The government should get its spending in order before it resorts to domestic or foreign borrowing, experts tell Niveen Wahish For the past year, the government has issued all types of treasury bills and bonds, with maturity going from three months to nine years. And more auctions are on the way. It has been reported that the government is aiming to borrow some LE170 billion from the domestic market. While the figure sounds staggering, Ministry of Finance sources say it is normal. It is set to be used to reschedule an outstanding public debt of around LE135 billion, while covering around a quarter of the budget deficit. Meanwhile, the government appears on track to resume negotiations of a $3.2 billion loan with the International Monetary Fund (IMF). Minister of Finance Momtaz El-Said has been reported as saying that an IMF mission will be visiting Egypt 15 January. While in the past few weeks there had been news reports that the government and the IMF are at odds over the conditions tied to the loan, the minister of finance has repeatedly said the reform programme being discussed with the IMF is purely Egyptian. An IMF spokesperson told Al-Ahram Weekly that the "IMF continues to stand ready to support a programme that is designed and fully owned by the Egyptian authorities and carries broad political support. An IMF arrangement would include benchmarks and quantitative targets taken from the government's own economic plan." In June, before the government backtracked from its plan to sign a loan agreement with the IMF, it had prepared an economic plan that included a set of reforms. The IMF source added that, "six months later, the authorities are still updating their economic programme, to the extent that their policy plans have changed to better reflect the economic environment since [the government's] programme was announced in June, then we would expect some changes to the benchmarks to reflect this update." The government's economic plan included various measures such as the lifting of subsidies on energy intensive industries, the collection of taxes on corporate dividend payments, reducing exemptions from customs duties, increasing taxes on tobacco from 40 to 50 per cent and improving the budget's transparency. Salwa El-Antary, former head of research at the National Bank of Egypt, believes that many of these recommendations are worth being adopted. "It would be a shame if the government only decided to implement them only because of the IMF agreement," El-Antary said. Nonetheless, she believes that before deciding to borrow locally or domestically, the government should maximise its revenues and trim any unwarranted spending. To start out, El-Antary wants "private funds" to become part of the budget. These private funds are where government service fees such as stamp taxes are accumulated. It is estimated that there are hundreds of billions of pounds in these private funds. El-Antary cited an example saying that only part of the fees students pay at universities is delivered to state coffers, while the rest remains in a fund owned by the university. While that money should be spent on ameliorating services, only part of it may be used for that purpose, while the rest is used to pay exceptionally high salaries for some staff members. "That money was collected from the people and should be part of the budget," she said. Another step which should make a difference to the budget is placing a maximum ceiling on wages. While the government has already announced that a maximum wage will go into effect starting this month, El-Antary lamented that the mechanisms for its implementation are not clear. "Will it be a maximum wage or income? And does it include only the salaries financed by the budget or other salaries which may be financed by the private funds?" El-Antary asked. On a similar note, Ihab El-Dessouki, professor of economics at Sadat Academy for Management Sciences, also believes that before borrowing, the government should first try to stop the budget deficit from widening by rationalising and introducing better revenue collection. El-Dessouki believes the tax regime leaves much to be desired, whether in efficiency in collection or in the types of taxes imposed. He thinks budget cuts announced by the government, aimed at reducing the deficit by around LE20 billion in order to maintain the budget deficit at the target rate of 8.6 per cent of GDP, are insufficient. These measures include trimming government spending and combating tax evasion. But El-Dessouki wants to see a progressive tax in place. Taxes had been raised in early 2011 from 20 per cent to 25 per cent on incomes exceeding LE10 million. To El-Antary, that is not enough. "Why on earth should somebody with an income of LE9.9 million be taxed an equal percentage as somebody who makes LE20,000?" she argued. Moreover, she wants to see more taxes implemented. The government had been planning to impose a capital gains tax in June but then backtracked after it was met with strong opposition. El-Dessouki agrees in that capital gains, which are the difference between the purchasing price of a share and its sale price, "is profit made out of thin air." And it should be collectable from everyone, not only non-resident foreigners as had been suggested before. Taxes should also be collected on dividends' distribution and profit sharing, adds El-Antary. "Without doing that, the government is actually only collecting taxes from the waged which lacks social justice and is a waste of resources." As for imposing further taxes on cigarettes, El-Dessouki does not believe it is feasible. "For many Egyptians cigarettes are a staple," he said. Already a 10 per cent tax increase has been imposed on cigarettes since July 2011. El-Antary adds that that would be a tax which would not be a significant burden for the rich but would weigh heavily on the poor. Regarding the lifting of subsidies on energy intensive industries, which the government said it started applying this month, El-Antary applauded the move. But she also said it should be accompanied by a set of measures which guarantee that the increase in energy prices will not affect consumers. "Strict market supervision is needed," El-Antary said. She added that social safety nets need to be strengthened, through a minimum wage for workers and pensioners, in order to guarantee that their level of income does not decrease. Otherwise that will only lead to the poor getting poorer. Only once it has put its house in order should the government decide how much it needs to borrow, said El-Antary. Should there be a need to borrow, priority needs to go to domestic borrowing. Foreign borrowing bears the risk of exchange rate fluctuations, which would increase the debt burden. But El-Dessouki worries about the fact that interest rates on treasury bills and bonds have risen steeply, reaching around 16 per cent. That being the case, he prefers the IMF loan, which was originally offered at 1.5 per cent interest. And for those fearing the conditions attached on any foreign loan, be it from the IMF or any other source, El-Antary said that any lender is bound to put conditions to guarantee the ability to pay back. But "we should be an able negotiator. We are shareholders in the IMF and we have the right to borrow without crippling conditions. We should be able to convince them that we know what we are doing and that we are able to summon our resources and repay," El-Antary added. If the government is able to do that and concludes the loan agreement, she said, that would have the added advantage of pumping up Egypt's credibility on the international market.
