July 7, 2014 Leave a comment
Egypt’s new President, former military head Abdel Fattah el-Sisi, is beginning to show his hand on economic policy – but despite tax hikes intended to appease populist demands, his regime is still rooted in the support of the country’s business elite.
Following Mr Sisi’s formal election in late May, after nearly a year at Egypt’s helm following last summer’s military coup, the Finance Ministry has revealed plans to raise taxes on companies and high earners. These initiatives are being used by the government to bolster its claim to be pursuing the redistributive policies demanded by protesters in Egypt’s 2011 popular uprising.
The policy drive began when Finance Minister Hani Qadry announced plans for an additional 5 percent tax on individuals with incomes in excess of 1m Egyptian pounds (around $140m) in May.
Although Mr Qadry was keen to stress that the tax would only be in place for the next three years, the announcement of a further tax, this time a 10 percent capital gains tax intended to raise $1.4bn for the state coffers, hit the stock market hard. The country’s key index fell by over 4 percent in two days.
The Finance Ministry feared the market’s reaction and immediately moved to announce that exemptions would be added to the legislation for low value dividends. The tax was also amended to halve the rate paid by the country’s biggest investors – shareholders who own more than 25 percent of a company – thereby tempering the effects of the legislation considerably.
The government then announced that it would abolish a 2013 transactions tax, and that state employees would receive a 10 percent raise beginning at the end of this month. The pay rise will further widen Egypt’s budget deficit which is currently estimated to be around 12 percent of GDP.
According to Amr Saleh-Ahmed, tax consultant at Metlife Egypt, many in the market believe the new taxes are a mistake.
“The tax will definitely raise revenue for the government, but a lot of the gains will disappear because of lost investment,” he tells This is Africa.
“The government says this tax regime will only be in place for three years; however, it is possible that it will go on longer. They are doing this because of holes in the budget, and holes in the budget will not disappear after three years,” he says.
Nevertheless, Egypt’s investors are still treating Mr Sisi kindly, and despite some volatility the market is performing far better than at any time under deposed President Mohammed Morsi. A number of prominent investment decisions have recently been announced, with British Petroleum’s plans to invest $1.5bn in Egypt this year to boost production of natural gas heading the list.
Meanwhile Egyptian billionaire Nassef Sawiris, whose family heads the sprawling Orascom group, announced on 10 June that he will set up a new investment firm with backing from investors in the Persian Gulf, Europe, and the United States. The firm claims to have already invested $55m in Egypt’s health sector.
“Examining the macro picture of Egypt, one would realize immediately that the economy needs fiscal consolidation. This is a measure that would entail increasing the revenue side and reducing the expenditure, and hence this tax would be a step in this direction,” Wael Ziada, head of Research at the Egyptian investment bank EFG Hermes, tells This is Africa.
But Mr Ziada believes that for now the planned taxes will actually have relatively little effect, neither making investors poorer nor the government richer. The true aim may well be to provide the appearance of softening the blow of coming austerity measures, including cutting fuel subsidies.
“The importance behind this move is to usher a clear message to the masses, who perceive investors in the stock market as the highest income bracket, that everyone with no exception will have to shoulder the burden of fiscal consolidation – especially if you are about to deregulate energy prices and restructure subsidies,” he says.
The government is attempting to fill gaps in the budget by cutting spending, especially on social welfare programmes for the poor, and is planning to issue an international bond with a value of between $750m and $1bn sometime this year.
Mr Sisi’s regime has also hired US consulting firm Strategy & (formerly Booz and Company), and Bermuda-based US investment bank Lazard to advise on economic policy. The firms are promoting pro-austerity policies that will prepare Egypt for negotiations for a loan from the International Monetary Fund.
According to Joel Beinin, professor of Middle East history at Stanford University, these firms now appear to be some of the key actors shaping Egyptian economic policy.
“This suggests that there is very likely to be a continuation of the main lines of economic policy followed in the last decade of Hosni Mubarak’s rule, although Sisi will try to cordon off the military’s economic activities from market competition and privatization,” he says. “If this economic program can be successfully installed, the rich have nothing to fear.”
Egypt’s business world is strongly tied to the military establishment that forms Mr Sisi’s power base, and the chief executives of many of its largest companies are former generals. For now, all signs indicate that Mr Sisi stay the course approved by the country’s wealthy investors. Egypt’s poor, however, face the likelihood of austerity measures that will continue to push living costs higher.
This article was originally published with Financial Times: This is Africa on June 17 2014.