INTERVIEW: Egypt’s tax share of GDP remains low, more could be done on income taxation to close loopholes: WB chief economist

Doaa A.Moneim , Sunday 11 Apr 2021

We project Egypt to attain seven percent overall budget deficit and 1.8 percent primary surplus in FY2021/22, which starts in July, said Gatti

World Bank
During spring meetings, that concluded on Sunday, the World Bank and the International Monetary Fund (IMF) have signalled key measures that developing countries and emerging markets need to apply to protect their economies and boost their recovery amid the ongoing pandemic crisis.
In an exclusive interview, Ahram Online discussed, with the the Chief Economist of the Middle East and North Africa (MENA) region of the World Bank Roberta Gatti, the bank’s outlook for Egypt’s economy amid the pandemic.
Ahram Online also talked with Gatti on the elevated public debt level in Egypt as well as the procedures Egypt needs to take to boost its revenues, especially through the tax system.
Ahram Online: The World Bank’s updated report on MENA’s economic outlook says that the region remains at risk in terms of the elevated debt levels. What are the causes of such a situation?
Roberta Gatti: During the pandemic, there has been a global increase in sovereign debt. Most economies—regardless of their level of development—lost public revenues as economic activity slowed down, and in some instances, countries increased public spending to protect the poor and support enterprises to prevent their collapse.
MENA was no exception. We are witnessing increases in public debt across different country groups. However, some MENA countries already had elevated levels of public debt relative to the size of their economies. In other words, they entered 2020 with a pre-existing condition of high levels of debt. This syndrome was most worryingly concentrated in the region’s oil-importing middle-income countries, which by 2019 had abnormally high debt. In 2020, these countries were still facing higher debt burdens than the typical middle-income countries in the rest of the world. And so, here we are.
As an immediate response to the pandemic, we believe that financing disaster relief with additional debt was necessary, but we argue that rising public debt, while helping MENA countries finance short-term needs, carries long-term risks including: crowding out private investment, crowding out public investment as interest payments rise and macroeconomic vulnerability that might raise the likelihood of costly debt crises.
Most importantly, transparency can help reduce the economic risks of high debt by helping accelerate the recovery of economic activity, improve the efficacy of fiscal policy, and by helping reduce financing costs.
AO: What are the policies and strategies that the region’s governments need to set in order to put the high level of debt on a downturn trajectory?
RG: Our view is that in the short-term, as the pandemic is still raging, government spending is necessary to mitigate the effects of the pandemic. Nevertheless, it is important to keep in mind that building up debt carries long-term risks, especially for countries that already had elevated debt before the pandemic. In the MENA region, many oil importers had relatively high debt.
The long-term risks of the build-up in public debt underscore the importance of efficient spending now. Like World Bank President David Malpass said, “Sunlight is always a good remedy.” Transparency is key to speeding up economic recovery. One example is that countries with lower COVID-19 positivity rates also had lower growth downgrades in 2020. Transparency also helps to allocate public resources efficiently, for example in the choice of investment projects. Finally, better use of data (including better social registries) can help social transfers best reach targeted recipients.
In the longer-term, as the pandemic subsides and after the pandemic, the need for such disaster relief spending will end. The issue then is not about borrowing, specifically, but how MENA countries can make tough choices to bring debt to a sustainable level relative to the size of their economies.
In our view, this entails boosting economic growth, being cautious about additional public stimulus after the pandemic subsides, and to implement a transparent, credible multi-year fiscal and debt strategy to bring debt‐to‐GDP ratio to sustainable levels as well as to reduce uncertainty for creditors and the population.
AO: What are the World Bank’s projections for Egypt’s public debt to GDP ratio in 2021, and over the long term?
RG: Egypt’s debt had been elevated before the pandemic, peaking at 108 percent of GDP in FY2016/2017. The country had been on a path of debt reduction, enabled by the maintenance of primary budget surpluses, which had reached almost two percent of GDP in FY2018/19 and FY2019/2020.
But higher expenditure needs and sluggish revenue growth associated with COVID-19 led to a reduction in the primary surplus and a pause in debt reduction. This will push the government’s debt-to-GDP ratio upwards from 87.5 percent at the end of FY2019/20 to above 90 percent of GDP by end-FY2020/21 (ends in June 2021).
The World Bank assumes that fiscal consolidation, mainly through domestic revenue mobilisation, will resume over the medium-term, notably with the implementation of the recently-approved Medium-Term Revenue Strategy. This would get the debt-to-GDP ratio below 80 percent by FY2024/25.
AO: What are your expectations for Egypt’s real GDP growth, inflation and budget deficit in the current FY2020/21 and for FY2021/22?
RG: For the current FY2020/21, we estimate that growth will come in at 2.3 percent. For the FY2021/22, we are projecting 4.5 percent. It is only in FY2022/23 that growth will finally be back around its pre-pandemic level, at 5.5 percent. For much of the calendar year 2021, we foresee ongoing effects of the pandemic and the challenges experienced by many countries, including Egypt’s tourism sector, with slow vaccine roll-out.
Nonetheless, consumption will be underpinned by resilient remittance inflows, expanded social protection, lower inflation (which helps maintain households’ purchasing power) as well as monetary easing. As vaccine deployment reaches a level delivering significant immunity in the population by early-2022, Egypt is expected to gradually regain growth momentum. This still means that COVID-19 will have caused at least a 3-year shortfall from pre-pandemic rates.
AO: Egypt’s FY2021/22 draft budget targets decreasing the overall deficit to GDP ratio to 6.6 percent as well as reaching a 1.5 percent initial surplus, with revenues expected to increase by 16.4 percent to post EGP 1.3 trillion. How do you see that? And can Egypt achieve that during the upcoming fiscal year?
RG: Our projection is very close to this. We project a seven percent overall deficit and a 1.8 percent primary surplus. The government has shown a strong commitment to maintaining a primary surplus and getting it back to two percent, the pre-pandemic target.
For us, perhaps most importantly, will be to deliver the projected revenue growth, will be the status of the various tax forbearance measures that have been in place and the recovery in the tourism sector.
With the pandemic kept under control by social distancing; masks and progress in vaccinations, conditions should improve enough to phase out forbearance, while the revitalisation of tourism and in-person spending will kickstart Value-Added Tax (VAT) receipts. Again, transparency in the publication of public health information, such as vaccinations, will be instrumental for the recovery of the economy, particularly tourism.
AO: The report touches on the tax system in the region and its need to be strengthened to counter the ongoing challenges and to raise states’ revenues – if applied on Egypt, how can it be executed?
RG: Egypt has done a lot in recent years to improve tax administration, but the tax share of GDP remains much lower than in similar countries. The general prescription is clear; there is a lot that could be done on income taxation to close loopholes and put exemptions on a fairer and more transparent basis – toward a general principle that households with similar economic circumstances should be taxed in a similar way. Currently, the tax system makes many distinctions between types of income and how it is earned.
It is noteworthy that the time and cost spent dealing with the tax and customs authorities are burdensome, mainly in terms of gathering the necessary information, computing the payable tax amounts and tariffs, and filing the required tax returns and documents.
AO: For prioritising spending during the ongoing crisis, what are the fiscal policies and measures required for Egypt to chart a path of recovery during 2021 and over the medium term?
RG: As the pandemic is still ongoing, strengthening public health surveillance is fundamental. Widespread testing (contact tracing and isolation of infectious cases), sharing of information with citizens on where COVID-19 hotspots are so that individuals can take appropriate measures to protect themselves, and communicating clearly with citizens have shown great results in a number of countries. These measures also have long term benefits because they strengthen the health system and could be very important for Egypt.
In parallel, it is important to support vulnerable families. If lockdowns are necessary to contain the disease, then informal and underpriveliged workers will not be able to respect them unless they have alternative ways to support themselves.
As the pandemic subsides, it will be important to remedy those areas that are likely to carry long-term costs – for example schooling losses, worse health due to disruption of health services and unemployment—all of which negatively affect the long-term accumulation of human capital.
AO: What sort of fiscal stimulus should Egypt’s government extend in this regard?
RG: The government has, understandably, avoided very large fiscal stimulus, while at the same time doing enough to impart some fiscal momentum to the economy during tough times. This included keeping existing investment projects going, putting more funding into health response, some expansions of existing social assistance programs, as well as the temporary payment scheme for irregular workers.
As I noted earlier, social sector spending will need particular attention in the recovery phase to address the hits to education and beef up health systems for what could be a sustained fight against flare-ups of COVID-19. This would include more focus on disease surveillance, rapid response capacity and recurring vaccination campaigns as boosters are needed.
AO: How can accelerating vaccines deployment, including providing fair shots for all, in the MENA region contribute to rebounding the region’s growth and boosting its recovery?
RG: While the pandemic is still ongoing, fiscal spending is probably best used to protect the welfare of vulnerable families and to invest in public health. The pandemic is having disproportionate impacts on poor households because they are less healthy and less likely to be able to social distance. A rapid and fair roll out of COVID-19 vaccines for all will not only save lives, but also speed up economic recovery.
The most affected economic activities, such as tourism, hospitality and cultural industries, will only return to normalcy once a significant number of people from MENA and beyond, believe that the pandemic has been brought under control.
This is a good example of where public health investment, as a short-term response to the pandemic, could also bring long-term gains. Proper investment in vaccinations would not only reduce the risk of a prolonged crisis and speed up economic recovery, but it would also reinforce the infrastructure for long-term public health. Rough calculations of the costs and benefits of investing in vaccination programs (which need to be interpreted with a grain of salt) indicate that the benefit-to-cost ratio could be large—around 78-to-1, if MENA vaccinate 20 percent of its population at current prices proposed by COVAX, the multilateral effort to channel COVID-19 vaccines to poorer and lower-middle income countries.
In this context, it’s impossible to exaggerate the importance of transparency and the credibility it brings for a country’s mitigation and vaccination efforts.
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