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Economic reform: Where to?

Fady Labib

14 Dec 2016 3:09 pm

 

 

 

 

Today, it is the ambition of Egypt’s business community to enhance the investment climate in the country. The government has been working hard to achieve this goal by adopting a reform plan that takes into account economic and social concerns. The focus of business executives inside and outside Egypt is the expected new investment law, which is being heralded as the compass that will determine the direction of Egypt’s future investment path.

Within this framework, the Egyptian Centre for Economic Studies (ECES) and the economic reporters’ branch of the Journalists’ Syndicate recently held a workshop in Luxor entitled “Extra-Parliamentary Economic Discussions”.

ECES chairman Omar Mohanna opened with a brief overview of Egypt’s economic woes. “Unemployment is Egypt’s main enemy,” Mr Mohanna said. “It can only be solved by achieving investment levels higher than 25 per cent. Promoting foreign investment is the only way to create new job opportunities in Egypt and face inflation using the formal sectors of the economy. Granting tax exemptions is no longer a preferred method of promoting investment, other methods must be adopted.”

 

Safety in informal sector

According to Mr Mohanna, the vast informal sector of the economy—which experts place as constituting almost 70 per cent of the national economy—has always been a safety net for Egypt during times of economic downturn. It is still performing well despite the challenges the country’s economy is facing. This means, however, that a very large sector of Egyptian businesses deals in cash, which allows businessmen to evade issuance of receipts and consequently the implementation of value added tax (VAT). This, he said, might make it impossible for the new tax to succeed in generating revenues.

Mr Mohanna said the taxation system in Egypt “needs an overhaul”. He predicted that the tax yield would be at its lowest following the latest decisions to float the Egyptian pound. He also warned: “If Egyptian taxpayers do not feel any tangible results for what they paid, next year’s tax yield would also suffer.”

Given that the Central Bank of Egypt (CBE) has issued investment certificates at the high interest rates of 16 and 20 per cent, Mr Mohanna explained: “This is a necessary step, even for a short period of time, to raise enough funds and foreign currency to boost the economy.

“As for the privatisation process in Egypt, despite its important role in reviving the economy, it has been handled poorly in the past few years and was plagued with corruption charges. The outcome was that today people believe that privatisation implies that companies and assets are sold in backroom deals at very low prices,” Mr Mohanna said.

 

Impoverishing Egyptians?

Ziad Bahaa-Eldin, former Deputy Prime Minister and Minister of International Cooperation, insisted that: “The 3 November decision to float the Egyptian pound is not the reason for what some people brand as ‘impoverishing Egyptians’. Floating the pound was inevitable. The current economic crisis and price hike is rather the result of a pile-up of problems over many decades. Floating the pound can be used to advantage where our export capacity is concerned. Other decisions such as the increase in fuel prices and application of VAT are significant steps in the direction of implementing a bold economic reform plan.”

For her part, Executive Director and Director of Research at ECES Abla Abdel-Latif sees that Egypt has a long way to go before it could achieve real economic growth. “Additional burdens are expected to fall on the shoulders of the Egyptian economy,” she said, “given that the country has to implement the development programme devised by the International Monetary Fund, which Egypt had agreed to follow, and to fix the many flaws in the State budget. The government had better postpone implementation of the Capital Gains Tax on profits made on the stock market.

“By 2020 Egypt must pay a EGP40 billion debt,” she said. “How will this be possible when we are still suffering from the economic and social consequences of floating the Egyptian pound?”

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Complicated, lengthy law

Economic expert and MP Bassant Fahmy said that the prospective investment law was complicated, lengthy and difficult to read. “It gets especially complicated with issues concerning national security or land allocation,” she said.

“When we speak of investors,” Dr Fahmy said, “we speak from our own viewpoint but never put ourselves in the investor’s shoes. Reality implies that we listen more to foreign investors and allow for more transparency, candour and governance while at the same time securing mechanisms that would allow companies the freedom to get in and out of the market.”

Dr Fahmy lamented the current investment climate which, she said, “is filled with investment impediments. Major among them is the media incitement against foreigners who are frequently accused of taking advantage of Egypt on the economic front.” She questioned how such a tense climate could be favourable for foreign investors.

“The new investment law,” Dr Fahmy said, “will protect free economic zones and allow for tax exemptions which would benefit the foreign investor and the country in which he paid taxes.” This is made possible by the double taxation treaty, which aims to eliminate the double taxation of income where a country levies tax on an income that has already been taxed in another country. “Exemptions may be based on a local development basis,” she said.

Tarek Tewfiq, Under-Secretary of the Federation of Egyptian Industries, insisted that the State must focus on reviving local manufacturing and easing the manufacturing overheads of the industrial sector. “Older methods such as granting investors tax exemptions are no longer among the most important tools to attract investors,” he said. “Today, business transparency is a major factor to boost investment; even more important is the guarantee that all government decisions are in harmony and include no contradictions.”

 

Absorbing the aftershocks

Dr Bahaa-Eldin drew attention to the dire need for the State to work to absorb the aftershock of the economic reform on the masses.  “Most important,” he said, “is to create new job opportunities to solve the unemployment problem.

“One must not forget the role that NGOs and civil society can play in this regard,” Dr Bahaa-Eldin said. He demanded that the government eliminate any obstacles and impediments that might prevent these associations from playing their important social role to ease the reform on the general public.

Along the same line even if on a different note, Dr Abdel-Latif claimed that the devaluation of the local currency had caused an additional 1.3 million Egyptians to fall below the poverty line. “It is therefore of the utmost importance,” she said, “that in parallel with the economic reform the State should focus on adopting a social reform programme that would promote social justice. This is especially important in additional development programmes in the sectors of healthcare and education.

“Social reform must go hand in hand with an economic reform programme that would bring about structural and institutional overhaul of the Egyptian economy,” she said.

 

Watani International

14 December 2016

 


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