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Al-Sisi’s government engineers bold reforms, more structural adjustment required: IMF - Daily News Egypt

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Al-Sisi’s government engineers bold reforms, more structural adjustment required: IMF

Foreign investors applaud removal of subsidies, VAT, liberalised exchange rate, investment and banking reform, but demand more liberalisation policies from the Egyptian government


“Let me start with the good news. The journey to higher growth has already begun,” Christine Lagarde announced at the Egypt Economic Development Conference held last year in Sharm el-Sheikh that outlined Al-Sisi’s plan for economic reform.

Egypt’s reform has been celebrated by a number of international financial institutions and foreign investors; however, greater measures are needed according to the International Monetary Fund.

According the IMF a balanced budget is the main goal for Egypt. The 8.9% of the GDP budget deficit has expanded as a result of high expenditure on wages, around 14% of GDP, and subsidies and interest on past loan payments which make up 28% of the 2015/2016 budget.

While a number of organisations have applauded Egypt on the removal of energy subsidies, they expect Egypt to push further with reforms by removing most, if not all, subsidies. According to Christine Lagarde: “Beginning this process was a major achievement. Continuing it will be equally important, and completing it for good, the ultimate goal.”

Increasing revenues through taxation on goods and services has also been a major objective of both the government and the IMF despite the desire for the removal of the capital gains and income tax.

A value-added tax (VAT) has been approved by the cabinet, but has not yet been approved by parliament, who is hesitant to implement the tax due to the backlash it is likely to receive from the public. Banks have also refused to implement VAT.

The Egyptian government is facing a massive shortage in finances as a result of capital flight, the collapse of tourism, decreasing exports and increasing imports have resulted in the draining of reserves. Besides the implementation of a VAT tax, the IMF wants Egypt to liberalise the exchange rate.

However, according to the April 2016 World Economic Outlook published by the IMF, the fund claimed that floating the exchange rate would only reduce the impact of capital shortfalls, not reverse it. The lack of capital to emerging economies is a result of increased profits in advanced economies due to higher quality labour and commodity markets, diverting investment from countries like Egypt.

The budget deficit has resulted in a lack of credit for social and infrastructural development and has forced the Egyptian government to seek financing from abroad.

Since negations for a loan from the IMF stalled in 2013, a number of international donors suspended aid to Egypt, including USAID, which has reduced economic funding yo the Egyptian government from $1.3bn to $200m according to Michele Dunne, a senior associate with the Carnegie Endowment for International Peace.

According to documents obtained by Mada Masr as well as former deputy prime minister Zied Eldin, the first instalment of a World Bank loan is contingent on the implementation of a number of structural adjustment policies prescribed by the IMF and outlined by Christine Lagarde’s speech in 2015. This includes new investment laws, removal of subsidies, liberalisation, and privatisation of utilities, VAT and other trade and economic liberalisation measures. The loan can be continuously delayed until the IMF is satisfied by Egypt’s commitment to reform.

She stated that further work can also be committed to openness to trade and the business environment in which Egypt ranks 119 out of 142 in the World Economic Forum’s Competitiveness Index.

Lagarde stated that the way Egypt could attain a top 50 spot in the index is the implementation of the new investment law, which allows for an untaxed transfer of profits abroad.

“Yet, investment only goes where there is confidence and policy certainty,” said Lagarde.

Egypt and the Middle East have faced a number of challenges since 2011 and social unrest, changes in government and uncertainty have been cited as the main concerns for businesses and investment. The lingering concern of domestic and regional security have played a major role in frightening investors.

When asked about Egypt’s risk of doing business and what the IMF plans to do to reduce risk in Egypt, José Viñals, director of the Monetary and Capital Markets Department at the IMF, stated that “these risks are of a non-economic nature, the solution must come from elsewhere”.

Many investors believe that the regime unstable, losing popularity and facing mounting discontent as a result of human rights abuses, the selling of the Tiran and Sanafir islands, and even the economic reforms themselves.

Long term poverty has risen to 26.3% according to CAPMAS, while 17.2% do not have access to their daily nutritional needs and 13.4% of the population does not have access to any income according to government statistics.

In order to fulfill social justice, the parliament is working on passing a cash transfer programme to help people pay for goods and services, according to Zied Eldin. However, during a lecture at the American University in Cairo, Zied Eldin admitted that without transparency it is unlikely to be effective.

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https://www.dailynewsegypt.com/2016/06/08/al-sisis-government-engineers-bold-reforms-structural-adjustment-required-imf/
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