Economic pundits claim that recommendations by the ruling party's first annual conference are by no means enough to tackle Egypt's economic woes.Gamal Essam El-Din reports The ruling National Democratic Party (NDP) concluded its three-day first annual conference on 28 September. With "A New Way of Thinking and Rights of Citizens First" as its slogan, the conference devoted a day entirely to addressing the nation's most pressing three economic issues: rising prices, a dollar squeeze and a growing budget deficit. The recommendations provided by the conference for how the government of Prime Minister Atef Ebeid will deal with these three issues were greeted with wide scepticism on the part of many independent and opposition economic pundits. They rather expect Ebeid to face a tough time ahead in tackling these key problems and keeping his government in office. In the area of rising prices, the NDP recommended reducing custom duties on imports of some strategic goods such as ready-made garments and basic foods (such as flour and sugar). It also urged the government to submit to Parliament in its new session a bill aimed at amending the Unified Tax Law. The 193-article bill, said Finance Minister Medhat Hassanein, is expected to provide new income tax cuts (estimated between 20 per cent to 30 per cent) to private and public sector employees. "These cuts will help more than five million Egyptian families meet a lot of their basic needs and absorb the recent shock of rising prices," Hassanein said. In addition to the above, Ebeid revealed that the government is studying the possibility of imposing a 15 per cent tax on certain non-essential consumer goods such as luxury cars. "These goods are affordable to only 15 per cent of citizens. These new tax receipts will be used for funding subsidies required to help limited-income citizens buy goods and services at cheap prices," Ebeid said. Many economists, however, argue that the policy of subsidies must be wholly revised not only because these subsidies are widely misallocated, but also because they are a major factor in the budget deficit in the last few years. Social subsidies account for more than 30 per cent (or LE50.5 billion) of total budgetary allocations, while the deficit in the past year has climbed from 5.5 per cent to around 6.5 per cent of GDP. According to Mostafa El-Said, a former economy minister, the Egyptian economy is like a patient in dire need of radical surgery. "The solutions offered by Ebeid aimed at just keeping the patient alive rather than helping him recover," El-Said said. As a result, he added, providing more subsidies is a mere "painkiller, but one offered at the expense of relieving the economy of its serious chronic illnesses". El-Said added that a democratically-elected government is the only hope for adopting radical surgical solutions in curing the country of its economic and political malaise. Siding with El-Said, Ali Negm, chairman of El-Delta International Bank, said "the government must admit that the economic situation has reached a crisis stage and that this poses serious social implications for the country as a whole." Negm, addressing a symposium organised by the Press Syndicate on 2 October, added that "getting out of this crisis is beyond the capacity of the government or any new government unless a long-time gap of confidence between state officials and the people is finally closed." In terms of the dollar squeeze, Ebeid announced that he will address this very serious problem accordingly: compelling exporters to supply three quarters of their receipts to banks or face punitive measures. Ebeid, in a recent press interview, went on to attack exporters, charging them with swamping the dollar market with speculative practices which precipitated the squeeze. "When I decided to float the Egyptian pound on 29 January, they vowed they would support this decision by supplying 75 per cent of their dollar receipts to banks. Instead, they opted to speculate on the dollar and even resort to forging export documents to evade supplying their receipts," Ebeid revealed. The prime minister said that the Export Development Bank funded export operations estimated at $400 million over the last six months, but in return exporters supplied the bank with just $75 million out of their receipts. Ebeid warned that exporters found guilty of failing to supply the required quota of receipts will be banned from exporting. Adding to the above, Ebeid said the Central Bank of Egypt (CBE) will make $400 million available to banks in an attempt to cover their needs. Ebeid also believes a number of small banks played a role in causing the dollar shortfall. "They resorted to speculation to compensate for their meagre profits," Ebeid said. He suggested a major step of banking reform is to launch a wide- scale programme of bank consolidation. "We will push hard to make these small banks merge with large banks into strong banking entities and relieve the market of their speculative practices," Ebeid said. El-Said characterised Ebeid's solutions as inadequate, attributing the chronic imbalances in the foreign exchange market to the country's low productivity levels and modest export abilities at present. "The ultimate panacea is to export more until you secure a considerable surplus in the balance of trade. Until you reach this stage, you can't float the national currency all at once," El-Said said. For the moment, El-Said suggested that the government open new channels for deposits featuring higher interest rates on the Egyptian pound to discourage citizens from hoarding dollars. "This step was adopted by Atef Sedqi (prime minister from 1986 to 1996) and it helped stabilise the exchange rate," El-Said said. Louis Bishara, a major exporter of ready-made garments, told the Press Syndicate that exporters must not be blamed for the dollar squeeze. Bishara dismissed any suggestion that banks made dollars available to help businessmen fund their export activities in the last period. "As a matter of fact, it is the black market, rather than the banking sector, that we resorted to in order to help meet our dollar needs," Bishara said. He called upon Ebeid to coordinate economic policy with export businessmen rather than "shock them with surprising decisions". Closely related with the above is the problem of the swollen budget deficit. In NDP's recent conference, Ebeid vowed to bring the deficit under control. Ebeid, however, admitted that this is a hard job "because of the proposed tax cuts, reductions in custom duties, and more subsidies". The budget deficit grew in 2002/2003 to 5.5 per cent of GDP and is expected to climb to 6.5 per cent (or around LE42 billion based on a GDP of LE415 billion) in 2003/2004. According to Ebeid, this is a normal per cent "but we have to be keen not to let it go up in following years." Ebeid said he has two options to cover the budget deficit: impose new taxes with cutbacks in spending or borrow money from the social insurance fund reserves (estimated at LE170 billion). According to him, the second option is the most convenient and reasonable one. "These reserves, which are deposited at the National Investment Bank, are usually used in funding government investments. We aim to borrow from these reserves and in return transfer the ownership of some government investments (such as Telecom Egypt) to the social insurance fund," said Ebeid. Ebeid said this will help cover the budget deficit and reduce domestic debts. This option, however, triggered an outcry from both opposition and independent political forces. The leftist Tagammu Party described this measure as highly dangerous "because pension reserves were primarily accumulated to help cushion pensioners from any future risks (such as subscriptions may not match the required pension money in a year)." El-Said recalled that the NDP, in a conference last year, called for rationalising subsidies in an attempt to reduce budget deficit. In its recent congress, however, the NDP urged the government to allocate more money to food subsidies (around LE1.6 billion). "This is why I do not think Ebeid is to blame on this issue -- because providing subsidies is now a matter of national security for the NDP," said El- Said.
