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Egypt's govt proposes subsidies cuts, tax increases to slash deficit

The ministry of finance estimates that the new package of reforms, yet to be approved by the Shura Council, could save Egypt LE10-12 billion a year

Marwa Hussein, Tuesday 26 Feb 2013
Proposed economic reforms to save between LE10 and 12 billion per year
Egypt's President Mohamed Morsi (R), Prime Minister Hisham Qandil (C), Former Finance Minister Mumtaz Al-Saeed (L) and Governor of Egypt's Central Bank (CBE) Farouk El-Okdah (2nd L) meet with IMF Managing Director Christine Lagarde at the Presidential Palace in Cairo (Photo: Reuters)

In order to reduce Egypt's growing budget deficit, the government has proposed a package of reforms that includes raising taxes and cutting subsidies.

The reforms will be included in a modified economic programme that Egypt will present on Tuesday to the IMF, with the aim of meeting the pre-conditions for a proposed $4.8 billion loan to Egypt.

The proposed modifications should, according to Hani Qadri Demyan, assistant to Egypt's minister of finance, reduce expenditures by between LE10-12 billion ($.1.8 billion) in 2013/2014.

At a conference held at the ministry of finance on Tuesday, Demyan said that savings from the current fiscal period will not be very high, as the reforms will not be adopted before March or April.

The implementation of the proposed reforms will not start until they are approved by the Shura Council, which will start debating them within two days, according to Demyan.

The reforms approved by Egypt's cabinet are a milder version of a set of policies proposed by Morsi in December, which he then suspended amid growing popular anger.
The cabinet has approved an increase in tax sales for six goods instead of the 25 proposed previously. The concerned goods are beverages, cigarettes, steel, cement and telecommunications.

"Fertilisers, oils and wood will not be affected, to make it easier for citizens, especially those with limited revenues," reads a document released by the cabinet, referring to the law unilaterally issued by Mohamed Morsi, last December.

The fiscal reforms also include an increase in the maximum revenue tax from 20 to 25 percent, as well as an increase in the annual income tax exemptions for salaried employees from LE9,000 to LE12,000 as of October 2013.

The tax brackets in between will be also modified.

Another aspect of the government programme is a cut in energy subsidies, which are estimated to reach LE117 billion this fiscal year.

Energy prices for energy intensive industries will be gradually raised to reach production costs in three years.

"It was clearly announced that food industries will not be concerned because of their social aspect," Qadri commented.

The fate of other industries is not clear yet. The government, however, increased energy prices in April last year for energy-intensive industries from $4 to $6 per million British Thermal Units (BTU) and from $2.25 to $3 for medium energy-intensive industries.

The government also intends to ration subsidised fuel through a system of smart cards, allowing drivers a limited amount of fuel.

Demyan described energy subsidies as the main article that can make big savings, as three quarters of state expenditures are divided between subsidies, debt service and salaries.

At the press conference, Minister of Finance El-Morsi El-Sayed Hegazy saluted an initiative made by Egypt's former prime minister Ali Lotfi calling on the rich to pay back to the state their share of annual subsidies, which he calculated at LE16,000 per person.

Egypt's deficit is estimated to reach between LE180-190 billion, or between 10.7-11 percent of GDP this year. 

"The proposed fiscal reforms should help to cut the deficit to 9.5 percent of GDP in 2013/2014, otherwise it will explode," said Demyan.


This story was corrected on 27 February thanks to a reader's comment.

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