WATANI International
26 June 2011
The economic choices taken by the interim government since the fall of the Mubarak regime in February have been noted for their confusion and, subsequently, their negative effect on the general investment climate. Yet economics experts have expressed cautious optimism, speaking of the reasons for the decisions and throwing light on specific issues that have been at the centre of confusing pronouncements, such as those on progressive taxation, minimum wage, and the stock market.
Balancing act
“There is clear confusion about economic decisions folllowing the 25 January Revolution,” agrees Magda Qandil, the executive director and head of research at the Egyptian Centre of Economic Studies.
Dr Qandil says the main reason is the government’s policy of trying to soothe public anger while steering clear off` announcing a definite, comprehensive vision for the future. The government makes a decision, and then a group of people protest so, she says, the government reverses its decision or suspends it while it attempts to reach an agreement with the people. For instance, applying the minimum wage policy, defined as EGP700 for the public sector—and under negotiation with the private sector, the labour unions, and the Supreme Council for Wages—had an inflationary effect on the economy and the general State budget. The government accordingly proposed imposing progressive taxes, since the minimum wage conflicted with the interests of Egyptian and foreign investors, especially in case of small or medium-sized businesses at a time when Egypt is desperate to attract investors. Imposing a minimum wage on the private sector, at this time when production is severely shrinking, could serve to increase prices and shrink growth.
Loggerheads over policy
“Achieving the social justice demanded by the 25 January revolutionaries is something that everyone agrees on. But on the other hand, economic instability is very dangerous,” Dr Qandil says.
This recently applied to the stock market. A profit tax was imposed on transactions, but when a number of shareholders protested it was reversed. The minister of finance felt the decision perturbed investors, so he went back on his decision in order to alleviate their fears.
Further contradictions emerge between the policies of the Finance Ministry and the Central Bank of Egypt (CBE). The CBE is attempting to maintain the value of the Egyptian pound and stabilise exchange rates, while the Finance Ministry has increased expenditure, hoping to assuage public anger. The ministry is trying to arrange for international loans to cover the gaping budget deficit and fulfil the country’s needs, but such continuous borrowing will necessarily harm the economy.
These short-term policies may have medium- and long-term repercussions. The social agenda, as well as the economic, should be taken into consideration, Dr Qandil said.
Interim decisions
Ahmed Saqr Ashour, professor of management at Alexandria University and a UN expert in governance and battling corruption, says the government’s decisions are based on the vision of the Military Council. “We can expect contradicting economic decisions in the current period because the current government is an interim one,” he says. “Many of the previous policies which led to the current situation in Egypt still exist. We need new financial policies in the State budget, including priorities of expenditure and tax policies. There must be radical adjustment to control inflation and guarantee economic stability, making use of untapped potential, while maintaining justice in distribution and fighting poverty.”
Dr Ashour says many Egyptians are taking advantage of the current upheaval to commit anti-social and illegal activities that the government is unable to control, such as building on agricultural land, rampant violations, and some ingenious new types of cheating and corruption. “The government has its hands full, especially that, in view of the wide public discontent, it does not have the capacity to carry out painful reforms. On the other hand, the economy cannot be refreshed in a climate of insecurity and instability.”
Yumna al-Hamaqi, Economics professor at Ain Shams University and secretary-general of the Economy Committee in the former Shura Council, said politicians and persons in leading positions were wary of issuing decisions that might be met with public disfavour. This, she said, meant that no-one was moving towards solving the major problems of unemployment, poverty and so on.