Statements by Prime Minister Mustafa Madbouli, newly appointed Minister of Finance Ahmed Kouchok, and the latter’s deputy were making the headlines last week, touching on debt, the exchange rate, privatisation, and taxes.

During his weekly meeting with the media, Madbouli said on Thursday that fears that the previous week’s outflow of portfolio investments on the back of the meltdown in the international markets had harmed the economy were unfounded.

US economic data released last week was seen by observers as evidence of a possible US recession, triggering sell-offs in the international capital markets. The markets lost $6.4 trillion in hours, with investors liquidating their holdings to invest in the dollar, now considered a haven.

Only $600 million, representing seven to eight per cent of foreign holdings in Egyptian treasury bills and known as hot money, left Egypt, according to Madbouli. He added that the effects on the exchange rate were limited and were in the same range as the losses in the currencies of peer markets.

Egypt lost $20 billion in hot money in 2022 on the back of the outbreak of the war in Ukraine, triggering a foreign-currency crunch that hard hit the economy and led to a drain in the country’s international reserves.

Foreigners then invested billions of dollars in the treasuries market after Egypt sold the development rights to the prime Ras Al-Hekma site in February.

Last week, the dollar increased by 2.6 per cent against the pound on the back of the outflows, trading in the banks at LE49.5 to the dollar on 5 August, the lowest rate since March. The dollar stood at LE49.3 on Tuesday.

 While noting that Egypt was among the hardest hit markets in the region by the global meltdown, the consultancy firm Capital Economics saw a silver lining. “The fact that the pound weakened suggests that it is now allowed to move more freely than in the past, adding to the credibility of the policy shift,” it said.

In his first press conference as finance minister, Kouchok said that the government would maintain a primary budget surplus and pledged to reduce government debt interest payments from around half of spending at present to 35 per cent in the medium term.

Capital Economics said that this “reaffirmed the government’s commitment to a tight fiscal policy”.

According to Kouchok, Egypt has succeeded in realising a primary budget surplus, being the difference between revenues and expenses after deducting interest rate payments, of six per cent in 2023-24.

The government has been working on reducing public expenses through a series of subsidy reductions, translated into hikes to local fuel prices and subsidised bread over the past few months.

Another topic referred to by Kouchok was government plans to restructure its debt. He pledged to extend the maturity of the debt and diversify Egypt’s public debt investor base across other markets and currencies to reduce the country’s public debt-to-GDP ratio to 85 per cent by the end of 2025-26.

Debt service costs account for 45 per cent of expenditures in the current year’s budget.

Kouchok’s statement came a few days before the Central Bank of Egypt (CBE) announced an auction of euro-denominated treasury bills worth 600 million euros. It auctioned more than LE100 billion in treasuries with maturities extending between three months and three years last week.

The state plans to turn to the local debt market over the coming period, Kouchok said, adding that the Ministry of Finance will be looking to expand its debt instruments to treasury bonds, green bonds, and sukuk Islamic finance bills.

There was also much talk about tax reforms last week, with Kouchok and his deputy Sherif Al-Kilani giving an outline of what taxpayers should expect in the coming period.

Al-Kilani said in a televised interview that the government vis considering increasing the income tax threshold. Currently, those with an annual income of less than LE60,000 are exempt from income taxes, though this is seen as too low by observers given that the minimum wage for both public and private-sector employees currently stand at LE6,000 per month or LE72,000 per year.

The tax system has been criticised because much of its revenues, standing at 36 per cent, come from the value-added tax (VAT) calculated as a fixed percentage, 14 per cent, of the price of goods. This means that consumers pay the same amount of VAT regardless of their income.

“Lower-income consumers bear the most significant tax burden from the VAT because they spend most of their income on basic needs compared to higher-income groups, and they save the least, if they save at all,” said a report published by Alternative Policy Solutions (APS), an AUC-affiliated research unit.

The revenue earned from income tax on salaried workers is about 55 per cent of total personal income tax revenues. The tax on land and property ownership (real estate) is at most 2.6 per cent of total income tax revenues.

A move to increase the income tax threshold would fit into government plans to adopt a wider social-support package starting in October. The government has no intention of introducing new taxes, according to Al-Kilani, who added that such a step would be unrealistic amid the current inflationary pressures.

The government has previously noted that it wants to increase tax revenues by 30 per cent, a move Al-Kilani explained would be made through merging the informal sector of the economy, which observers say is the equivalent of 30 to 40 cent of GDP, with the formal sector.

Kouchok said that in the 2023-24 fiscal year ending in July, tax revenues increased by 30 per cent to reach LE1.49 trillion without imposing any new taxes or increasing rates.

Tax revenues were directed to spending on health and education, he said.

The features of the long-talked-about new tax policy will be revealed in 2025, according to Al-Kilani, and it is currently the subject of public consultation. It is expected to include lower tax rates for foreign investors, as well as tax deductions for new projects.

The current budget shows tax revenues representing 77 per cent of public revenues, a 32 per cent increase compared to the previous year’s budget. Targeted revenues come in at LE2 trillion.

Kouchok also set out plans to raise $2.5 billion this fiscal year from the privatisation drive that had stalled in the past year.

“In the grand scheme of things, it equates to just 0.8 per cent of GDP in funds, but it at least points to efforts to reinvigorate the drive and to try to be more realistic in its goals compared to previous cabinets,” commented Capital Economics.

* A version of this article appears in print in the 15 August, 2024 edition of Al-Ahram Weekly