Patrick Werr: Egypt should swallow this bitter medicine to put its finances on the right track

Spending cuts, more taxes, a devaluation of the currency and privatisation. The measures have all the elements needed for a traditional IMF agreement, writes Patrick Werr.

Egypt’s economic managers seem to be cooking something up these days. After serial crises and years of dithering, the government seems about to push through a package of reforms that could begin to put its shaky finances back on track: spending cuts, more taxes, a devaluation of the currency and privatisation. The measures have all the elements needed for a traditional IMF agreement.

If true, it would be one of the best things to happen to the economy in years. It would give investment a boost and stop a steady deterioration in business conditions that has been a yoke around the neck of the private sector.

The problem is that despite the reports, no one can really be sure what the government is up to. In the past, it has announced new measures only to back down when powerful interests object. Plus no one is sure if it indeed plans to go for an IMF agreement. If it offered some sort of clear road map, businesses might be encouraged to start making investment decisions now rather than later.

Egypt has been plagued by unsustainable budget and balance-of-payments deficits since the 2011 uprising, and an overvalued currency has devastated the country’s international trade. According to the national purchasing managers’ index, private business activity contracted last month for the ninth month straight.

Several measures are being proposed to deal with the budget deficit, including a plan to expand the country’s 10 per cent value-added tax (VAT) to include services, in addition to manufactured goods, which the tax already covers. The VAT plan was supposed to have been implemented a year ago but has been delayed repeatedly. Parliament is now expected to approve the VAT law in weeks.

The Finance Ministry also plans to increase revenue from real estate taxes and customs duties and to reduce bonuses paid to civil servants, measures which, though good for the economy, are sure to be unpopular with the public.

The government’s budget for the fiscal year that began on July 1, approved by parliament in the final days of last month, will have a deficit equal to 9.8 per cent of GDP, down from the 11.5 per cent forecast for last year. This would still leave Egypt’s deficit as one of the worst in the world. More than 30 per cent of its 974.8 billion Egyptian pounds (Dh403.24bn) in expenditures will have to be financed through borrowing, which has become increasingly hard to find.

At the same time, the country’s current-account deficit deteriorated dramatically after a collapse in tourism caused by the downing of a Russian plane over Sinai in October, a slump in Suez Canal revenue and a reduction the amount of money Egyptians working abroad sent home. This renewed pressure on the central bank to reduce the official exchange rate of the pound, which was already overvalued.

Tarek Amer, the bank’s governor, said this month that the country’s policy of targeting the exchange rate over the past five years had all been a grave mistake. The central bank had spent almost all of US$22.5bn in grants, loans and deposits it had received since the 2011 uprising to support the currency, he said in a series of telephone interviews to local newspapers.

Mr Amer, who took up his post in November, implied – but did not explicitly say – that more devaluations such as one he implemented in March one were on the way.

“I will take the decisions that are right from my point of view and bear the responsibility … just as what happened in devaluing the price of the pound and eliminating restrictions on depositing dollars and other matters,” he said.

More than a week has passed since the interview, but still no devaluation. Meanwhile, the pound weakened from 11 to the dollar early this week to 11.50 on Tuesday.

The central bank has also said it plans to sell shares in three state-owned banks. And Al Shorouk newspaper quoted an unnamed official as saying the government planned to sell a stake in the Food Industries Holding Company by the end of the year in addition to stakes in other companies.

Spending cuts, more taxes, a devaluation of the currency and privatisation. These are precisely the measures the IMF traditionally bases its structural adjustment programmes on.

Reuters last month quoted an unnamed cabinet minister as saying Egypt had started talks with the IMF. The central bank denied that, but said it was eligible for up to $10bn by agreeing to a structural reform programme.

In addition to the IMF, the reforms could unlock billions of dollars in funds from the World Bank, the African Development Bank, Gulf countries and other donors.

Let’s hope the government has the fortitude to press ahead.

Patrick Werr has worked as a financial writer in Egypt for 25 years.

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