Last year, Egypt resolved to regain control of its destiny and purposefully embarked upon a process of political, social and economic renewal. The first step was to put the country’s political life back in order by holding a new constitutional referendum and conducting presidential elections. The successful completion of the two critical political markers was instrumental in restoring confidence in the Egyptian state and its institutions. The next political milestone will be the parliamentary elections which will take place in October and November of this calendar year. I look forward to the contributions that the Parliament will make in rebuilding Egypt, not only with respect to crafting new laws to foster the country’s path towards development and greater shared prosperity but particularly in light of its role in monitoring the government’s performance and representing the interest of the people.
On the economic front, it is important to recall that Egypt faced an acute internal crisis during the political transition. The earlier prolonged period of uncertainty and turmoil inflicted significant economic and financial costs. The government budget deficit ballooned into the double digits, foreign exchange reserves shrank, inflation soared, many businesses struggled or were forced to close their doors, many people fell below the poverty line and the numbers of the unemployed grew. That is the set of economic conditions that I confronted as the newly-elected president in 2014. To get the economy back on track and to alleviate the suffering of the Egyptian people, to give Egyptians hope for the future, it was vitally important for the government that I appointed shortly after taking office to come up with a credible and effective plan.
The plan would have to inspire confidence in the economy’s prospects by tackling head on Egypt’s macroeconomic imbalances and pervasive infrastructure deficits, including the shortfalls in the power and transportation sector. It would have to establish a new foundation for sustainable growth by incentivising productivity, investment and job creation. Above all, it would have to put the economy on course to meet the legitimate demands of the Egyptian people for lives of greater stability, security and dignity, as well as to deliver a meaningful improvement in the quality, range, and accessibility of services to which they are entitled.
The government met this formidable challenge by devising and implementing a comprehensive and far-reaching package of policies, programmes and projects. The list of main accomplishments over the past year and a half is worth noting:
(1) The New Suez Canal project was completed on time and in a record period of one year, demonstrating the government’s capacity to deliver large and complex projects as promised. The new canal will not only bolster Egypt’s long term competitiveness in international trade and generate additional revenues for the state, but is also part of a broader endeavour to develop a new economic zone running alongside the canal corridor that will encompass industrial parks, logistical areas, touristic resorts and other projects offering new opportunities for the private sector and job seekers.
(2) We have constructed new roads in the past year to expand our national road network and facilitate internal transportation and trade. We are also working on the reclamation of 1.5m feddans to increase agricultural output and enhance food security. Other infrastructure projects and reforms are addressing Egypt’s long unmet needs in water supply, sanitation, port and rail transport, hospitals and schools.
(3) A strong start to fiscal consolidation was begun in FY 2014/2015. On the revenue side, the government introduced amendments to the tax code to make the tax system more equitable and broader in coverage, and to improve tax buoyancy. This includes the recent measure unifying the top income tax rate of 22.5%, which will also apply to the special economic zones formerly subject to a 10% rate of tax. In taking this step, the government has closed a loophole for tax arbitrage – thereby improving fairness in our tax policy while expanding opportunities for revenue generation. In addition, the government implemented the property tax that had been passed in 2008 but never previously enforced and also introduced a new 10% tax on dividends. Custom administration was streamlined and modernised, resulting in a robust pick-up in customs revenues while costs were contained. A new mining law that replaces its 1953 predecessor will unlock the untapped potential of the mining sector as well as produce a new stream of revenues.
With respect to expenditures, the government moved ahead with bold energy subsidy reforms and initiated measures to control the public sector wage bill. Altogether, the underlying fiscal consolidation effort in FY 2014/2015 – when grants from foreign governments are excluded (as Egypt received substantial grants in FY 2013/14 but not in FY 2014/15) – amounted to about 4% of GDP. By any measure, that is an extraordinary fiscal adjustment in a single year, particularly for a country emerging form the difficulties that Egypt had been experiencing.
(4) The move to slash energy subsidies in July 2014 (an adjustment that alone amounted to 2% of GDP) heralded the start of our medium-term plan to eliminate these subsidies almost entirely, save for subsidies in fuel products and electricity consumed by the poor. The importance of the subsidy reform has multiple dimensions; it shifts incentives away from capital-intensive economic activity toward the labour-intensive activity that Egypt needs. It also signals an essential qualitative improvement in the nature of government spending, with the government shifting away from wasteful and regressive areas of spending in order to create room for expenditure on capital investment, public services and targeted cash transfers. Reflecting this shift, the budgetary allocation in FY 2014/15 for health and education exceeded energy subsidies for the first time in many years. This was a policy choice that the government made well before the sharp decline in global oil prices after October 2014 further reduced the weight of energy subsidies in the budget.
(5) The government has launched the “Takaful” and “Karama” programmes which distribute cash directly to designated beneficiaries in Egypt’s poorest districts. These programmes will cover 500,000 households during the current fiscal year, expanding over a three year span to benefit 1.5m households.
(6) Fiscal reform has enabled us to carve out additional space in the current year budget to lift capital expenditures to EGP 75bn, up to 25% over the previous fiscal year, While the budgeted amount still falls far short of Egypt’s needs, the government is pressing ahead with efforts to encourage the private sector to play a bigger role in service delivery and infrastructure development, including via public-private partnerships and other vehicles.
(7) The food subsidy system has been overhauled to improve the quality and widen the choice of commodities provided to the public, while substantially reducing leakages. Instead of the previous quota system limiting beneficiaries to only five staple commodities, the new arrangement constitutes a point system allowing the eligible consumer to purchase his or her choice among nearly 100 commodities.
(8) The electricity sector has been liberalised in order to encourage private sector investment in both conventional and renewable energy. With the passage of the electricity liberalisation law in July 2015, the state will move to a strictly regulatory role, while responsibility for power generation and distribution will shift into the domain of the private sector. In addition, a legal framework for feed-in tariffs to foster the development of solar and wind energy was established in 2014.
(9) The electricity deficit is being addressed with the addition of new power capacity installed this year. This will ensure the provision of adequate power to serve both residential and industrial demand. We expect to continue to meet the growing economy’s demand for power in a proactive fashion over the coming years, supported by our intention to follow through on the commitment to eliminate most electricity and fuel subsidies, as we have previously outlined.
(10) A number of laws have been amended or newly introduced to strengthen the domestic business environment and reinforce the rule of law. Highlights of legislative reform include the amendments to the investment law, which have bolstered the autonomy and scope of one-stop shop, thereby streamlining various processes for investors. The new investment law also includes a dispute resolution mechanism based on international best practices. Other important legislations that have recently been passed to enhance the conditions for doing business in Egypt are the microfinance law and amendments to the competition law.
(11) Nearly 300 disputes with foreign investors have been resolved and the remaining cases are under way.
The chief objective of all the theses policies, programmes and projects is two-fold: to ensure long-term sustainability by correcting the country’s microfinance imbalances, and to create a dynamic, competitive and private sector-led new platform for growth.
What the government is planning entails nothing less than the massive re-engineering of Egypt’s entire economic apparatus. An economy that has for too long underutilised its natural and human resources is being restructured and retrofitted so that it can reach its full potential. At the same time, lessons learned from Egypt’s last economic boom during the mid-2000s are being applied to make sure that this time around growth will benefit all Egyptians, and not just a few. This means that we will ensure that the fruits of the growth are fairly distributed and that the burden of adjustment falls most on those with the capacity to shoulder the impact, while the most vulnerable are protected.
While it is still early days, the economy’s initial response to the government’s policy initiatives has been promising. Growth is estimated to have reached 4.2% in FY 2014/15, following several years of annual growth hovering at only 2%. We are aiming for 5% growth during the current fiscal year, driven by rising FDI inflows, the continuing recovery of tourism, the implementation of the various new energy, infrastructure and agricultural reclamation projects, and the start-up of the second phase of the Suez Canal development project.
In recounting the achievements of the past year and several months, I mean to highlight that we have delivered much of what we committed to do, even against difficult odds. There was considerable pressure on the government to adopt a populist approach, and many fears that fiscal consolidation would nip a budding economic recovery before it has a chance to flourish. In spite of these pressures, we were willing to make the tough decisions and to forge ahead with the long-overdue and contentious reforms that prior governments had known were necessary but did not carry out.
At the same time, I do not discount the political and structural challenges that we have been wrestling and that still lie ahead. Transition is never easy, and creating a new model of economic growth inevitably generates resistance from some groups. We have encountered delays in implementing a few new measures, while in selected instances reforms have been put temporarily on hold.
Nonetheless, such detours do not deter us from our determination to continue with the reforms. We have been ambitious in setting the preliminary stage of economic recovery and have achieved a good momentum so far, but we know that it is essential to deepen the reform effort. If we do not do so, we risk losing the credibility and confidence that we have earned to date – and we will cheat the Egyptians of the brighter future that they deserve.
The crux of our reform effort will continue to be gradual fiscal consolidation in order to restore macroeconomic stability and crowd in a stronger and larger private sector. The primary target is to bring our domestic debt down toward 80%-85% of GDP by FY 2018/19, as the government has previously announced. At the same time, we will continue to balance the fiscal consolidation objective against our firm commitment to promote social justice, with some portion of the savings from the various austerity measures channelled to fund development programmes, as well as services for the poor. For example, 50% of the proceeds from the property tax are being redirected to improve conditions in urban and rural slums. This balance means that fiscal consolidation will be much less aggressive than we could otherwise achieve, but the pace will be appropriate in light of Egypt’s priority to build a more just society – a worthy goal in its own right and one that safeguards the political durability of the reforms.
As we look to the immediate horizon, the main reform on the agenda concerns the proposed amendments to the General Sales Tax (GST). These amendments were intended to be the most significant factor in last fiscal year’s revenue-raising effort, but have been delayed to the current fiscal year. The planned reform will move Egypt toward the implementation of a Value Added Tax (VAT) regime that will not only raise revenues to contribute to the medium-term fiscal consolation, but will also bolster investment incentives. By capturing services that are currently not taxed and by unifying the rate of taxation on goods and services, the new regime will further broaden the tax base and enhance tax equity. A speedy refund mechanism embedded in the design of the new law will also help improve firms’ cash flow. The government expects that theses tax advantages will encourage informal economic actors to join the formal sector, as well as help small enterprises to become larger and more competitive, in the process boosting growth and generating more jobs. The government is also preparing a simplified tax regime for SMEs that combines their sales and income taxes, reducing bureaucratic hassles for them.
The volatility that we have recently witnessed in the global markets further justifies the rationale for completing Egypt’s reform agenda. While our economic policy framework is already structured to manage domestic challenges, we must continue to build stronger buffers against potential external risks. At the same time, while the global situation may currently entail some negative spillover for Egypt, falling commodity prices could also create new opportunities for enterprising investors.
To shore up Egypt’s economic resilience over the longer term, we also need to focus on fostering and deepening our manufacturing and production base, increasing local value added, and improving the quality of the Egyptian workforce. In the final analysis, sound economic fundamentals, a favourable enabling environment for private sector and foreign investment, and the development of a growth model reliant on Egypt’s large domestic market will constitute the best policy recipe to reserve growth and protect the welfare of the Egyptian people.