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Cloaks and dollars: World Bank's $1bn, VAT, and misalignment within government - Daily News Egypt

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Cloaks and dollars: World Bank’s $1bn, VAT, and misalignment within government

An attempt to provide an account of the brief history of the World Bank loan agreements, negotiations surrounding VAT, and the implications of parliamentary intransigence


In December 2015, Egypt and the World Bank Group agreed to a controversial $1bn loan that was announced to fund Egypt’s economic reforms, concomitantly publishing the conditions of the loan agreement.

The status of the loan however remains cloaked in obscurity with various government figures having offered countervailing accounts regarding everything from whether the loans have been received two reasons for an alleged delay.

Outside official government accounts however, there seems to be a discrepancy between the parameters of the official World Bank agreement and certain developments in Egypt’s politico-economic terrain. In February, Mada Masr published a document that was putatively leaked from the office of the president that urged the House of Representatives to pass the value added tax (VAT).

There are two key economic reforms, the VAT and the Civil Service Law, the latter of which restructures the public employee sector and was overturned during the parliament’s review of more than 300 decrees issued in its absence. They will address the World Bank’s conditions yet to be addressed by the parliament amid a volatile and highly contested in the first months in office.

It would seem that excepting these reforms, the loan cannot be dispersed. What follows is an attempt to provide an account of the brief history of the loan agreements, negotiations surrounding VAT, and the implications of parliamentary intransigence.

The loan’s origin

In December 2015, the World Bank Group endorsed a new Country Partnership Framework (CPF) for 2015-2019 which was issued to support “Egypt during a critical period of economic and social transformation”, according to the financial organisation’s official account .

Under this programme, Egypt acquired approval for two loans, one from the World Bank and one African Development Bank (AfDB) that were valued at a cumulative $4.5bn, with $3bn to come from the World Bank and $1.5bn from the AfDB. The loans were expected to be disbursed over a three-year period as soft loans with an interest rate of 1.68%, a repayment period of 35 years and a grace period of five years.

Members of the Egyptian government called securing this loan a coup. Earlier this month, Minister of Investment Ashraf Salman explained that unlike usual funds Egypt receives from the World Bank, which are delimited to a specific use, the new loan was support the general budget, allowing for broad implementation measures.

“Hats off to the Minister of International Cooperation for the ‘miracle’ of the World Bank loan,” Salman said. At the time, he stated that dispersal mechanisms for the first segment of the loan were proceeding efficiently.

However increasingly, government figures have provided countervailing accounts of the status of the loan’s dispersal. On 1 January 2016, Minister of International Cooperation Sahar Nasr, who signed the loan and who was also a former World Bank economist, announced that the $1bn had been disbursed.

A few days later however, Governor of the Central Bank of Egypt (CBE) Tarek Amer said the loan had not been received yet, which prompted Nasr to explain the delay had been caused “executive procedures”.

Citing unnamed government officials, local media reported on 22 February that the government will use the $1bn to pay its debts owed to foreign oil companies.

Despite the approved loan, the World Bank has lowered its forecast for GDP growth in Egypt from 4.2%, in FY 2014/2015 to 3.8% in the current fiscal year, a drop by 0.7 percentile points from its prior prediction in June 2015.

Announced conditions of the World Bank

“The World Bank and any other international institution must place conditions for any loan it gives out,” acting Executive Director and Director of Research at the Egyptian Centre for Economic Studies Omneia Helmy said. “[The World Bank] can make sure that Egypt will be able to pay back the loan.”

The loan agreement between Egypt and the World Bank $1bn made provision for the following goals:

  • Advancing fiscal consolidation through higher revenue collection;
  • Moderating the growth of the wage bill;
  • Improving debt management;
  • Ensuring sustainable energy supply through private sector management;
  • Enhancing the business environment through issuing investment laws and licences to ensure industrial requirements.

If Egypt worked toward these recommendations, the World Bank  forecasted an increase in the non-sovereign corporate income tax and sales tax from 5.4% of GDP in 2015 to 6.7% of GDP in 2018, a reduction in the wages of civil servants from 8.2% of GDP to 7.5% of GDP in the same period. It would keep track of both of these features through the issuance of an annual publication updating the debt management on the medium term.

If the Egyptian government took steps to  reform its energy supply, the World Bank forecast a decrease in energy subsidies from 6.6% of GDP to 3.3% of GDP, an increase in the average electricity tariffs from EGP 0.226/kWh to EGP 0.451kWh, a reduction in the market share of the state-owned Egyptian Electricity Holding Company (EEHC) from 92% to 85%, and an increase in private sector-owned renewable energy projects from 0 MW in October 2015 to 1,500 MW by the end of 2018.

“Repaying the loan can either be done through increasing revenue or decreasing expenditure,” Helmy said. “It seems that the main focus of the conditions is on decreasing expenditure.”

To restructure the business climate, the document stated that Egypt would have to implement a-four one-stop-shops to facilitate business licenses and operations by 2018. The bank also recommended that Egypt expedite the issuance of licences in the industrial sector, reducing processing time from an average of 634 days to 160 days by 2018. Despite these suggested conditions, the World Bank still considered Egypt to have a high risk rating.

However Omar Ghannam, a researcher at the Egyptian Centre for Economic and Social Rights, questioned the World Bank’s forecast, stating increasing debt services will only further burden Egypt’s economy . “You need to consider that the largest part of the general budget is debt service, principal and interest, which is very rapidly increasing and new loans would do the opposite of stemming that rapid growth,” Ghannam told Daily News Egypt.

The leaked VAT condition

In an internal government document dated 19 December 2015 that was allegedly leaked and attained by Mada Masr, the office of the presidency stated the loan could be voided if Egypt did not adopt the VAT. The document stated the World Bank would not disperse the loan until Egypt made progress regarding VAT’s implementation. The tentative deadline for the government to meet these conditions was disclosed as within 180 days from the agreement on 16 June 2016.

Helmy said the implementation of VAT is considered a crucial way to supplement revenue as other policies can prove difficult.  “VAT is called the money machine,” Helmy said, referring to the tax’s high ability to increase revenues. She said VAT also helps add the informal sector to the tax base.

The current tax base focuses on employees while the ability to tax “those who really make money is marginal”.

Although the Ministry of Finance plans to increase tax revenues for FY 2015/2016 to EGP 422.4bn compared to EGP 364.2bn in FY 2014/2015, a growth rate of approximately 13%, with part of the procedures including completing VAT, updates on the status of the facts are still unknown.

What we know of VAT

The tax has been partially applied since 1991. The sales tax and several amendments have been proposed to fully implement it. The plan to convert the sales tax into the VAT was introduced in 2007. However no notable progress was made to take an official step towards that change.

The VAT law was nearly passed in fiscal year (FY) 2013/2014 but was not concluded due to the political turmoil in Egypt, notably with the ousting of former president Mohamed Morsi; discussion on the introduction of the Vat resumed in FY 2014/2015.

Applying new taxes has been a challenge for Minister of Finance Hany Kadry Dimian; the application of the proposed wealth tax and capital gains’ tax have both been halted.

Resumed talks on applying the VAT have been ongoing since 2015 but the rate of the tax and the exempted commodities remains unknown. Ministry officials have stated the refusal to disclose further details is to avoid unnecessary inflation that may arise due to “the fear of the application of the tax”.

Dimian highlighted that the increase will have an effect on the top 40% of earners among the population.

In January 2016, Advisor to the Minister of Finance Mahmoud Ali said the inflation caused by VAT will range between 0.5% and 1.5% and that any price increase will be experienced only once rather than gradually.

Ali said the ministry preferred to amend the sales tax law instead of writing up a new law for VAT to avoid any price increases. The amendments include the unification of the tax price, which remained unannounced, compared to the gradual sales tax that is currently applied.

Possible changes also include setting a general application tax and reducing all products and services. The proposed VAT law also set a unified obligatory minimum value of sales for the tax’s registration for any business, whether a manufacturer, merchant, or service provider, at EGP 500,000.

Ghannam however impugned the government’s forecast, questioning whether there is a positive correlation between the introduction of VAT and economic growth, despite the widely held belief that it increases tax revenue. “[ VAT] has been proven to affect economic growth rather negatively as we have seen in the case of increasing VAT in Japan last year. So it’s trade-off and since the government hasn’t released any studies on how it will affect the economy, it’s all guesswork as there is no concrete data to weigh the positives and negatives,” Ghannam told Daily News Egypt.

Nonetheless, earlier this month, Prime Minister Sherif Ismail announced that VAT will be introduced to the parliament. He assured that the law will be passed before the end of the current FY. The tax is already facing resistance from some sectors in the market, particularly the banking sector who are demanding to be exempted from it.

EIPR criticises confidentiality of real loan conditions

In a report issued last week, the Egyptian Initiative for Personal Rights (EIPR) criticised the conditions of the World Bank loan.

EIPR said the economic reform programmes the government promised to obtain fall under a certain type of World Bank Loans that obliges governments to agree in advance to such reforms. “This means that the Egyptian government had already started to take economic reform actions without announcing to the public that it is undertaking such reforms to get a loan,” it said.

According to EIPR, negotiations of the loan progressed without democratic consent. “We didn’t know anything about the loan before it was signed a day before the inauguration of the parliament,” the report stated.

A real dialogue must take place with the Egyptian citizens and the scope of the problem [the economic burden on citizens] must be explained.  “In order to receive the public support, citizens must feel that both the burdens and the benefits will be distributed,” Helmy said.

“All these pledged reforms were for a tiny amount of money, $1bn, which don’t even cover half of the country’s annual wheat imports and is equivalent to 1/10 of Egypt’s petroleum imports,” the NGO said.

Ghannam said the conditions of the World Bank loan would affect low-income Egyptian citizens in myriad ways, notably as “increases in energy prices are sure to increase prices directly and indirectly”.

World Bank loan dragged into government’s battle with civil servants

The World Bank has been silent for more than two months now after the $1bn loan announcement. Economists contend the reason for this silence is that the international institution has been dragged into a local debate, which is the application of the Civil Service Law.

In the list of conditions the bank initially offered, reform of the civil service sector was listed among the “additional” reforms to be undertaken by the government beyond the pillars of the loan package. Nonetheless the World Bank emphasised the necessity of reducing the wage bill by 2018.

After six months of implementation and despite official calls by the government and the majority of parliament to approve the Civil Service Law before it was voted upon, the parliament rejected the decree last month by a majority of 332 votes out of 468 votes.

The rejection of the law was a surprise as the assembly is believed to be pro-government. On the same day, Minister of Planning Ashraf El-Araby came out to say that the rejection of the law will make Egypt “lose” the $1bn World Bank loan.

 

Topics: Loan VAT World Bank

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