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One year on: Economic policy under El-Sisi

Ahram Online looks at President Abdel-Fattah El-Sisi’s economic policies during his first year in office

Randa Ali , Tuesday 9 Jun 2015
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Egypt's President Abdel Fattah El-Sisi speaks during the opening of the Egypt Economic Development Conference (EEDC) in Sharm el-Sheikh, March 13, 2015 (Photo: Courtesy of the Egyptian Presidency)
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Field Marshal Abdel-Fattah El-Sisi was sworn in as Egypt’s second-democratically elected president on 8 June 2014, less than one year after he led the popular ouster of his Islamist predecessor Mohamed Morsi.

Inheriting a legacy of long-time bureaucratic inertia, corruption, the post-2011 uprising political turmoil and security vacuum, in addition to the ongoing attacks on military and police that followed the ouster of Morsi -- all of which has taken a toll on the already fragile economy -- the soldier-turned-president vowed during his inauguration speech to boost the country’s economy through encouraging investment and achieving security and political stability.

While some economic indicators show that the government’s efforts are starting to pay off, El-Sisi himself stressed in his closing speech at the March Economic Development Conference, that the country would need "no less than 200-300 billion dollars" to rebuild itself.

Ahram Online provides a guide to the main changes that has occurred to the Egyptian economy since El-Sisi was sworn in.

Growth

Egypt’s GDP is projected to grow roughly four percent at the end of the current fiscal year compared to 2.2 percent in FY 2013/14, the year that saw the ouster of Mohamed Morsi and the ongoing violence that followed, according to Minister of Planning Ashraf El-Arabi. 

The government is aiming for a six percent growth rate by FY 2018/19 through a medium-term economic plan that includes cutting the budget deficit from 12.6 percent of GDP in 2013/14 to 8-9 by FY 2018/19.

Taxes

Egypt's economic ministers agreed in March to unify the income tax ceiling at 22.5 percent, indicating a drop from 25 percent and the cancellation of a temporary five percent tax on individuals and corporations earning more than LE1 million annually, while introducing in a tax hike for new special economic zones.

The new tax will apply to businesses planned to be established in special economic zones; however, existing businesses will continue to pay at the current rate of ten percent.

The new unified tax, which is yet to be ratified, is proposed to remain fixed for ten years. 

In addition, the government suspended in May a controversial capital gains tax for two years, resulting in the sharpest rise in Egypt's benchmark index in two years.

The ten percent tax on investors' gains in the bourse had been introduced by the government in July 2014 as part of a spate of new taxes on income, consumer goods, and real estate geared to bolster state revenues and cut the budget deficit from 12.8 percent of GDP to 11 percent this year.

When the tax was implemented last month, it was blamed for a simultaneous drop in stock turnover and value. Egyptian investors also launched a legal challenge to the capital gains tax.

However, following its suspension Chris Jarvis, IMF’s Egypt Mission Chief, expressed his disappointment to Bloomberg stressing that the tax was rather fair and necessary and that its suspension would mean “more of the cost of reducing the budget deficit will now be paid by people who are less able to afford it.” 

Subsidies

In the summer of 2014, Egypt cut fuel subsidies, raising prices at the pump by as much as 78 percent as the government set to reduce its budget deficit by 10 percent of GDP, down from 12.8 percent in the previous year.

Egypt, which depends heavily on oil imports, benefited from OPEC’s decision to maintain production levels despite an increasing supply and slowing demand which led to the falling of international oil prices. According to the minister of petroleum, the move is expected to cut Egypt's projected fuel subsidy bill by at least 35 percent this year.

A new smart-card system, designed to curb fuel smuggling, will be implemented on 15 June when only card holders will be able to obtain fuel at subsidised prices from petrol stations.

A new system for food subsidies was introduced, saving the state budget LE300 million, according to the Minister of Supply Khaled Hanafi.

Under the new smart-card system, card owners are entitled to a fixed ration of five loaves of bread per day at the unchanged subsidised price of LE0.05 per loaf. To avoid bakers selling off subsidised flour for profit, bakers buy flour at a market rate, and are reimbursed the subsidy later, based on sales data gathered from the smart cards.

Debt

Egypt's external debt dropped to $39.58 billion, or 12.5 percent of GDP, in the three months ending 31 March, from $45.1 billion, or 15.8 percent of GDP, in the same period a year earlier, according to the Central Bank of Egypt's (CBE) May statistical bulletin. 

The central bank attributed the decline in external debt partly to the repayment of $3.5 billion of loans and credit facilitations, according to state-run news agency MENA.

The CBE also credited $2.7 billion saved in the external debt to the fall in the value of international currencies - which are part of Egypt's debt portfolio - to the dollar.

However, in April, Egypt received $6 billion in aid from Saudi Arabia, the United Arab Emirates and Kuwait in the form of central bank deposits.

In addition, domestic debt increased to LE1.9 trillion by the end of December 2014 compared to LE1.8 trillion at the end of June 2014.

Interest rates

In April, Egypt's central bank (CBE) held deposit and lending interest rates at 8.75 and 9.75 respectively, a 50 basis points increase for each from June 2014 when El-Sisi took office.

The CBE targets curbing inflation to counter the implications of cutting fuel subsidies.

Inflation

Egypt's annual headline inflation accelerated to 10.96 percent in April from 8.2 percent in June 2014, while annual core inflation slowed to 7.19 percent in April compared to 8.76 in June 2014.

Currency

The Central Bank of Egypt devalued the pound to reach an interbank rate of 7.53 compared to 7.14 in June 2014. The move came as part of the bank's fight against a currency black market fuelled by the lack of dollar availability.

To further eradicate the black market, the CBE introduced dollar deposit limits in February to a maximum of $10,000 a day and $50,000 a month, making it harder for companies to buy foreign currency and then depositing it in banks. The restriction did not impose any limits on the sale of dollars to banks.

Unemployment

Egypt’s unemployment rate fell slightly in the first quarter of 2015 to 12.8 percent from 13.4 percent in the same period the previous year, state-run statistics body CAPMAS announced mid-May.

The minimal decline was attributed to improvements in economic activities and depicts a reverse in the upward direction seen in unemployment following the 2011 uprising.

Almost 65.6 percent of unemployed people were aged between 15 and 29, and more than 76 percent hold diplomas or university degrees.

Reserves

Egypt's foreign currency reserves increased to $19.55 billion in May compared to $16.687 in June 2014.

Foreign reserves had fallen sharply following the 2011 uprising but increased in April as Egypt received $6 billion in deposits from Gulf Arab countries which pledged aid during an investment conference in March.

Reserves stood at about $36 billion before the 2011 revolt.

Legislation: Investment, labour and civil service

New laws affecting businesses were introduced and ratified during the first year of El-Sisi's presidency.

Coming from a dire need to boost the country’s investment, the amended 8/1977 investment law, ratified a day before the March economic conference, aimed at protecting investors from legal disputes or cabinet reshuffles and to gradually eliminate the notorious red tape.

However, critics said that while on the surface it brought forward some positive changes, it does not secure the eradication of fundamental institutional problems that could halt the implementation of the law.

The civil service law, also passed in March, regulating pay scales, promotions and disciplinary procedures for civil servants in the government, has also stirred controversy.

On 30 May, 21 professional syndicates -- including the doctors, pharmacy and engineers -- issued a statement voicing their opposition to the law, saying it increases levels of managerial authoritarianism that can jeopardise the workers’ rights.

Meanwhile, the issuing of the labour law draft was postponed by the government, which said that it will have to wait to be passed by the yet-to-be elected parliament.

The draft labour law has stirred controversy over issues such as workers' right to organise and negotiate collectively, monitoring of the law's implementation and the minimum wage.

Mega projects 

A new waterway for the Suez Canal, funded through investment certificates issued to Egyptians only and domestic debt, is expected to be inaugurated in August. The government estimates that the new project will double the canal’s revenues by 2023.

The digging of the parallel waterway is estimated to be accomplished at a cost of $4 billion. The project will also include the construction of six tunnels to link Sinai and the two Suez Canal-bordering governorates of Port Said and Ismailia, at a cost of $8.2 billion.

The new waterway is presented as a first step in the main project to build a logistics and industrial hub along the canal, a project that aims to create one million job opportunities.

Another highly anticipated project is the new administrative capital, unveiled during the March economic conference. It will be built on an area of 700 square kilometres east of Cairo, between Cairo and the planned Suez Canal hub north west of the Gulf of Suez.

It will include 1.1 million residential units to house 5 million inhabitants, as well as an administrative district on 1,000 acres of land, with a presidential palace, ministries, government bodies, and embassies, as well as a financial district.

The total cost of the project is estimated at $45 billion, and is expected to be completed in five to seven years, according to Housing Minister Mostafa Madbouly.

The implementation of the project will be carried out by Capital City Partners, a company founded by Emirati business tycoon Mohamed El-Abbar.

Another project is the Golden Triangle, which aims to create new industrial and mining projects in 6,000 square kilometres extending from the Red Sea cities of Safaga and Al-Qusayr to Eastern Qena in Upper Egypt. There are also plans for agricultural and touristic projects in the area.

Last March, Italian consultancy D'Appolonia won a bid to prepare a study on the project.

Additionally, other projects were announced but with no details or steps taken, including the reclamation of 1 million feddans for agriculture, building one million affordable housing units and establishing a tourist hub on Egypt's north coast.

Investment

Egypt is expected to attract $8 billion of foreign direct investment in FY 2014/15, up from $4 billion last year, Investment Minister Ashraf Salman said in March. 

Egypt signed energy deals and MOUs worth over $36 billion during the March economic conference. The three-day summit saw British Petroleum making the single largest foreign investment deal in Egypt’s history, committing to invest $12 billion over four years to develop gas resources and condensates in the western Nile Delta.

As part of finalising deals agreed on during the March economic conference, German industrial group Siemens signed an 8 billion-euro deal ($9 billion) with Egypt in June to supply gas and wind power plants designed to boost the North African country's power generation by 50 percent.

Stock Market

Egypt's benchmark index has fallen by 2.2 percent in the year to date.

Chairman of the Egyptian bourse Mohamed Omran announced in April that the stock market raised LE4 billion in the first quarter of 2015 for six companies, twice that raised in 2014, a year that witnessed IPOs of 13 companies collecting LE1.9 billion.

Last week, Egypt's stock exchange said it would reduce the free float required for new companies to list on its benchmark EGX30, as part of structural changes to the index with the aim to boost trading in the country. 

The free float reduction could also pave the way for the entrance of Orascom Construction into the index, since its free float is less than 15 percent but the market value of its free floating shares is more than 100 million Egyptian pounds.

Omran also said the bourse planned to launch a new equal-weighted index that would include the top 50 companies in terms of liquidity starting August.

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