Egypt’s Minister of Finance Dr. Ahmed Galal stated that the new government considered its options, in terms of what to do with the economy, taking into account the aspirations of the Egyptian people. It decided to go for a combination that is really difficult to achieve, which is bringing about macro stability specifically in terms of the budget deficit, while adopting an expansionary fiscal policy, in addition to addressing social inequality.
He added, in a conference call organized by Beltone Financial that, the path was made more possible through the generous support provided from Saudi Arabia, the UAE and Kuwait.
They pledged a total amount of USD12 billion and had dispersed USD5 billion already. USD6 billion of the total amount are in the form of grants whether in kind or cash. The other USD6 billion would be added to foreign reserves as five-year interest-free deposits in Egypt’s central bank. This financial support provided the Ministry of Finance with room for maneuver to achieve exactly what it aimed to achieve.
He pointed out that, at the time when the new interim government took power, all macroeconomic indicators signaled a very weak economy. Budget deficit had reached 13-14% of GDP, borrowing costs had soared, NIR had fallen to uncomfortable levels, poverty rate had increased and growth had slowed down considerably.
However, external financing provided to Egypt from Gulf countries will not make the government complacent and will not become an excuse for inaction. On the contrary, the Ministry of Finance is planning to adopt policy reforms, as if the IMF was in town, but not necessarily along the IMF’s policies.
One area of reform the ministry is actively pursuing is energy subsidy reforms and there is a plan and a program that will be phased out over time. The plan is essentially to move forward in three phases, but the plan is not completely defined yet. But roughly speaking, the ministry initially wants to ensure that there is no leakage in the energy subsidy system and no smuggling. This is being achieved by using the so-called smart card system. The smart card system will be implemented in the next two to three months.
The second phase constitutes a plan for gradually closing the gap between international and domestic prices over a number of years — two, three, maybe. The ministry plans to mainly target heavy users across all sectors instead of being limited to one sector versus another. Ultimately, reforms will reach end-consumers, but this will not take place now. In addition to that, the government aims to reform the petroleum sector, looking at alternative uses, whether one product can be substituted by another, whether the product mix is right, whether the import/export combination is the correct one, and also increasing the level of extraction.
Simultaneously, the Ministry of Finance is studying the implementation of conditional cash transfers replacing the commodity subsidies. The ministry is also studying ways to reform the informal sector to expand the market and activate the economy.
The Egyptian economy is growing below its potential of at least 4-4.5% GDP, therefore there is much room for growth without creating inflationary pressures. Since boosting growth is the ultimate objective of the ministry, the ministry believes this is not the right time to increase taxes. However, the ministry is working on some tax reforms, which include replacing sales taxes with a Value Added Tax system (VAT), which will help increase tax revenues, and moving ahead with implementing the real estate tax.
Egypt is targeting a budget deficit target of 9% of GDP in FY13/14 and aims to reduce the need for borrowing from the domestic market, allowing banks to increase credit to the private sector.
On the recently announced stimulus package of EGP22.3 billion, the funds will be directed toward investments in infrastructure of all kinds. The source of funding of the package is the grants pledged and received and some other areas of savings within the budget. This will allow the government to expand without widening the budget deficit. This is only the first phase of stimulus spending. When additional funding is received, the government will launch more stimulus packages. The ministry is increasing public investment across all sectors, this will boost economic growth. The government aims to achieve at least 3.5% real GDP growth in FY13/14.
The ministry believes that it has a very comfortable plan to achieve major objectives that it has set forth, and is already moving in that direction, adopting a number of reforms that will pave the way for subsequent governments. An economic plan and the political roadmap, in addition to government’s aim to provide an investment climate conducive for investments should help attract FDI inflows back to Egypt.
On the balance of payments, exchange rate and reserves, the financial support pledged and received so far with more to come, the Central Bank has secured a stable reserve position and stabilized the currency, with rates in both the official and black markets converging.
In line with the expansionary fiscal policy, the central bank cut its key policy rates in its latest MPC meeting, which has also reduced the government’s cost of borrowing. In summary, Egypt is moving on all fronts to adopt a full-fledged expansionary policy.
On payments owed by EGPC to foreign companies, there will soon be an announcement of an arrangement reached between the Ministry of Finance, Ministry of Petroleum, the Central Bank of Egypt and foreign companies that will be favorable to all parties involved. By paying back any debt owed, Egypt is trying to signal to investors that it is serious, disciplined, and eager to motivate domestic investors, as well as foreign investors, in taking part in the economy.
On PPP plans and mega development projects, the government is thinking more along the lines of projects that cover many sectors and not only focusing on one. Plans for the development of the Suez Canal will constitute many areas and not just transforming it into a logistical hub as previously planned. Also the investment instruments could vary from PPPs to other types of investments.