On behalf of the Egyptian people, I welcome the international investment community to Euromoney’s Egypt Conference: Stability, Investment and Growth. This is an opportune time for the global financial community to come to Egypt to witness firsthand the changes that the country has made over the past year to fundamentally reform the economy and unleash its productive capacity. Our government is committed to pursuing policies aimed at achieving high and sustainable rates of growth and creating an attractive, predictable, fair and internationally competitive business environment. We know that we face many challenges ahead on both a macro and micro-level before we can fully realize these objectives, but Egypt is on the right track. This country is turning the corner on its recent unusual period of political strife and uncertainty, and a positive momentum has already begun. As we now look ahead to fulfilling Egypt’s potential, we invite both domestic and foreign investors to take part actively in the re-invigoration of the Egyptian economy.
Egypt’s economic revival is first and foremost being driven by the ongoing restoration of confidence in the country’s path. This reflects the improvement in political stability as we have implemented our political roadmap. So far we have succeeded in implementing two of the three major milestones outlined in the roadmap, namely adopting the constitution and holding the presidential elections. The third one – the election of a new legislature – will follow in the very near future.
Growing confidence also rests on the structural reforms the government has already implemented – as well as on the many additional reforms still in the pipeline – to correct fundamental deficiencies in our economy. For too long, excessive and ineffective government spending, wasteful energy subsidies, endemic corruption and economic mismanagement had undermined the promise of our country, strangling our economy and our people’s dreams. Although a preceding period of prudent macroeconomic policies and structural reforms pursued during 2004 to 2008 quickly generated 7% growth per annum, we did not have enough time then to institutionalise the reforms nor to enable the average Egyptian citizen to benefit from the fruits of this take-off in growth.
When the Egyptian people took to the streets to demand real change, first on 25 January 2011 and again on 30 June 2013, they sought to bring about effective and accountable governance and a fresh economic direction. However, the troubles we endured as we collectively struggled to reach a new political settlement exacerbated the country’s underlying problems, causing our budget deficit to balloon to an unsustainable level, our national debt to soar, our unemployment rate to rise and our already stretched infrastructure and services to deteriorate. A course correction was hard but absolutely necessary. Today, we are doing just that, charting a new path for Egypt that ensures fiscal discipline and a return to high growth, but this time with an eye to social justice in order to meet the legitimate demands of the Egyptian people for a better and more dignified life, and to safeguard the durability of the reform effort.
The decision to roll back energy subsidies demonstrates the boldness and vigor with which the government is now pursuing reforms. These subsidies had subsumed a massive portion of the national budget, costing the treasury EGP 143bn in the 2013/2014 fiscal year, or roughly 20 percent of the entire budget. Moreover, they were highly regressive, with the richest quintile in the population consuming the lion’s share of the benefit, and led to waste and distortions of incentives, particularly by favoring capital intensive investment over the labor intensive investment that Egypt badly needs. Although many doubted that we would be able to take meaningful action on this front – in large part because the government had promised to do so in the past, but had repeatedly shied away from going ahead – we substantially slashed fuel and electricity subsidies within one month into my tenure in office. This move has sent a clear signal to global markets and investors that Egypt is finally serious about addressing a longstanding structural weakness. We are pleased to note that the international financial community, led by the international financial institutions, has recognized this decisive course of action, offering strong praise.
The reduction of the energy subsidy will narrow the budget deficit in the current fiscal year by some EGP 50bn, or 2% of GDP. Demand will further be rationalised through the use of smartcards, which will be rolled out first in Port Said in November and then nationwide in April of next year. Over the next five years, we will eliminate remaining energy subsidies for all commercial and residential users except for LPG targeted to the poor and lower income segments of our population. Beyond the fiscal objectives, an equally important goal dimension is that the reform will generate better capital allocations that will result in greater economic efficiencies, including incentivising a shift to renewable energy, as well as foster greater inclusivity.
Furthermore, the energy subsidy reform will strengthen the financial position of EGPC, our national oil company and thereby prevent the accumulation of any new arrears to its foreign partners. As for the stock of existing arrears, EGPC has already started to pay back part of this obligation while the government is considering several options to accelerate their full repayment. Egypt has had a good track record in dealing with our foreign partners in the oil and gas sector, many of which have been operating here for decades successfully and profitably. It is vitally important for us to restore our standing with this important group of investors in our country.
Fiscal consolidation will also be driven by reforms to make our tax regime more sensible and equitable, to widen the tax base and to improve tax buoyancy. The government is continuing work on improving the progressivity of the tax regime, while introducing new capital gains and dividend taxes, introducing a temporary five percent tax increase on those earning EGP 1m or more annually, applying new rules to combat harmful tax planning and to close other existing loopholes, implementing a fair property tax system, and increasing taxes on certain commodities, primarily tobacco and alcoholic beverages.
In addition, the government is preparing to introduce a new fully-fledged VAT system in the current fiscal year to replace the GST. The new VAT will have many advantages over our existing regime: it will be fairerto taxpayers, allowing an immediate full tax refund on capital goods and broader tax credit system as well as applying a single unified rate, incorporating a high threshold and extending to a wider range of goods and services. We expect the VAT to yield 1.6% of GDP to government revenues on a yearly basis. Moreover, the VAT is designed to incentivize business investment because it allows firms to deduct tax on capital inputs, and obtain refunds of paid tax. Therefore, it will reduce costs of investment, improve cash flows and improve the local business climate. We foresee little, if any, impact on the prices of basic food items, which will continue to be exempt from the VAT. In effect, the new tax will serve as a win-win for both the government and the business community, while Egyptian consumers should see little change in the costs of most goods and services.
The government is also planning to introduce a new simplified tax regime for small and medium-sized enterprises (SMEs). This will be designed to not only to bring a wider pool of economic actors into the tax net, but also to incentivize the SMEs to grow and develop. Such an outcome is particularly important given that SMEs tend to be important job creators.
The new and expanded sources of revenue and our expected budget savings mean that Egypt can spend more on areas that boost efficiency and productivity, particularly of our workers. Part of the proceeds from the energy subsidy reform will be redirected to spending on health, education and R&D. In this way, we are not only removing a heavy and wasteful burden from the budget and our economy, but also improving the quality of our spending by redirecting it to areas that will enhance Egypt’s growth potential over the medium and longer-term. Education and vocational skills training are at the top of our priority list so that we can take advantage of our demographic dividend. We are a country of young people who are eager to learn and acquire skills, to obtain meaningful jobs, and to become productive citizens in a renewed and prosperous Egypt. We want to tap and develop the energy and brainpower that the country’s youth offers.
Egypt not only boasts considerable human resources, but also significant natural resources, a diverse economic base and a geo-strategically important position straddling Asia and Africa. There are many opportunities for both domestic and foreign investors in an array of sectors. We have an unparalleled tourism product that has never been fully tapped, even before the 2011 revolution; it will inevitably recover and again become an important venue for investment and catalyst for growth. Light manufacturing should take off in this country given the advantages that Egypt offers in terms of its relatively low costs, large labor pool and accessibility to markets in Europe, the GCC and Asia. Another dynamic area of opportunity is information and communications technology, which we see poised for take-off. The energy sector will also revive as the energy subsidies are overhauled, leading to renewed exploration and production. Other sectors include transportation, housing, agriculture, and mining. The ambitious Suez Canal Regional Development project, the flagship of the government’s investment recovery program, will provide many opportunities for investors as it sets the stage to enlarge and cement Egypt’s role as a global trading and logistics hub.
Blueprints for other major national projects are being drawn, including a “Golden Triangle” development project in Upper Egypt. This project envisions exploiting Egypt’s natural resources and mineral wealth in the “Golden Triangle” region between Qena, Quseir and Safaga, while also developing the area for touristic, industrial, commercial and agricultural opportunities. We are also drafting a “North West Coast Development Plan” which also seeks to develop that area’s rich potential.
Egypt is furthermore launching a PPP program that will provide an important gateway for investment, addressing the country’s infrastructure needs while involving the participation of the private sector in varied projects ranging from seaports, utilities, railway and metro transportation, wastewater treatment and new schools. We expect to tender 1 project per month over the remainder of this calendar year, and 6-7 projects in the next calendar year. We are seeing very significant interest in these projects from domestic investors as well as foreign investors across the globe.
Accompanying these big-picture reforms and large projects are concerted new efforts to tackle the regulatory and bureaucratic obstacles that stand in the way of private sector and foreign investors, as well as policies to ensure a level playing field for all investors where transparency and the rule of law prevail. This is an ongoing process with much still to do, but one that has a firm political consensus behind it. We have introduced amendments to the competition and anti-monopoly laws. We have removed legal hurdles and will soon introduce a new uniform investment law that will further streamline the path for foreign investment. In the past, companies have hesitated to do business in Egypt due to antiquated and unfair legal practices. The government is determined to remove these constraints in order to create a welcoming climate for all investors.
We are already seeing signs of an upturn in our economy as political stability has gathered pace and as economic actors and investors respond to the government’s structural reforms. Industrial production and manufacturing production have turned up sharply over May and June 2014, particularly manufacturing, which was up 27.8% in May and 37.6% in June year-on-year. Real GDP growth is estimated for the final April to June quarter of fiscal year 2013/2014 at 3.5%t, up from 2.5% growth in the third quarter and only 1.2% growth over the first half. Foreign investors have returned to our stock market and are again participating in government debt auctions. Critically, FDI is also reviving: over the first three quarters of FY 2013/14, net FDI inflows reached $4.7bn, more than 20% up from the corresponding period in the preceding fiscal year. We see major multinationals already reinvesting in Egypt, both upgrading old facilities as well as building new capacity.
The international rating agencies have also begun to revise their views of Egypt. Standard & Poor’s raised Egypt’s foreign currency sovereign credit rating to B- in late 2013. In early 2014, Fitch also upgraded Egypt’s long-term outlook to stable, affirming a rating of B-. But while the rating agencies are cognizant of the country’s positive direction, we believe that they have fallen behind the curve. Egypt’s five-year CDS spreads have fallen to below 270 basis points, down from some 900 basis points in the summer of 2013, implying that the global markets see us as trading like countries with ratings a full grade above our own.
Our concluding message is this: our ultimate goal is to generate sustainable high growth that is well- balanced and inclusive in order to build prosperity for the Egyptian people. This is necessary to maintain political stability, and will also benefit the business community. We know that macroeconomic stability is a necessary condition for securing the business community’s continuing confidence and to ensure that our economic recovery remains durable. We also know that we must maintain the momentum of reforms so that growth can accelerate on a sustainable footing. Over the span of the next five years, we expect our reforms to produce the following results:
(1) Real growth will reach 6%;
(2) We will lock into a budget deficit that will be in the single digits, down from 13.7% of GDP in fiscal year 2013/14 and 10% of GDP in fiscal year 2014/2015 even as we will be spending more on health and education in line with our constitutional commitments;
(3) The public debt will be put on a long-term sustainable path, falling toward 80% of GDP in the projected time frame from 94% at the end of fiscal year 2013/2014;
(4) The inflation rate will fall to single digits as we maintain fiscal and monetary policy prudence.
I am fully confident that we will succeed in achieving these results. With a sensible macroeconomic policy framework, persistent structural reform, the full and welcome participation of the investor community, and the hard work and persistence of the Egyptian citizen, Egypt’s renewed blueprint for stability, investment and growth will no doubt be realised.
President of the Arab Republic of Egypt,
Abdel Fattah Al-Sisi