Gulf aid geared to revolution's side effects rather than causes

Amr Kotb, Wednesday 19 Mar 2014

Most of the LE83.5 billion in Gulf aid is being used to plug economic leaks rather than address the socio-economic problems that cause them, say financial experts

In this photo released by the Egyptian Presidency, Egypt's interim President Adly Mansour, center left, and Kuwait's Sheik Sabah Al-Ahmad Al-Jaber Al-Sabah meet in Kuwait (Photo : AP )

Egypt’s transitional government may be using LE83.5 billion ($12 billion) in Gulf aid solely to plug leaks stemming from political instability instead of addressing the structural economic issues that played a role in the outbreak of the 2011 revolution.

Interim president Adly Mansour recently announced a LE153 billion ($22 billion) stimulus package largely dependent on aid from Gulf states.

On 9 July, six days after the ouster of former president Mohamed Morsi, Saudi Arabia announced LE34.8 billion ($5 billion) in aid to Egypt which included LE14 billion ($2 billion) in petroleum products and natural gas as well as a LE14 billion ($2 billion) deposit in the Egypt's Central Bank (CBE) that was free of normal financing expenses.

The UAE followed suit with a LE7 billion ($1 billion) grant and an interest-free loan of $2 billion.

Kuwait was not far behind with an aid package totaling around LE28 billion ($4 billion).

In early February, it was announced that Egypt expected to receive an additional LE41.8 billion ($6 billion) in aid from Saudi Arabia and the UAE, thus bringing the total of guaranteed Gulf funding to LE83.5 ($12 billion) with the potential later addition of nearly LE42 billion ($6 billion).

According to statements from the government under former prime minister Hazem El-Beblawi, the Gulf aid is instrumental in addressing both the economic causes and effects of the political instability that has plagued the country over the past three years. Ahmed Galal, finance minister in El-Beblawi's cabinet, recently stated that Gulf aid was instrumental in adopting an expansionary fiscal policy while also plugging leaks such as the deficit and FOREX levels.

The Problem: Stated vs. Actual Policy

Despite the government’s assertions, its focus thus far has been much more on staying afloat economically rather than tackling these problems' socio-economic causes. Gulf aid has pushed Egypt's foreign reserves up to LE120.4 billion ($17.3 billion) as of February's end, and the trade deficit is down 17.9 percent from this period last year.

At the same time, little progress has been reported on the systemic economic issues which led to the revolution. Sixty-nine percent of the unemployed are youth and despite a modest increase in September, the country's minimum wage remains far below expectations.

 “There is a gap between what is being said and what is being done,” said economist and journalist Wael Gamal. “It is impossible for [former finance minister] Ahmed Galal to pledge to narrow the deficit four percent while simultaneously practicing an expansionary fiscal policy.”

“A negligible fraction of the money coming from the Gulf has actually addressed responsible investment,” Gamal said, referring to the LE29 million ($4.2 million) that has gone to the construction of bridges.

This was echoed by Samir Radwan – finance minister in 2011 during the rule of the Supreme Council of the Armed Forces (SCAF) – who said that the transitional government is doing little more than “tiding the country over” by paying its bills and filling gaps.

The government has continued many of the same economic policies that existed under Mubarak. The problem with these policies is that they catered to social and business elites, meaning that the high growth rates in the years leading up to the 2011 revolution were reserved for the upper classes. That wealth and advantage didn't trickle down ultimately played a role in causing the 2011 uprising.

An example is tax policy, Gamal said, specifically issues within capital gains, income and mergers and acquisition taxes.

“Businesses profiting from major acquisitions are not taxed and the loss incurred by the government is then covered by reserves," Gamal said.

Gamal points to companies like the Sawiris-owned Orascom Construction Industries (OCI) and the largely untaxed acquisition of its subsidiary by cement giant Lafarge. As these businesses are spared from taxation, the Value Added Tax (VAT) continues to be paid by all Egyptians.

Gamal also referenced a recent PWC report on the strength of tax systems worldwide in which Egypt was ranked 148 out of 189 countries.

Subsidisation of energy is another systemic issue that predates the current government and caters to the upper-class. Both Radwan and Gamal noted that the government can unsubsidise energy-intensive factories which currently sell at international prices.

It does not make sense for an “Italian company to be subsidised to sell Egyptian cement at international prices,” Gamal said.

Radwan added that the inflation that results from selling at market price could be remedied with price controls, as was done in Britain and Switzerland.

At the same time, the government has shown little outward interest in addressing these systemic issues. Public spending on infrastructure so far has been geared toward major projects, like the Suez Canal Development Project, what Gamal called "an expensive publicity stunt" that doesn't address cheaper systemic issues like tax reform.

The Solution

While it is nearly impossible for the government to have an expansionary fiscal policy and also close gaps within the deficit or build reserves, Egypt's authorities can use Gulf funds to restructure their economic policies in a manner that addresses both the causes and effects of the 2011 revolution.

“Restructuring tax or energy policies creates government revenue, and such revenue can then be used to build reserves,” said Gamal.

Similarly, unsubsidising fuel-intensive factories also creates government revenue that can be channeled into realistic development projects.

Gamal added that simply using the Gulf funding to raise FOREX levels and then pull from these new FOREX levels to finance lofty, expensive projects while also maintaining policies that continue to disenfranchise the poor will only serve to put Egypt in the same economic plight which bred the revolution.

Rebuilding consumer confidence in the government through give and take is also instrumental in economic recovery.

“These are difficult times,” Gamal said, “The government needs to communicate that and engage the public’s support in addressing economic issues.”

Balancing a gradual reduction of the hemorrhage in public spending on fuel subsidies with actions such as raising the country's minimum wage allows for the give and take needed to address both the economic causes and effects of the revolution.

Government Response

Government officials from El-Beblawi's former government stated that the Gulf aid is being used to address both the economic causes and effects of political instability.

Sherine Shabrawy, head of the social justice unit at the finance ministry, said that the government is not using the funds to simply fill gaps. Rather, it is working towards identifying the people and organisations that most need or deserve public funds within health, education and research.

In education, for example, Shabrawy said that the government is doing less within the realm of increasing teacher's salaries and more towards the creation of infrastructural monitoring, evaluation and performance indicators that identify the teachers most deserving of raises and the public schools in greatest need of funding.

With respect to systemic issues such as subsidies, Shabrawy said that she’d rather focus on other areas to boost consumer confidence first.


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