INTERVIEW: Financial reassurance on the economy

Nahla Abul-Ezz, Tuesday 15 Mar 2022

Egypt has plans to improve its economic situation and counter the effects of the Ukraine crisis on the economy, Minister of Finance Mohamed Maait tells Al-Ahram Weekly.

Financial reassurance on the economy

Being the man responsible for Egypt’s finances during this critical period and dealing with the aftermath of the pandemic and the repercussions of the Russia-Ukraine war, Mohamed Maait has a lot of thorny issues to tackle.  

As the conflict in Ukraine enters its fourth week, Egypt is putting in place mechanisms to protect its wheat supplies and economy, according to Maait.

“We have so far set aside about LE12 billion in additional allocations for the purchase of wheat after the rise in the crop’s international prices as a result of the disruption in supply chains, increased freight costs, and the unprecedented rise in inflation rates linked to the conflict in Ukraine,” he said.

The government has also decided to increase the price it pays for homegrown wheat to farmers by LE670 per ton to encourage them to cultivate more wheat.

 Egypt has also been studying the effect of the war on other commodities.

Maait is optimistic that the economy’s strong fundamentals would enable it to weather the effect of the war as it did with the aftermath of the pandemic.

“Despite all the challenges that the global economy is experiencing, from disruptions in supply chains to a sharp rise in inflation and shipping costs, the indicators of the financial performance during the first half of this fiscal year are reassuring,” he added.

The average growth rate from July to December 2021 reached nine per cent, the highest in more than 20 years. Unemployment fell to 7.4 per cent at the end of December.

According to Maait, Egypt is the only country in the Middle East and North Africa region that has retained the confidence of the three global ratings agencies Standard & Poor’s, Moody’s, and Fitch during one of the most difficult periods in the global economy as a result of the Covid-19 pandemic.

The economy’s performance has exceeded expectations despite the coronavirus crisis, according to the testimony of international ratings and financial institutions, especially the IMF and World Bank.

He sees this as an evident of the success of the comprehensive and bold economic reforms adopted by President Abdel-Fattah Al-Sisi and supported by the Egyptian people. These reforms, according to the minister, contributed to the stability of fiscal and monetary policies and were complemented by the efficient allocation of spending of the financial stimulus package that was set at two per cent of GDP and introduced in the wake of the Covid-19 crisis to support the activities and groups most affected by the pandemic.

The World Bank has recently upgraded its forecast for the growth of the Egyptian economy by one per cent to 5.5 per cent in 2022. The IMF also raised its projections to 5.6 per cent, up from 5.2 per cent.

“There are other estimates that suggest Egypt’s economic growth will surpass 5.7 per cent. These figures reflect the strength of the Egyptian economy and its ability to recover from the repercussions of the coronavirus pandemic and contain domestic and foreign shocks,” he noted.

The economic indicators for the first half of the fiscal year 2021-22 which started in June supports Maait’s bullish outlook for the economy.

“The average growth rate in the first half of this fiscal year reached nine per cent, which indicates that the Egyptian economy is recovering. The acceleration of growth, coupled with the decrease in unemployment rates to 7.4 per cent in December, is also a good indication,” he said.

Moreover, the government has succeeded in reducing the total budget deficit by 50 per cent during the past five years, and targets to lower it to 6.7 per cent in June, down from 7.4 per cent in June 2021.

Egypt, according to Maait, wants its budget deficit to stand at less than six per cent in the next fiscal year and to reduce the debt-to-GDP ratio, which recorded 108 per cent in June 2017, to less than 90 per cent by June 2022 and less than 85 per cent over the coming three years.

The budget shows a primary surplus of LE3.2 billion during the first half of the year and target a primary surplus of 1.2 per cent for the whole fiscal year.

“This is less than the surplus achieved last year. The decline comes on the back of the increase in expenditures by 15.4 per cent to finance government investments and meet the needs of the health and education sectors,” explained Maait.

This year, spending on the health sector increased by 30.4 per cent, education by 21.1 per cent, and social protection by 20.6 per cent.

Figures provided by the minister show a 12 per cent increase in investments financed by the treasury to reach LE82 billion. National investments in the Decent Life initiative, Egypt’s project to develop the countryside, are expected to hit LE200 billion this year.

Some LE90 billion was paid to the Insurance and Pension Fund, with the total paid in 30 months amounting to LE420.5 billion and set to record LE510.5 billion in June. These figures were calculated since the signing of the agreement with the ministry of social solidarity to pay the dues of insurance funds accumulated over 50 years.

As for the new budget (2022-23) to be drafted during the coming few weeks, the plan is “to achieve a growth rate of 5.7 per cent of GDP, a primary surplus of 1.5 per cent, reduce the total deficit to 6.1 per cent, cut the debt-to-GDP ratio to less than 90 per cent and thus decrease the debt service to total budget expenditures to less than 30 per cent,” according to Maait.

Meanwhile, there are no plans to increase taxes. “We do not need to increase tax rates, but rather to continue to expand the tax base by integrating the informal sector into the formal economy and identifying the exact size of the tax base,” he said.

He stressed that the state wants to support the industrial sector and encourage local products giving example by the 40 commodities exempt from the value-added tax to stimulate investment and reduce the cost of manufacturing and production, thus contributing to lowering the prices of goods and services.

With the war expected to squeeze Egypt’s foreign currency sources, especially the tourism receipts with the absence of the Russian and Ukrainian tourists, who count for more than 40 per cent of overall tourists, observers believe that Egypt might resort to more foreign borrowing.

Even before the Russia-Ukraine conflict broke out, “Egypt was looking into the possibility of issuing Samurai bonds — bonds targeting the Japanese market — for the first time as part of plans to issue diverse medium- and long-term government bonds.”

Egypt has tapped the international markets with two bond offerings with an overall value of $6.75 billion during 2021. The bonds were grabbed by investors due to the high yield they offer.

The government is also preparing for its first-ever sovereign Islamic bonds (sukuk) between April and June, which aim at attracting new Sharia-compliant investments both in local and foreign currencies to provide additional cash flow to the Egyptian economy, according to Maait.

Meanwhile, the government is supporting the exporters with an ambitious aim to increase annual exports to $100 billion.

The government has issued six successful initiatives to pay the Export Development Fund’s overdue subsidies to exporters. The latest of these was the instant cash payment initiative.

Egypt’s total export revenues recorded $45.2 billion in 2021, according to Prime Minister Mustafa Madbouli. This figure marks an 80 per cent surge from the 2020 figure of $25 billion.

“We have paid more than LE33 billion in arrears to 3,000 exporters since the start of the overdue subsidies payment programme in October 2019,” he added.

He also bragged about another arrears payment initiative that allows exporters to receive overdue subsidies in a single payment rather than in installments over four to five years, in return for a 15 per cent haircut. The initiative was launched in cooperation with the banking sector and the Ministry of Industry and Internal Trade.

“These initiatives help provide the necessary cash flow for exporting companies to ensure the continuation of production, increase their production capacities, expand the export base, and enhance the competitiveness of Egyptian products in international markets.”

The reform in the customs system is one of the main changes praised by importers and even international institutions. According to the World Bank, Egypt has succeeded in reducing the average customs release time by 50 per cent.

Maait tells the story of reform with admiration: “The Egyptian customs system has witnessed qualitative development based on modernising the legislative structure by issuing the new customs law, which contributes to the optimal use of advanced technology, and the adoption of international experiences in the application of the Single Window Pre-Clearance System and the transition from a paper-based work environment to a digital environment.

“This helps in simplifying procedures, reducing the cost of the import and export process, facilitating the movement of international trade, and reducing the time for customs release,” he added.

The reforms included the setting up of fourteen logistics centres for customs services, covering 97 per cent of Egypt’s imports and exports. Moreover, the Advanced Cargo Information (ACI) system for shipments was applied in seaports.

The National Single Window for Foreign Trade Facilitation (Nafeza) system was introduced in April 2021to save money for those who conduct cross-border trade. They are able to save $400 on every shipment, reduce the time needed to deliver or receive documents, and decrease the fees for storage and late delivery by LE22,500 for every cargo.

These steps, according to Maait, target improving Egypt’s classification in three important international indicators: global competitiveness, doing business, and the macroeconomic environment.

The success of implementing the new system is encouraging the government to apply it in airports as well. The date of the trial operation is yet to be released.

“Applying the ACI system in airports will help reduce the customs release time, encourage Egyptian exports, and facilitate work for the business community, especially with regard to imports of production inputs, services, and strategic goods,” he noted.

Maait’s tenure as minister of finance witnessed the introduction of the tax digitisation projects, such as electronic invoices, electronic receipts, and automated standardised tax procedures, changes that he believes would guarantee the fairness of Egypt’s tax system.

Egypt was one of the first countries in the Middle East and North Africa region to implement the electronic invoice system to follow up on commercial transactions between companies in real-time. “We started off with an average registration of no more than 40,000 receipts in the first month. Over 52,000 companies registered in the electronic invoice system, and more than 43,000 companies have activated their accounts on the electronic system so far. They have sent more than 150 million electronic invoices through this system,” he said.

These projects help to identify the size of the tax community and integrate the informal sector into the formal economy. Tax digitisation projects have increased tax revenues by 13 per cent in the past fiscal year despite the coronavirus crisis. More than 15,000 cases of tax evasion have been discovered, 4,300 of which have paid tax differences of about LE6 billion to the public treasury.

All tax digitisation projects are scheduled to be completed by the end of June.

“Our success in implementing the electronic invoice system has encouraged us to introduce the electronic receipt system in places of sale to consumers starting next month to enhance the efficiency of the tax system through the optimal use of technological solutions to follow up on commercial transactions in real-time.”

Furthermore, a system of “unified automated tax procedures” was launched in large and medium taxpayers centres in January. This provides services to taxpayers electronically without them having to go to the centres. All they have to do is visit the website of the Egyptian Tax Authority and enter their unified tax registration number and pay their tax dues electronically.

*A version of this article appears in print in the 17 March, 2022 edition of Al-Ahram Weekly.

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