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Friday, 28 July 2017

Fiscal reform isn’t the problem—it’s the belated economic recovery

Ziad Bahaa-Eldin , Saturday 8 Jul 2017
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Views: 1113
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Views: 1113

The worst thing is for the people to pay the price of fiscal reform without getting its reward. And this is exactly what is happening now.

Every economic decision inevitably entails a cost and a benefit. Under the program agreed between the government and the IMF Last November, which included currency liberalization, fuel subsidy cuts, and a VAT, the cost was clear: drastic price hikes affecting everyone with an overall inflation rate of 32 percent last year, and even higher for food.

These measures were necessary to restore fiscal balance to the national economy, and delaying them further would only incur steeper costs in the future.

But they should have brought major benefits, increasing investment and tourism, reducing unemployment, providing foreign currency, and freeing additional resources to allow the state greater spending on public services.

However fiscal and monetary reform alone cannot yield these results.

They must be accompanied by policies and programs that bring real economic reform, by removing obstacles to investment, opening up monopolistic sectors to competition, unleashing entrepreneurial and innovative energies, fostering small businesses, and energizing the sluggish tourism sector.bFiscal and monetary reform is necessary, then, but it isn’t enough for economic development.

It simply lays the groundwork for deeper reforms that can bring the desired gains.

Yet in the past year, the government has acted as if these fiscal and monetary measures alone are sufficient. So we wasted two years debating a new investment law while the investment climate became less inviting thanks to red tape, state intervention in all fields, slow litigation, the high cost of financing, and other obstacles to investment.

In tourism, we failed to lift the travel ban from the traditional tourist countries, open new markets in Asia, or offer support to the tourism sector.

And while the float of the pound brought new export opportunities, the government was not ready with programs and incentives to enable Egyptian exporters, especially small and medium ones, to take advantage of these opportunities, leaving them to fend for themselves in a fiercely competitive world where other countries support their exporters.

Even the resources saved as a result of the energy subsidy curs were poured into megaprojects of secondary importance instead of being used to improve the standard of living for millions of citizens.

The result is that amid runaway prices, there was no real increase in investment and tourism, no appreciable drop in unemployment, and no improvement in public services.

When the government says it took difficult but necessary steps that others were hesitant to take, it is absolutely right. But it isn’t enough to take these steps and stop. It should have been prepared to mitigate their economic and social repercussions, and to stave off the inflation and unemployment nightmare now plaguing every Egyptian home.

It’s no wonder the public is angry at the state and its officials for the constant price increases and statements that condescend to their minds and feelings. But the truth is that the cause of the current conditions isn’t the decisions to float the pound, institute a VAT, or cut energy subsidies.

The real failure is the government’s inability to exploit the improved macroeconomic indicators brought about by these decisions to harness the country’s potential in investment, employment, and export.

The result is that citizens have paid the price twice over: once in price increases and again with the ongoing recession, unemployment, and deterioration of public services.

The fiscal and monetary reforms can’t be turned back, and complaining of high prices won’t help the people. The only course now is to understand why the reforms did not bring the hoped-for results, admit the futility of perpetuating current economic policies that thwart development, and listen to investors and ordinary citizens seriously. 

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