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Availability of foreign currency, public debt growth largest challenges for encouraging investment: World Bank economist - Daily News Egypt

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Availability of foreign currency, public debt growth largest challenges for encouraging investment: World Bank economist

Poverty rates are still high, especially in Upper Egypt

Economic expert at the World Bank in the Middle East Ahmed Kojak
Economic expert at the World Bank in the Middle East Ahmed Kojak

By Ahmed Farahat and Ghada Helal

The World Bank maintains regular evaluations on the general Egyptian economic situation, and is following the Economic Summit events in March, in specific. The World Bank fears that public debt rates, as well as issues of foreign currency availability to investors, will increase, according to Ahmed Kojak, an economic expert at the World Bank in the Middle East.

The bank is expected to keep its speculations at the same level, in the next evaluation, as the deficit rates for fiscal year (FY) 2014/2015 stand at roughly 11.3% of the gross domestic product (GDP), according to Kojak, in an interview with Daily News Egypt. The government expects budget deficit rates by the end of this FY to reach 10.5% of GDP, according to statements of the minister of finance.

What is the nature of the World Bank’s evaluation of the Egyptian economy?

The bank’s current evaluation of the Egyptian economy takes place on a regular basis and is not a result of anything, so the bank is aware of all the economic changes taking place. The World Bank is expected to maintain its expectations for FY 2014/2015 by the end of June at 11.3% of GDP. This rate takes into consideration some economic reform policies, which will take more time to achieve their aim. This means that the budget deficit will stay at its current high rate for some time. However, the rate is better than the previous rate, at 12.8% of GDP in FY 2013/2014, and 13.8% in FY 2012/2013.

Minister of Finance Hany Kadry Dimian expressed his expectations for the budget deficit rates by the end of FY 2014/2015 to be at 10.5% of GDP, following the economic reform plans and the global decline in oil prices.

How would you evaluate the public debt in Egypt and its high rates?

The public debt rate over the past two years came close to 100% of GDP, but they recently declined to be 97% of GDP. The debt rate is slowly decreasing because of the accumulation over the years. There is another issue related to issuing bonds on an annual basis for pensioners, at EGP 15bn, to pay for previous loans. Consequently, this creates increased financial dues for the government to pay, besides the annual public budget deficit.

What are the World Bank’s evaluation methods?

The evaluation indicators for the World Bank are the outcome of the bank’s regular meetings with the Egyptian government, representatives of the private sector, and workers in international institutions, as well as meetings of the banking sector. The most significant indicators for WB’s evaluation are the high rate of tax increases on sales and companies’ revenues, which is a positive indicator on the total volume of consumption in the market and the economic situation. Some indicators concern the interest rate in banks and the nature of the rate of deposits as well as loans.

What do you think of the current Egyptian economic situation?

The Egyptian economy is starting to recover after the political events and their effect. The Egyptian economy relies on several indicators, and it takes time to know the growth sustainability in the economy.

The World Bank believes that the economy is recovering. However, the growth rate is less than the normal rates for a country like Egypt. The rate is also lower than the rates necessary for creating enough job opportunities annually.

There has to be some balance between the growth rates and their effect on citizens, so that everyone can feel the results. Before 2011, the Egyptian government used to achieve high growth rates; however, they would be distributed on only some citizens. This was a result of the lack of policies and effective social security networks.

The government has to stop taking populist measures without taking into consideration the economic consequences of these policies and their financial costs.

How can harmony be achieved between the economic goals?

To achieve harmony between the economic goals, the government has to work on three things; the first is to achieve high growth rates, the second is to create enough job opportunities, and the third is to increase the efficiency of the social policies.

Creating job opportunities in the economic sector requires boosting the sectors that are most capable of creating opportunities and have trained workers. Achieving growth rates should also be more inclusive, so that it provides efficient workers. The employment policy in Egypt needs to be amended.

We have to provide enough job opportunities and social security networks to include all the social classes, so that they lead a good life.

What is your evaluation of the economic policies of the consecutive governments?

I believe that the expansionary policy adopted by the government after 30 June through the implementation of the stimulus package to boost the economy was a correct decision, especially under the halt in economic activity.

That’s why the government has pumped large sums of capital into investment projects to create job opportunities and get the investment wheel moving and at the same time reassure the private sector. But these policies, for the most part, did not create permanent obligations on the following governments.

I believe that the current trends of the government are sound and they depend on progressive policies to reduce the budget deficit. The government also understands the gravity of high budget deficits and their financial burdens.

The government needs to reconsider some budget items to increase their efficiency, particularly after the recent constitutional obligations.

The new constitution obliged the government to increase expenditures on education, scientific research and health provisions to up to 10% of GDP by the end of 2017. This requires ensuring that these funds will contribute to improving the level of education and health services to the people.

What do you think of the latest tax reforms, especially the unification of tax rates and the tax on the stock market?

The latest tax reform with regards to unifying tax rates at 22.5% as a maximum tax is a good decision by the government, because it announces the stability of the tax system for 10 years.

At the same time, this will lead to increasing cash flows from taxes through broadening the tax base by increasing the tax on companies working, and on work in special economic zones.

I believe that the idea of the tax exemption for companies is not practical due to the abuse in dealing with the exemption system by some companies; some companies conclude their work in these zones as soon as the exemption period expires, others shift from one activity to another to benefit from another exemption without achieving tangible economic return.

According to international experiences, the tax rate is not the only key element to attract investment, but the general investment environment, as well through the availability of infrastructure and lands and facilitating the payment process.

What do you think of imposing taxes on capital gains and dividends of corporations listed in the stock market?

Taxes imposed on the stock market and on real estate are the fairest types of taxes by nature. However, the government should address their problems and their methods of application, especially after the many complaints raised by investors lately.

I believe that imposing taxes on the stock market is not an Egyptian invention; it is applied in different countries of the world, including countries with the same economic characteristics as Egypt. On the other hand, there are other countries that do not follow the same approach, believing that imposing taxes on income is not suitable for the early phases of their economic growth.

How do you evaluate poverty rates under the Egyptian economy?

The time gaps in poverty and growth indications stand as great challenge, due to the obstacles faced by the World Bank in obtaining information periodically for that indicator. Lack of information in general is an obstacle for the bodies and institutions working on evaluating the economic situation. I believe that the current poverty rates are still high, especial in areas like Upper Egypt.

The current poverty rates are about 26%, while Minister of Planning Ashraf El-Araby mentioned last week in a press conference that the government’s short term plan in FY 2015/2016 until 2018/2019 aims at reducing the rate to less than 17%.

What is your evaluation of the growth rates?

The World Bank’s expectations for the growth rates of the Egyptian economy were and still are around 4.3% of the GDP by the end of this FY 2014/2015, while the government believes that it would reach a rate of 3.8% of the GDP by the end of the same year. Generally, it is a good sign that the government is being conservative in its evaluation of the economy.

How much is the World Bank’s funding portfolio for Egypt?

Currently, it amounts to $5.5bn, and will be increased with economic reforms and investment projects.

How do you evaluate the new Civil Service Law after its adoption?

The new civil service law is the bravest law adopted in the last period, because of what it addresses in problems accumulated over the past years regarding the wages’ structure of different state sectors, as well as developing systems of reward and promotion for civil servants.

Adopting the law is to a great extent similar to the decision of correcting and improving the subsidies system for bread and food products taken by Minister of Supply Khaled Hanafy. These procedures were perceived in past as problematic and sensitive issues that should not be touched.

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