Economist now carries the title of former minister of finance. He came to the ministry during the initial 18 days of the revolution. Although he was at the helm of the Finance Ministry for less than six months, he had the task of preparing the post-revolution budget, that of 2011/12. His choice for the position at the time had caught many by surprise and was criticised due to the fact that his area of expertise had been employment and labour market policies rather than finance. He spoke to Niveen Wahish about the challenges that faced the Egyptian economy in the past year. What were the first problems you encountered as minister of finance? There were problems with the budget that would look anyone right in the face. Besides widening to 9.8 per cent in the fiscal year ending June 2011, the budget deficit was really not telling the whole story. The ministry of finance, by law, received all the income from the Pension Fund and the Petroleum Authority. That money should be paid back by the ministry. But as it was unable to pay it back, that accumulated as debt. That is why the national debt of Egypt has always been going up. Equally serious is the status of the Petroleum Authority. The Petroleum Authority shows a loss every year, and the loss increases. This is the result of the fact that whatever funds came to the Petroleum Authority, they were given to the ministry of finance in return for bonds. So there is accumulated debt to the Petroleum Authority. What is more dangerous is that energy subsidies were being borne by the Petroleum Authority and not the government. Then professional protests started, timidly at first, and then they broke out on a large scale. The first period was immediate term emergency spending that had to be met. Also, along with the emergency spending was the regular spending on items such as butane gas and wheat. In the midst of all this we also had to keep our eye on reform. A committee was formed to oversee economic affairs. This was a mechanism wherein we started to look slightly ahead. There are problems that need to be dealt with now to have an effect in the long-term. Wages are an example; all those protesting had a right to protest. The wages are inhumane. My idea was to start a five-year reform process to begin this year with an LE700 minimum wage. That minimum wage would lift 1.9 million government employees from below the poverty line. What should have been celebrated, and was celebrated in Geneva, as a minimum wage, was not received too enthusiastically. We said it would reach LE1,200 in five years. This affects the 6.2 million government employees. And this raise would cost the government LE7 billion. This was to be the beginning of wage and pension reform. Would it not have been better to wait and not give any raises until you got your house in order? I was fully aware that I was going to cause an avalanche of demands but I could not have waited. The street was boiling. People found that protests were a way of getting what they wanted, whether rightful or not. I was doing this knowing that this is the second best choice as far as economists were concerned. It was not the optimum solution. If we had a plan wherein all the authorities would help, we would have waited. That was not the case then. But you were criticised for implementing populist policies by appointing more people in the government? The 480,000 people I appointed were temporary workers who were already receiving salaries from the government; the burden on the budget was more or less the same. Those are the ones I decided to permanently appoint with the government. The situation we were in was the result of defects of the system which have accumulated over 60 years. If we went back in time, would you have done it the same way? No. With tourism and production at a standstill, austerity was the way to go. Economics 101 would say impose austerity. Could you have imposed austerity at that time? It would have needed political support. I was fully aware of the paradox that when you put a minimum wage for government employees, you are crowding in people to come to work for the government. By appointing people, I was going against my economic education. But there was no one there to attract those youth towards self- employment and the private sector. The Social Fund for Development had not done anything for years. Also, half the businessmen were in prison while the other half had their visas and were ready to leave the country any time. It was the only choice; the third best but the only choice. I do not justify it but we had our backs against the wall as the street was boiling. The minimum wage absorbed the wrath of many people. Only history will tell whether it was the right approach or not. Where things went wrong was when we did not continue so that we move from a phase of emergency to that of reform. What reforms were you planning to embark on as minister of finance? I had three files on my desk. Once the 2011/12 budget was finished, I was going to deal with wages, taxes and untangle the budget. We had originally budgeted for a 12 per cent deficit and I had earmarked LE15 billion to begin to settle accounts with the Petroleum Authority and Pensions Fund. Were you planning to impose a progressive tax? I did increase taxes by five per cent. But I was not planning to impose more. You can collect more revenue without the progressive tax. When taxes are high, the revenue increases until it reaches a certain point and starts decreasing. We should not get hung on the fact that there is progressive tax in the US; our economy is not the same size as that of the US. But I was also planning to start implementing the Value Added Tax (VAT). This would have brought in double revenues of the sales tax because it allows for leakage in the system. What were your plans for the property tax given the opposition to it? The revenue from property tax on houses represents a limited sum to the overall revenue from the property tax. The greater part of revenue comes from establishments, not private housing. Indonesia presented a solution; they raised the ceiling for exemption to make sure the majority of the people were exempt. The ones that must be taxed are owners of palaces and 99 per cent of the Egyptians can be exempt. The name of the tax was going to change to community tax because in the US and Europe, it never goes to the state but to the local authorities to spend on improving the community. Did you find being an academic different from being in an executive position? I was an academic in the beginning but through my work in the International Labour Organisation, I was a practitioner on the ground, involved in reform. To be an academic is important because labour market policies and tax policies evolve very quickly and you have to keep up with developments. As a decision maker, you either know or you have good advisers. Even to receive advice, you have to have the knowledge to make the judgment. I visited 76 countries, a large number which I was responsible for their reform programmes. I saw them implemented and they worked. Why did your reform not work this time? Was the problem that this is your country? No. The problem here is that once you have a plan, you have too many cooks. There should be one person or ministry in charge for any project and they should be held accountable. What is the story behind the International Monetary Fund (IMF) loan? When I was planning for the budget, I had forecast a 12 per cent deficit because I wanted to do two things: give people who have legitimate demands what they need, then stimulate the economy with public investment because there was no private or foreign investment. So we needed to mobilise resources to pump money into the economy. The government owes the contracting sector LE6 billion. Paying that money would do wonders to the sector. The money will also reach many homes. I was aware that the deficit was huge. Twelve per cent, as high as it was, was manageable. The first problem was how to cover the budget and the second problem was how to get out of the deficit. I had a plan for fiscal consolidation plan wherein by 2015 I was hoping to take the deficit down to six per cent. The plan was good but would not solve today's problem. We had a financial gap of between LE10 to LE12 billion. We calculated that the domestic market can take the equivalent of $5 billion and not more because if you increase that, you deprive the private sector and you dry up the banking sector. And we said we would borrow $5.2 from the World Bank and the IMF. The IMF said we had the right to borrow up to $8-$9 billion and they told us we could borrow up to three times our IMF share, yet we were taking the minimum. We went and discussed this in April in Washington and we were welcomed, then later we went to Deauville. They were ready to pay. I presented the budget four times to the cabinet and we agreed that education, health and housing would receive higher investment. Otherwise, people were not going to feel there has been a revolution. But there was a negative sentiment against the IMF which is understood given the historical context. I myself was critical of the Bank and the Fund all my life. But what was different this time was that this was an Egyptian reform programme. In the past, the Egyptian delegation would receive a set of do's and don'ts. This time it was different. But there was a strong negative public opinion against the borrowing; since the budget, by law, had to be issued by SCAF, they said they did not want to leave a legacy of debt. That point of view had to be respected. In every single meeting, they said they did not want to stay a day longer than necessary and that when they left, they did not want to leave a budget with such a big debt. So we decided to revert to the Arab countries for assistance and to cut spending. But cutting spending was not going to be easy, especially in a short time. Where were you going to make the cuts in spending? The Egyptian budget is very rigid. A quarter goes to wages, another quarter to subsidies and a third quarter to debt service, so I am left with 25 per cent. Where shall I cut? Government expenditure is mostly wages, so can I sack employees? I had no leeway to cut expenditure except subsidies. We were not going to touch food subsidies which anyway they are the smaller portion [food subsidies are LE23 billion while energy subsidies are LE95 billion]. The largest portion of subsidies is fuel subsidies. Many bakeries work on solar energy at a time the natural gas pipeline passes at their front door. Solar energy costs the government LE46 billion. The brick-making factories consume 50 to 60 of butane gas cylinders an hour and they get them at a subsidised price. We would give them natural gas as well. Five star hotels use subsidised gas, and yachts use subsidised solar energy. Then there is smuggling. These were all files that were going to be opened. Do you feel international support for Egypt's revolution has waned? It has eroded. We have lost the momentum. In April, President Barack Obama was saying that the world was following what Egypt was doing; they admired us, they were behind us, and Egypt had no right to fail. That was the environment. Now, the approach to us by investors and policy makers is "wait and see." Does this mean that if we decide to take the IMF loan now, it would not have the same effect? Certainly we have lost time during which we could have resumed economic activity. Do you believe austerity is the way to go now? This is a country in recession. There are immediate things that need to be done because people will not wait. There are also medium term things that need to be done. What we need to do immediately is to stimulate the economy. This is a big economy which needs a massive stimulus programme. This encompasses a very important programme of public investment. Should the old mega-projects such as Toshka be revived? That would be for the long-term. But we could start implementing a small part of these mega-projects. If we decide to implement Dr Farouk El-Baz's development path, we can take the slice of North Egypt which begins in Alamein until Damietta and develop it, then move to the following slice. We should not put ourselves in a corner by grandiose ideas that cannot be implemented. We also need to work on small and medium enterprises. I had agreed with the Central Bank of Egypt to have Banque du Caire specialise in Small and Medium Enterprise (SME) lending because it has many branches and it would come in useful. But the issue is not only one of financing. We do not have entrepreneurs. People want to work for the government. We need to breed entrepreneurs. What do you think of formerly privatised companies that are being taken back from investors? We are sending a strong message whereby no investor would want to come to us. It was not a problem of privatisation but the corrupt system at the time. Those who were part of the corruption should be tried but we should not send a message that we are backtracking on our reform. We have to make a break with the past. Whatever has taken place, has taken place. If somebody has stolen through corruption, he or she should be put on trial and that money brought back. Today, we have a problem of very important public assets; they are huge and are deteriorating and losing. They are accumulating debt because company managers are afraid to privatise or take action because they would be on trial the next day. That is why I proposed the Malaysian way out. In 1982, [former Malaysian Prime Minister] Mahatir Mohamed set up an organisation called Khazana to which he entrusted all public property. Then he got management of international level, including foreigners to run this new entity. Khazana took the property, studied each and every project and said which was feasible and which needed to be sold. Now Khazana is the business arm of the Malaysian government. It is the main source of income; they buy and sell projects abroad. The returns from Khazana are spent on developmental issues, especially employment of young people. What needs to be done in the upcoming year? We need to do less talking and more action. We really need to settle the political impasse and get out of this political knot. Do not get absorbed in details. It is like you are arguing on the Titanic. Furthermore, the economy is a reflection of the political situation, so how do deal with it? It is nonsense to say that the SCAF should hand over power. Hand over to whom? We have to understand that the SCAF is an important part of stability in this country but we want to see a very clear roadmap for the handover. Is setting up a consultative council for the constitution the way out to calm people? Is advancing the presidential elections the solution? All this could and should be discussed but not through statements. The longer this process stays, the more confidence is lost and that is disastrous. Once this stops, you would be surprised how quickly the economy would recover. Do you believe the pound should be allowed to depreciate to avoid the drainage in the foreign reserves? That is a real danger. Our problem is the imports. We are a net food importer which means you will import inflation if you devalue. Inflation will hit the poor more than the rich because you are a net importer of food. Even with the other industries, 40 per cent of them are imported. My fear if you devalue is that you will add fuel to inflation. The first casualties of inflation are the poor. That is why I disagree with economists who call for devaluation and say there is no other way. The other way is to borrow and use the money to restart the engine. Do you believe the army budget should be a lump sum and go uncontested? We have to be very careful about revealing everything in this country. This country is infiltrated. The wars in the world now are not by arms but by information. Others collect every single every piece of information so you have to be careful what you should reveal and what you should not. I am not arguing that the army or presidency or police should have no control over their budget. We are not going to reinvent the wheel, and should move on. Look at what the other countries are doing. They have a defence committee in parliament. It should be made of people who will not part with the information the next morning. There is an element of national security that has to be respected but that does not mean it should be a black hole.
