Special Year End 2014 Feature:
In 2012, the Egyptian government undertook many difficult economic decisions, to meet the budget deficit and the sharp increase in domestic debt.
The government reduced energy-oriented support to reach EGP 100.3bn in the new budget of fiscal year (FY) 2014/2015, to reduce expenses and move towards austerity.
Economic scholar at the Carnegie Middle East Center Amr Adly told Daily News Egypt that the government’s decisions were not enough. Instead, he said it should treat the economic crisis by developing a comprehensive economic plan, rather than temporary fiscal and monetary management to save the value of the Egyptian pound.
The most important of these decisions are:
Raising the prices of petroleum products
The government raised the price of a litre of 80 Petrol to EGP 1.60 instead of EGP 0.90, and the price of 92 petroleum to EGP 2.60, instead of EGP 1.85.
The price of a litre of 95 petroleum has been raised to EGP 6.65 instead of EGP 5.65, with the price of diesel raised to EGP 1.80 instead of EGP 1.10.
Subsidies in the current fiscal year’s (FY) budget 2014/2015 for diesel fuel is about EGP 44.9bn, about EGP 20.1bn for gasoline, EGP 19.1bn for butane gas and EGP 16bn for diesel.
The cost of fuel subsidies amounted to EGP 22bn in the first quarter (Q1) of FY 2014-2015, a rate of decrease of 29% from the same quarter in the previous FY 2013/2014, which amounted to EGP 31bn.
Amr Adly said the government had to cut subsidies, as it is the largest cost in the state budget. It has consequently raised oil prices and restructured the petroleum sector in order to accommodate the inflationary impact of the economy.
Raising electricity, gas and water prices
The government restructured electricity prices, leading to the elimination of subsidies across several stages for over five years. The change takes into account the social dimension of low-income people, and providing electricity for the middle class at no more than its costing price.
At the beginning of FY 2014/2015, the price of electricity for home use ranged between 7.5 piastres per kilowatt per hour (kW/h) for consumption from zero to 50kW. The price gradually increased to reach EGP 0.74 at the maximum for more than 1,000 kW/h.
The natural gas price for domestic and trade use starts at EGP 0.40 up to 25 m3. For more than 25 m3 and up to 50 m3, the price is EGP 1 per 1 m3. For more than 50 m3, the price is up EGP 1.25 per 1 m3.
The government also raised gas prices used in factories. The price of one million BTUs of gas for the cement industry was raised to $8, and the price of a million BTUs of natural gas for the iron, aluminium, copper and ceramic industries reached $7.
Water supply amounted to about about EGP 800m, according to the current national budget. Water tariffs were raised on higher-income citizens who use more than 20 m3 per month.
The minimum and maximum wage
President Abdel Fattah Al-Sisi issued decree 63/2014 determining the maximum wage for state employees.
The maximum wage for any governmental employee amounted to EGP 42,000 per month, which represents thirty-five times the minimum wage (EGP 1,200).
Amr Adly said it was necessary for the maximum wage to be applied by law not by a presidential decree on all state institutions, and the public and private sectors. This is in addition to restructuring the governmental sectors and monitoring the application of the minimum and maximum wages.
“The maximum wage is essentially a political decision, not an economic decision, as an expression to consolidate the idea of social justice, and has nothing to do with budget cuts or contributing to the reduction,’’ Adly said. “The money that will be saved from the maximum wage is much less than it contributes to the reduction of the state budget deficit.”
Economic expert and director of the Center for Economic Studies Salah Gouda criticised the decision not to bind the private sector fully to the minimum wage of EGP 1,200. He noted that the number of state employees is approximately 6.5 million, while the number of private sector employees is no less than 8 million employees.
Gouda added that there is no law for wages reform to put the basic wage to be at least 80% of the income, and for additional income to be no more than 20%.
Imposing new taxes
The government imposed a new surtax, the “wealth tax” for the first time, valued at 5%, on individuals whose annual income is more than EGP 1m. Wealth taxpayers can pay through funding projects in the fields of education, health, agriculture, housing and infrastructure in various governorates nationwide.
Salah Gouda said that the government has not yet explained these projects and the procedures of payment; therefore this tax is inoperative.
The government also decided to impose a tax of 10% on capital gains on the Egyptian Stock Exchange (EGX), raising the tax on liquor to 200%, and 50% on cigarettes.
Member of the Tenth of Ramadan Investors Association Abdallah Hilmy said that the EGX tax would not encourage new companies to get involved in the stock market, thus reducing the investment. He added that this confirms that these decisions are not well thought out and will negatively affect the investment climate.
Long live Egypt Fund
President Al-Sisi launched the “Long live Egypt” Fund to support the Egyptian economy, urging Egyptians to donate to boost production and use the fund’s returns in developmental projects for youth. Al-Sisi declared that he would donate half his fortune and his salary to the fund, and urged businessmen to donate.