatation of the pound led prices of basic goods and services to increase and reductions in electricity and water subsidies compunded the problem. But these were necessary steps.
Without the reforms Egypt was facing bankruptcy. After the four years of chaos and political instability that followed the uprising of 2011 and the resulting shortage of foreign currency Egypt had no choice but to reach a deal with the IMF.
I do not agree with those economists who say the government should not implement the last phase of the IMF agreement. We have to follow the reform road to the end to rid Egypt of its chronic structural ailments.
The agreement with the IMF was tailored to Egypt’s needs. It is a purely Egyptian economic reform programme. All the IMF wants is to make sure Egypt can pay back the loans and believes this will only be possible by implementing economic reforms.
In its regular reports the Budget Committee has proposed ways to further cut the budget deficit and reduce debt. We have suggested radical reform of the subsidies system and a restructuring of the country’s administrative system.
The 2018/19 budget allocated LE266 billion in salary payments to seven million government employees. The government could save much of this amount by getting rid of as many as three million redundant employees, freeing them to enter the productive work force.
We have also proposed the government raise revenues by taxing construction land and foreign businesses in Egypt. These two measures could generate up to LE100 billion which could then be spent on the social protection programmes needed to mitigate the negative impacts of the reform policies on the poor.
The committee has floated the idea that public banks write off a portion of their government loans in exchange for shares in new mega-development national projects.
This would reduce government debt and the cost of servicing it. We have also recommended a new approach be adopted to loss-making entities like the Egyptian Railway Authority.
Some economists have expressed concern that the increase in exchange reserves is largely due to foreign loans…
When the uprising broke out in 2011 Egypt’s foreign reserves had reached $36 billion. Tourism contributed a large part of this amount but those revenues collapsed following the Russian passenger plane crash in Sinai in October 2015.
In the early stages of reform foreign exchange will always come primarily from loans. But as political stability and economic performance improves the manufacturing and service sectors begin to contribute more to exchange revenues.
I am optimistic next year will see Egypt move into a position where it is no longer necessary to secure foreign loans. In the long run we have to become an economy that produces goods and services that meet local needs, reducing imports and increasing exports.
A lot of developing countries — I’ll cite just Malaysia and Indonesia here — have followed this path successfully.
Egypt’s public debt is sometimes said to have reached alarming levels. Is this true?
We need to distinguish between local and foreign debt. Domestic debt has reached a worrying level, exceeding LE2.5 trillion, and continued spending on subsidies and salaries makes it hard to reduce.
Foreign debt was $88 billion in May and, according to the latest Central Bank of Egypt figures, has now reached $92 billion, accounting for 30 per cent of the total public debt. This is a serviceable amount and Egypt has been able to pay off installments on time.
What will be the focus of the Budget Committee in the current parliamentary session?
Amending the Real Estate Tax Law (Law 196/2008) is the most important item on our legislative agenda. The changes are an important plank in the reform programme and will increase state revenues.
In Egypt taxes generate 70 per cent of the state’s revenues. This is not bad, but most developed economies use taxes to reduce the budget deficit. Taxes are important for us not only to cut the budget deficit but also to stop borrowing.
The Real Estate Tax Law was referred for amendment by President Abdel-Fattah Al-Sisi. Many citizens complained it was being applied unfairly, and that the government lacks the means to implement it equably.
The law is nonetheless necessary, not least because the revenues it generates could fund different social protection programmes.
*A version of this article appears in print in the 1 November, 2018 edition of Al-Ahram Weekly under the headline: Economic reform followed through