“The nature of the crisis compels us to accept the loan from the International Monetary Fund.” This is not a quotation from a liberal economist, but rather comes from famous Egyptian economist Galal Amin, who is known for his socialist leanings. It may be an indication of how bad the country's economic situation has now become. Amin wants the government to come clean on the fine print of the agreement with the IMF in order that society as a whole will be in a better position to support it. He was speaking at the recent Economic Research Forum (ERF) in Cairo during a workshop that was part of an initiative to encourage national dialogue on economic affairs. Amin said that the reasons for the economic problems the country is currently suffering were not economic in the first place. “Take the bullet out of the patient before treating them,” he said, adding that security was needed first and not just police security. Instead, there was a need to change the political discourse that was increasing anxiety and affecting everything from tourism to investors, Amin said. “What is the point of changing one technocratic minister for another if the orders being given by the politicians are no different,” Amin asked In his talk, he summed up what was on the mind of the participants at the meeting, who had listened to ambitious government plans for the short and medium term to kick start the economy and make the best of available resources. “The Egyptian economy is growing at a third of its growth capacity,” said Deputy Minister of Finance Hany Kadry, describing the economic situation. The fallout from that slowdown had meant the rise of twin deficits, said Ahmed Galal, managing director of the ERF, a budget deficit and a balance-of-payments deficit. Egypt's budget has a financing gap of $14.5 billion until the end of fiscal year 2013/14, according to Kadry. This has come from a lack of revenues coupled with increased spending on social demands and lower tax revenues. In the meantime, the exiting of foreign investments from the country has put pressure on foreign currency reserves. Confidence in the ability of the Egyptian economy to pick up has also been shaken. “The more we delay solving the problem, the more it reflects on the economy,” Kadry said. He said the government was targeting to cut the budget deficit to 10.4 per cent of GDP by the end of the current fiscal year, down from 10.8 per cent last year. The plan was to cut that deficit further to 8.5 per cent by the end of fiscal year 2013/14. Kadry said that the government wanted to meet the aspirations of the population, but that it did not have space to maneuver. The only area where there was some space was energy subsidies, he said. “Twenty per cent of these subsidies go to the higher-income 20 per cent of the population. They represent 420 per cent of what is spent on health and 180 per cent of what is spent on education. Fuel subsidies are projected to use up LE117 billion of the budget during the current fiscal year.” Kadry said food subsidies “need to be developed, not rationalised”. These subsidies represent no more than 1.5 to two per cent of GDP, he said. “We want to make sure that every LE1 spent reaches the end beneficiary,” and cash support is something that the government may consider in this regard. Any savings made in subsidies should be used to support the social security network by increasing spending that benefits the poor, he said, “until we can safely move to cash support as agreed on by society”. The government was aware that no economic measures could be taken without society's support, he said. “The cost of reform must be borne by everyone, except the poor,” he added. According to a paper prepared by the cabinet's economic group, if reform is not implemented during the current or upcoming fiscal year the budget deficit for this year is expected to reach LE216.5 billion, or 12.2 per cent of GDP and to rise to 13.3 per cent next year. The government is hoping it can access a $4.8 billion loan from the IMF to support it until its reform programme begins to bear fruit. Kadry said that the international community was willing to assist Egypt but that it had requested a balanced, home-grown economic reform programme that would ensure the sustainability of economic growth after assistance was withdrawn. “We have prepared that programme, but we need the accreditation acquired from the IMF,” Kadry said. Besides its attempts to gain international financing, the government is also attempting to increase local revenues. Kadry said that this was not an appropriate time to increase taxes, but that the government intended to increase the progressivness of taxation within the current ceiling of 25 per cent. Voluntary compliance was important, especially as far as the sales tax was concerned, he said. Kadry also spoke of the importance of the new property tax. “It is a very fair tax,” he said. “One cannot treat those who live in slums the same as those who live in villas and palaces, but those with interests have used the poor as ‘human shields'” to protect their incomes. The new law, which comes into effect in July 2013, exempts one unit valued at a maximum of LE2 million per person and will be reevaluated every five years. In the meantime, 25 per cent of the revenues of the property tax will go to municipalities and another 25 per cent will go to the Slum Development Fund. Rania Al-Mashat, Central Bank sub-governor for monetary policy, said that Egypt had long had a chronic deficit in its trade balance, but that service and capital balances had been used to cover the gap as well as to feed the foreign reserves. “Without the restoration of security, which will help to increase tourism revenues, there will be a deficit in the services balance,” she warned. “The lack of confidence that we are seeing in the absence of the required reforms and the continuous cuts to our credit rating puts Egypt in a serious position,” she said. Al-Mashat explained that it was important to maintain the country's current level of reserves in order to be able to meet Egypt's international commitments in terms of debt repayment and debt servicing. The reserves were also important in covering the needs of Egyptian families for bread, fava beans, cooking oil and fuel. The budget deficit needed to be covered by fresh funds, and the IMF loan would provide hard currency as well as local liquidity. What was needed was political stability and agreement on needed reforms, she said. If these things were in place, the situation would change quickly. If not, no economic decisions would make a difference. Hazem Al-Beblawi, a former minister of finance, said that “we have an economic problem, but its causes and solution are not economic. It is all about a lack of vision and confidence.” Al-Beblawi described what Egypt was going through as a “war-time situation”, when what was needed was a “success story”. The government had a long list of things it wanted to do, but it could not try to do everything, since if it did it would not succeed at anything. “Focus on one thing, and make it a success story,” Al-Beblawi advised, using that to encourage support for other reforms. “We are entering a tough phase, but we can get through it,” he concluded.
