Egypt's Dh35bn tax 'black hole' and Morsi's dilemma

A crippled economy could force the Islamist leader from power - but so could the unpopular measures needed to repair it. Bradley Hope reports from Cairo

A woman carries a gas cylinder distributed by the army in Cairo. Even before the uprising in the country, the government often had problems delivering subsidised consumer goods to the poor.

CAIRO // Tax evasion and poor enforcement of Egypt's tax code has cost the state treasury at least 66 billion Egyptian pounds (Dh35.65bn) since 2000.

The black hole in tax revenues is the latest sign of an economic crisis that is fast becoming the pivotal political issue as opposition forces refuse to leave the streets in protest against the Islamist government led by Mohammed Morsi.

"We can't go on like this for much longer," warned Alaa El Shazly, a professor of economics at Cairo University and board member of the Egyptian Central Bank. "I believe that the critical state of the economy will be the spark that leads to the overthrow of the Islamists from power. Egyptians won't let things get to a desperate level."

The failure of government agencies, companies and individuals to pay their taxes is a symptom of a weak tax collection system, Mr El Shazly said.

Officials at the ministry of finance and tax authority refuse to comment on the amount of unpaid taxes, but Samir Radwan said that when he was minister of finance in 2011, tax authority officials gave a similar estimate.

"This problem is because of poor enforcement and loopholes in the law," Mr Radwan said. "This was one of the main priorities after the revolution, but it fell to the side when the political situation started to deteriorate."

Tax revenue accounts for about 70 per cent of the federal budget, according to the tax authority. The government collected about 170bn Egyptian pounds in taxes during the 2011-2012 fiscal year, it said in February.

Mr Morsi's government has not made strides to reform the byzantine tax administration system. It has opted instead to pursue back taxes from large companies, a strategy that has come under criticism for being selective and targeting some businesses rather than others.

The government's most prominent target is one of Egypt's largest companies, Orascom Construction, which is controlled by the Sawiris family. The government says the company owes 14bn Egyptian pounds from the sale of a cement business to LaFarge of France in 2007. Orascom has denied it owed the taxes, citing a 2005 law that it says exempted companies from capital gains taxes.

The government placed a travel ban this month on Nassef Sawiris, Orascom's chairman, and his father Onsi, a former chairman. The two sides were thought to be near a settlement in which Orascom would pay about 7bn Egyptian pounds.

Yousef Boutros Ghali, Hosni Mubarak's finance minister from 2004 to 2011, made tax reform a priority during his tenure. He cut the tax rate to encourage payments from companies, but the 2011 revolt that forced Mubarak from office ended his reform efforts. He was sacked by Mubarak in a cabinet shuffle and fled the country. Since then, he has since been sentenced in his absence to 30 years in prison for squandering government funds and assets.

Tax collection problems are only one symptom of Egypt's crumbling economy.

Inflation hit 8.2 per cent in February, and foreign currency reserves have dropped from about $36bn at the time of Mubarak's fall to $13bn today. Meanwhile, unemployment has risen to more than 13 per cent, and fuel shortages are becoming more common because the debt-laden ministry of petroleum is struggling to get state banks to issue new letters of credit.

The ministry of aviation said last week it was considering closing Cairo's international airport at night because of $779m in losses in the past two years. The ministry did not disclose its total budget.

On Thursday, the credit rating agency Moody's downgraded Egypt's sovereign rating to Caa1, which means its rating is "poor quality" and has a "very high credit risk". It estimated the chance of a default on foreign debts within five years was 40 per cent.

"The sustained deterioration in Egypt's external payments position and government finances have reached a level at which the country's vulnerability to economic or political shocks has widened and the risk of default has consequently increased," Moody's said.

A $4.8bn loan from the International Monetary Fund, which would unlock billions of dollars of additional aid, does not appear close to being signed.

The loan has been repeatedly delayed since 2011 because the IMF wants Egypt to agree to an economic reform plan that would balance the budget through increased taxation and reduced spending on energy and food subsidies. Both would be unpopular and provide the opposition with even more ammunition against the government.

Even if an agreement is reached, the infusion of cash would be a stopgap measure. In the past six months, Egypt has spent most of the $5bn in loans it received from Qatar. On Sunday, it received a commitment of $2bn from Libya.

Analysts say Egypt needs a top-to-bottom reform of its economy and a huge increase in foreign investment to have even a hope of keeping step with the hundreds of thousands of young people entering the job market every year.

But reform is now stalled because of the political deadlock between the Islamist supporters of Mr Morsi and a scattered, yet intransigent, opposition that is pushing for the replacement of the government and the end of Muslim Brotherhood rule in Egypt.

The amount of Egypt's foreign currency reserves when Mubarak fell from power was enough to cushion a short political transition. But after more than two years of instability - first under the Supreme Council of the Armed Forces and now under Mr Morsi - its current $13bn in reserves is barely enough to cover the cost of three months of imports.

Mr Morsi has urged his opponents and critics to stop protesting and join in a national rebuilding campaign. But the opposition, led by the umbrella National Salvation Front, have refused to budge unless he grants wide-ranging political concessions. The Front has called on him to replace his cabinet and for changes to the controversial constitution.

The political standoff that has, for the moment, pushed aside any move for political reform was on display over the weekend, when thousands of protesters clashed with police outside the Muslim Brotherhood's headquarters in the Cairo neighbourhood of Mokattam. At least 100 were injured.

The street battles were spurred by an attack on journalists and activists a week earlier outside the headquarters, but were also fuelled by widespread sentiment that the Brotherhood is attempting to monopolise power rather than achieve the revolutionary goals of better quality of life and justice.

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