Tuesday, 29 November 2016

Cabinet econ team on new taxes, IPO program, trade barriers

The Cabinet economic group sat down for an extended interview with the Youm7 editorial board. Prime Minister Sherif Ismail, Trade and Industry Minister Tarek Kabil, Finance Minister Amr El Garhy, Investment Minister Dalia Khorshid, Oil Minister Tarek El Molla, and Housing Minister Mostafa Madbouly all participated. Read the full interview here, or check out our summary of highlights below.


Ismail denied that public utilities will be rolled into the IPO program, saying the government spoke only of banks and oil companies, and not public utilities companies that first need to be profitable, which requires measures be taken beforehand. We’re taking this to mean that the companies managing the Siemens-built power plants, for example, may not be included in the program.

On whether there is a cabinet reshuffle on the horizon, Ismail said, “If we see that the situation warrants it, we will resort to one.”

“Economic reform plans are 30 years late, and will continue for three years,” said Ismail. The result of reform is often misconstrued as inflation, he says, and that’s a mistake: The government’s reform agenda aims to grow industry and exports, create jobs, attract investment, reduce the budget deficit, and improve the overall quality of life for citizens.

The government is setting up a database for qualified recipients of welfare payments that will allow reform of the commodity subsidy program. The goal is to ensure fairness in the system through smart cards and a benefits program that weighs the income, property holdings, and consumption rates of potential recipients as factors.

Asked about how low-income earners and the poor will be protected from inflation, Ismail noted that the state’s salary burden has risen to EGP 230 bn, pensions now cost EGP 160 bn annually, and individual ration-card holders now receive benefits worth EGP 21 per person against a previous from EGP 15. Electricity and fuel are still subsidized despite the float of the EGP float, and the government will leave the price of medicine unchanged for the time being while trying to work through challenges the pharma industry now faces.

There is no crisis in the availability of sugar and infant formula, Ismail said. The problem was that formula was leaking from the commodity subsidy system into confectionaries, he added, and “we only imposed regulations.” The sugar crisis was caused by the FX crunch, he says, when the CBE said it would provide the Supply Ministry with essential commodities, the private sector stopped importing sugar; imports of the sweet stuff resumed last week.

The price of a ticket on the Cairo Metro will rise, Ismail suggested. The Transport Ministry needs an additional EGP 30 mn per month to keep the Metro running, an expenditure the state treasury can no longer support. Ticket prices need to increase if the quality of Metro service is to be maintained, Ismail said, and a base fare of at least EGP 2 is probably fair. The government is still studying the rate, he said, adding that the true cost of a Metro rise is on the order of EGP 10-12.

On education, Ismail said Egypt needs 52k new classrooms to solve the problem of density at schools; 8,500 classrooms were established last year, and next year the government aims to establish 25-30,000 more. The private sector has been given the chance to bid on the construction of 200 schools as part of that effort.

On health, Ismail notes that the issue is that those private hospitals that exist are not affordable — or are lower-quality hospitals whose services are below average. “[The government] is trying to restructure the market to provide hospitals for the middle classes,” Ismail said.

Of the recent protests by Nubians, Ismail spoke of services the government is offering there, including water, education, wastewater, new schools, in addition to health services. Asked specifically about the latest protests over the 1.5 mn feddans project, Ismail responded: “The state is facing projects that have been accumulated for long decades, and we dealt with them with transparency. We will act according to the law. We continue to implement economic and urban development projects with the participation of Nubians, and the Nubians are prioritized.” Ismail added the boundaries of the 1.5 mn feddan project are being surveyed to ensure that it does not overlap with historically Nubian land.

Upper Egypt is also a priority, the OM said: “We have allocated land as part of our development strategy and we’re giving incentives for investment in Upper Egypt.” Ismail confirmed there will be an Upper Egypt investment conference.

Are we having local elections “on time”? “We are committed to holding municipal elections on time if the law is completed on time,” Ismail said. The local elections act has been reviewed by Maglis El Dowla (the State Council), he said. Ismail did not specify what “on time” meant, but the government had previously said it wanted to hold them by year’s end. That now strikes us as a rather ambitious timeline.

The Prime Minister reminded us a verdict on the constitutionality of the protest law is due on 3 December, refusing to comment further on a matter that remains before the courts.


Tax policy stability is more important than implementing a progressive tax system, he said, in addition to economic growth. “Attracting investments is more important than a new tax, because any tax that will be implemented incorrectly will be rejected by companies and business leaders, which is anti-growth,” El Garhy said.

Economic growth has lagged: When you delay important economic decisions for a long time, you exhaust the whole system,” the minister said, noting that Egypt grew at perhaps 1.5% per year in the four years following 2011 — and only grew in 2015 and 2016 due to infrastructure investments. The FX crunch and the tourism crisis have been critical brakes on growth, El Garhy added.

Egypt is committed to paying its USD 3.6 bn in arrears owed to international oil companies, but is not required to do so under the terms of the IMF loan, he said. The primary “condition” is to reduce the budget deficit to 10%, he added.


The Trade and Industry Ministry’s priority industries include chemicals, weaving and textiles, building materials and engineering, said Kabil, all within a framework of curbing imports and production. That will be key to creating jobs for a growing population, he suggested.

Egypt will only prioritize import substitution when there are feasible domestic alternatives, said Kabil. Domestic quality must improve across the board in key industries to complete the production value chain. Using textiles as an example, Kabil says that by tightening textile imports and allocating land to the sector to allow expansion, Egypt attracted both new investment from domestic manufacturers and interest from both Chinese and Turkish producers — the two largest suppliers of textiles to Egypt.

Egypt can contractually raise tariffs on imports, but it needs to inform the World Trade Organization and go into negotiations with trade partners, which can take years and could negatively impact Egyptian exports, said Kabil. It’s not a zero-sum game — protection on one front means offering incentives or dropping barriers on another. While Egypt can stand to gain a little from raising tariffs, it would send the wrong message to foreign investors, he added.

A shortage of land zoned for use by industry has been a big factor behind the nation’s industrial slowdown, said Kabil. That’s why the ministry has so far issued 6 mn in infrastructure-ready land plots for industrial purposes in Badr, El Minya, and Port Said, and plans to issue 4 mn more by the end of the year, he added.

Budget cuts: Total spending on trade rep offices is down by 40%, said Kabil, noting that 12 offices in Europe have been shuttered, but that five new offices have been opened, including three in Africa: Ghana, Cote d’Ivoire, and Djibouti.


Khorshid sidestepped real discussion of what might be in the investment law and gave no guidance on when it might come up for discussion in the House. The new law must streamline bureaucratic procedures and protect investor interests, she said. The prime minister weighed in on the same subject saying, “Egypt issued a law in 2015 and needs time to figure out what amendments are needed.”

FDI rose to USD 6.8 bn one year after the March 2015 Egypt Economic Development Conference in Sharm El Sheikh from USD 6.5 bn the year before, said Khorshid.


The government is prioritizing the administrative capital because the Egyptian population must move beyond the 6.5% of land it currently lives on, Madbouly said. Egypt aims to double its populated land, he said, without giving a timeframe for that goal. “The new administrative capital is the natural extension of New Cairo. New Cairo will exhaust its land within the next four years, which shows there is still demand from all tiers,” Madbouly said.


Egypt will be self-sufficient on the natural gas front by 2019 and will have an annual production surplus by 2021, El Molla said. “Relations with Saudi Arabia are good, there is no crisis,” he said, adding that Aramco stopped its fuel shipments for technical reasons. El Molla noted he had been invited to KSA recently and there were talks on cooperation in the oil sector.

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