Asked about the best way of setting the Egyptian economy back on track, Shireen Al-Kady, a leading investment banker, unhesitantly says “by changing the regime. The main problem now is the people in power. They have lost credibility, with neither donors nor investors both locally or internationally buying any of their promises.” The Islamist-led government of President Mohamed Morsi has taken several steps that are seen by many as anti-investment. Banning members of the Sawiris family, Egypt's richest and most influential Coptic business family, from travelling, freezing the assets of 23 businessmen who have still not been found guilty of irregularities in the sale of the Al-Watany Bank of Egypt, imposing a capital gains tax retroactively on stock market deals and then cancelling it a few days later, and announcing a set of controversial taxes in the middle of the night and then cancelling it before dawn are just a few examples of what Al-Kady is referring to. “Even if they rearranged their books now and adopted a new set of policies, their track record does not guarantee that they will change any time soon,” he said. “They have been presented with solutions both openly in the media and in closed meetings, but they don't listen and refuse to take the advice of the concerned parties.” Al-Kady points to the Shura Council's — the upper house of Egypt's parliament — recent decision to impose taxes on bad loan provisions at banks working in Egypt as an example of the mediocrity of the way economic decisions are now taken. Provisions are treated as tax-free expenses that the banks put aside as hedges against possible bad loans. “How come the Central Bank was not involved in discussions about the provisions tax law? How come no one from the banking sector was consulted?” Al-Kady asks. “By not doing so, members of the government and Shura Council proved that they were total amateurs.” The government cancelled the taxes fewer than 10 days after the Shura Council had passed them due to uproar in the banking sector. “It was very easy for Hisham Ramez, the Central Bank governor, to win the argument. It is part of the Basel Accords, governing banking activities worldwide, to have adequate provisions. The lawmakers did not do enough research before taking their decision. Had they consulted even their friends in Qatar, they would have known that a tax of this sort cannot be applied.” The close ties between Egypt's Muslim Brotherhood government and the Gulf emirate of Qatar have been worrying people in the business arena.
SAME OLD PROBLEMS: Al-Kady sees the country's trade deficit as lying at the root of the economy's problems, and he says that thus far no serious measures have been taken to solve it. Since the 25 January Revolution, consecutive governments have not tried to deal with the problem by looking at the breakdown of imports and exports in a bid to deal with the ever-increasing trade deficit. The people now in power think in the same way as those of the former regime, Al-Kady said. “When they talk about unnecessary imports, ostrich meat and caviar are targeted, ignoring the fact that we are importing everything. We are even importing vegetables,” he said. In light of the country's scarce foreign currency reserves, Egypt should have stopped importing cars, even if this led to an increase in vehicle prices, according to Al-Kady. “This measure alone would have saved us $2.5 billion, in addition to the $1.25 billion bill for the imports of spare parts.” He gives another example of the absence of economic sense in export and import decisions in the shape of phosphates, which Egypt exports as a raw material and then imports chemical products containing the same phosphates, having missed out on moving up the value chain. In Al-Kady's view, the solutions sought by the government's economic team are merely temporary painkillers, as they all revolve around foreign aid and short-term borrowing. However, foreign aid is likely to stop, since American and European donors have been put off by the recent conviction of 43 NGO workers in Egypt, seeing the sentences, ranging from between one and five years, as politically motivated. Moreover, the new NGO bill currently being discussed in the parliament has been criticised by many European observers for being incompatible with international law. As for the IMF, Al-Kady believes that no deal will be concluded with this organisation for a loan because the government has not been consistent in the policies it has promised to implement. “Look at the subsidies figures: Egypt promised the IMF it would rationalise them and then the proposed budget for 2013-2014 includes higher subsidies figures than last year's budget,” Al-Kady points out. “We don't need aid. What we need is in-house reorganisation to make better use of our own resources. Then we can borrow what we want. We don't need someone to put conditions on us at the moment,” he said. The overall value of the proposed IMF loan is not large enough to settle Egypt's woes. “Since the current regime came to power, Egypt has received almost $5-6 billion of foreign funding that no one knows where it went.” THE QUESTION OF SUKUKS: Sukuks, or Islamic bonds, are another sort of borrowing that the government sees as a means of securing much-needed finance. However, Al-Kady describes the Egyptian sukuk market to be over before its first issue sees the light. “The Egyptian sukuks law is not correct, and it does not match the laws of Malaysia or Dubai, for example.” Al-Kady explained that the law and statements by officials showed that the plan was based on treasury modarba sukuk bills, according to which state-issued bonds are backed by assets whose ownership can be transferred to the holder of the bond in case of the bond issuer's failure to meet financial obligations towards the holder. This type of sukuk was banned by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), a Bahrain-based not-for-profit corporate body that prepares accounting, auditing, governance, ethics and Sharia standards for Islamic financial institutions. The AAOIFI has said that government bonds of this kind are not Sharia-compliant. “Since then, nobody has been issuing this type of bond,” Al-Kady said, with Saudi Arabia, Dubai and Malaysia issuing sukuk bonds called ijara instead in which an asset is temporarily rented to an investor at a fixed interest rate and the issuer is obliged to return the value of the bond without changing the ownership of the asset. Al-Kady said that investors were not interested in buying sukuk bonds that were not Sharia-compliant. “Even if investors ignored the fact that the bonds are banned, they will always be hesitant to be involved in such offerings that might end up with them facing allegations of stealing national assets,” he said. The most obvious proof that the sukuks are not attractive came when Qatar bought $3 billion worth of Egyptian bonds on the Irish market last month and did not wait for the country's first sukuk issuance. “Issuing a law with such flaws puts question marks over the efficiency of the people making the laws,” Al-Kady said. SHORT-SIGHTED SOLUTIONS: Al-Kady believes that the problem is that the regime does not look at the economic scene as a whole and does not seek to avoid overburdening any segment of society. The absence of this way of thinking is obvious, according to Al-Kady, when one looks at how the government has dealt with the budget deficit. The budget is divided into chunks, the first of which consists of interest payments on debt that the government cannot touch as these relate to the country's LE1.3 trillion debt. Another item on the expenses side is salaries, and these are increasing, as are the gaps between people with different income levels. “We should have tried to increase the minimum wage by increasing the salaries of the poorly paid and not across the board as this just keeps the gap in income levels the same,” he said. The new budget for fiscal year 2013-2104, starting in June, puts the salaries figure at LE172 billion, which is almost 80 per cent higher than in the 2011-2012 budget, the last budget before the 25 January Revolution. This increase has been fed by raises and the appointment of thousands of temporary workers. The expenditure item the government is working on rationalising relates to the country's subsidies system, but according to Al-Kady it is doing this in the same short-sighted way. “It should set priorities if it wants to decrease expenses by slashing subsidies and hence increasing the costs of production on producers. It shouldn't at the same time aim to increase revenues and increase taxes on those producers,” Al-Kady said. By doing both at the same time, the government will not only overburden investors, but also push up inflation as prices will reflect the extra costs. “It is all unbelievably short-sighted. The way they are dealing with the budget deficit is the same way an incompetent housewife deals with her home budget.” UNFAIR TAXATION: Al-Kady also underlines loopholes in the taxation system. “The Egyptian government increases taxes on committed tax-payers like employees and the shareholders of listed companies, while ignoring the non-taxed transactions in the agricultural sector and real-estate sectors where millions of pounds of transactions take place every day,” he said. After taking measures that pushed up the prices of gas, electricity, water and food, the government should not have imposed income tax on people with limited incomes, who should be left with higher disposable incomes. But the new tax law levies a 10 per cent income tax on those earning LE30,000 per year. According to Al-Kady, those earning less than LE5 million per year should be exempted, while a 10 per cent tax should be imposed on those earning more than half a million and a 30 per cent tax on those with incomes of more than LE10 million. Moreover, the way the tax authorities are managed is not economically efficient. “The total revenues from the income tax, customs and sales tax authorities amount to LE17 billion, while the salaries and bonuses of their personnel is LE8 billion. So they are effectively just 50 per cent discount brokers.” Instead of introducing new taxes, the regime should be thinking of ways of increasing the tax base. Al-Kady gives the example of Tanzania, a small economy largely based on cash. The government there wanted to impose a sales tax, so it wanted to set up a database of taxpayers. It announced that those who presented receipts for a commodity or a service would be given a number and these numbers would be entered into a state lottery. “This changed the culture of the society, since every transaction thereafter was made by receipt and the government was able to compile a database of traders,” Al-Kady said. TARGETING BUSINESS: The regime's overburdening of businessmen surfaced several times in Al-Kady's interview with the Weekly. The regime is doing exactly what Recep Tayyip Erdogan, the Turkish prime minister, did eight years ago in Turkey when he attacked all businessmen with capital gains taxes in a bid to tame them, Al-Kady said. Turkey has long been presented by the Muslim Brotherhood as the model of economic success that it wants to imitate. “The current regime has a problem with Egypt's billionaires. It has political power, but it has no financial power without allies from the business arena. So the regime opts to bully businessmen to make it clear who has the upper hand,” he said. The message has meant that businessmen have lost trust in the regime. While the government has been talking about reconciliation with a number of heavyweights from the business arena who fled the country after cases of illegal profiteering were filed against them, according to Al-Kady, “there are no proper legal cases against these people. They are just a way of defeating them one way or another.” “I doubt these businessmen will be willing to return, as the regime has no credibility,” Al-Kady concluded.
A gloomy display THE MARKET has been muddling through the post-revolution economic and political doldrums. “It is a display window for all that has been happening in Egypt. The market index has gone up and down with the hopes and frustrations of the last two years,” Al-Kady said. After losing value in 2011 on the back of an unjustified decision to close it for two months, the market witnessed a revival during 2012 as the main features of Egypt's new political scene were formulated. “The country got a new parliament, an elected president and a constitution in the making, so the political infrastructure was laid down,” encouraging market recovery, Al-Kady said. However, things took a different twist after the constitutional declaration in November 2012 that gave the president close-to absolute powers. The whole political scene was turned upside down and the violence increased. “Starting at this point, people saw the political scene as not correct and they stopped expecting correct economic measures. From this point onwards, local and foreign investors started to sell off or downsize their portfolios.” A further move that took its toll on the market was talk about imposing a capital gains tax on market transactions. “I am in favour of imposing all kinds of taxes, provided that their burdens are equally and fairly distributed,” Al-Kady said. However, a capital gains tax should be applied on sales of tangible assets like cars and houses as well as on stock market values, and if this is not done the tax is not fair. Al-Kady said that introducing a tax on market transactions would be to add insult to injury. “Market transactions have become very thin, with average daily volumes of LE150 million, compared to the LE1-2 billion before the revolution.” The market is losing its appeal due to the uncertain political scene and the unstable economy. Morgan Stanley, the financial house and index provider, threatened last week to take Egypt out of its emerging markets index because of the problems facing foreign investors in finding foreign currencies when they want to repatriate their money. “The exchange rate is one of the main pillars of any investment decision, and the depreciating pound is a problem affecting the market,” Al-Kady noted. “When a foreign investor sells dollars for LE7, buys stock and then realises a capital gain of 10 per cent on selling it, this gain would disappear if the pound loses 10 per cent or more of its value,” he explained. The Egyptian pound has lost at least 15 per cent of its value since President Mohamed Morsi came to power. “The portfolios of local investors have shrunk and their outside business has been affected by recession and has shrunk as well. As a result, there is no injection of capital, as they can neither sell with a big loss nor have enough funds to buy even at such low prices.” Since early June the market has been heading south with very short-lived upward intervals for fear of the outcome of the 30 June anti-regime demonstrations. While it has seen many important deals, the way the market regulators have dealt with these has been worrying for Al-Kady, who said that the Egyptian Financial Supervisory Authority (EFSA), the market regulator, had given swift approval to the deal to buy Orascom Telecom shares by a Russian company though the offered price was very low. Meanwhile, it delayed approval for the Qatari Qinvest merger with EFG-Hermes until the offer expired. “I don't know why this is happening, but it does not look good. I hope the EFSA moves are not politicised.” Market observers believe that the government has been obstructing some deals for fear that they will lead to a number of blue chips delisting from the local bourse. Orascom Construction Industries, now listed in Amsterdam, might soon delist from the local market, depriving the main EGX30 index of its largest contributor. Representing one of Egypt's largest investment banks, Al-Kady said that the two previous years had been very hard on companies working in the market. In 2011, the decision to close the market for two months had cost them dearly. “The average loss was 30 per cent, with the brokerage line of business being the hardest hit,” he said. Corporate financial activity had also shouldered a considerable loss while activity almost stopped. With no IPOs or companies being sold, the cost of the salaries of high-calibre personnel had been an uncovered burden.
