Discussing the future of financial policies and the current economic challenges in the Government Business Dialogue Conference
After all the endeavours which successive Egyptian governments allege they have undertaken to attract financial and industrial investment, it is no secret that industrialists and businessmen are complaining bitterly about what they claim is a thoroughly investment-unfriendly climate in Egypt. As the rift between the two sides appeared to be widening by the day, a conference held in Cairo on 28 and 29 March tried to tackle just that. The Government Business Dialogue Conference was held under the auspices of Prime Minister Sherif Ismail and was attended by a number of cabinet ministers, State officials, economic experts, bankers and businessmen. The conference, which focused on “How to Stimulate Investment?”, was organised by Al Mal GTM with the aim to “reach solutions to be adopted in order to unblock the current stalemate in business community through promoting an environment conducive to dialogue between the Government and investors.”
Draining the State budget
Minister of International Cooperation Sahar Nasr began by saying that the government did not compete with the private sector over the market, but rather provided the necessary requirements to help promote private investment. Dr Nasr said the government was focusing on improving infrastructure and human development, and an international conference will be held in the near future to discuss means of improving the education system in coordination with the various ministries. The minister also announced that Egypt had signed with the World Bank a protocol of cooperation for a USD5 million grant.
Ashraf Qadry al-Sharqawi, Minister of the Public Business Sector. said that the government’s decision to create a new ministry for the public business sector reflected the importance the government grants to the business sector portfolio which surpasses USD8 billion. The public business sector is a denomination given to public sector firms, most of which have been losing money for decades and now represent a heavy drain on the State budget. During the 1990s and 2000s several public firms were privatised, but this drew harsh criticism from the socialists in Egypt and the workers who insisted that privatisation went against public interest and had, moreover, been managed in a corrupt manner. The process of privatisation was hence halted, but the government now finds itself in the dire situation of having to resolve the huge problem of this sector, especially when Egypt’s economy is itself in a precarious situation that can ill afford the haemorrhage of funds to losing companies. Strong fears of privatisation persist among workers who are bent on defeating any move in this direction; they realise that any private owner cannot afford to keep the excessive work force currently in the public sector companies or to maintain their expensive benefits.
In Egypt there are eight public sector holding companies that include 125 companies that are now being restructured, Dr Sharqawi said. The restructuring does not necessarily mean that they will be sold. Privatising such companies in the past aimed at turning them into profitable entities; however, the mechanisms adopted in the process did not achieve this goal. The plan of the ministry, he said, aims at restructuring the investments made by the public sector and diversifying the portfolios of the holding companies to achieve a surplus that will create a balance between losing and profitable companies. This process is not supposed to constitute a burden on the State budget but will be accomplished using the ministry’s resources which consist of company assets. For this purpose, non-banking financial tools can be used, such as selling real estate assets, financial leasing and increasing a company’s capital through selling some of its stocks on the stock market while maintaining the government’s ownership and management of the company. The ministry will focus on solving the problems companies are facing, Dr Sharqawi said, and strengthening their financial position.
The ministry’s plan also includes promoting the social responsibility of companies, reallocating the overemployed workforce to companies in need of employees, improving labour training and endorsing the idea of financial leasing to support production lines. All unexploited opportunities will be studied in order to support the public sector companies. Dr Sharqawi insisted several times in his address that all moves to be taken to improve the public business sector companies—even turning them into joint stock companies and trading their shares on the stock exchange, in which case the government would always retain a controlling share of any company—were far removed from selling or privatising them. It was obvious he was attempting to allay fears of privatisation.
For his part, Akram Tinawi, CEO, Managing Director and Director of the Arab Banking Corporation (ABC), said that the government was facing challenges in many fields but was capable of overcoming them. It was not realistic to ask the government to have a clear economic vision in this period full of changes and crises, he said. There was a global economic downturn which was, of course, affecting the Egyptian economy; but this was not the first time, and definitely not the last, that Egypt faced such challenges. The country had overcome them before and was capable of doing so again, he said.
Mr Tinawi gave an assurance that local banks had a considerable liquidity in local currency. However, banks were seeking to widen their depositor base, which should cause the deposit growth to increase to reach the targeted investment growth rates. As for financing in foreign currencies, Mr Tinawi said that local banks were working on opening credit channels with international and regional organisations to participate in financing projects in Egypt. In addition, all banks operating in Egypt offer US dollar saving schemes at high interest rates of around 4.5 to 4.75 per cent for periods between five and seven years. These interest rates are considerably high by international standards.
VAT-induced price increases
On a different note, the expected implementation of a 14 per cent Value Added Tax (VAT), according to the law approved by President Sisi in January, will result in a considerable increase in prices which could reach 40 per cent. Article 3 of the new law stipulates that a 14 per cent VAT would be applied on goods and services with the exception of machinery and equipment used in production or providing a service which will be subject to a 5 per cent VAT. Nothing has been said in the media, however, about the goods which will be subject to lower tax rates due to social considerations, nor those which will be exempted altogether from the VAT such as food commodities. Will this be among the first doses of the bitter medicine required to treat Egypt’s ailing economy?
13 April 2016