Egyptian Finance minister: Reform ‘must start today, not tomorrow’
Cairo - Amr el-Garhy might be the most unfortunate Finance minister in modern Egyptian history.
When he was assigned the post in the government of Prime Minister Sherif Ismail in March, Egypt’s budget deficit was 9.9% of gross domestic product (GDP), its foreign debts were $53.4 billion and urban inflation was 8.4%.
A few months into the job, the situation has gotten worse as he and his team work to redress the financial balance and rescue the economy. In the process, they have concluded that Egypt is in urgent need of financial and tax reform.
“And this reform cannot be delayed. It must start today, not tomorrow,” Garhy told The Arab Weekly in an interview. “If we do not initiate the reform today, the cost will be exorbitant.”
The reform effort, which has included electricity, water and transport subsidy cuts and a newly approved value-added tax (VAT) that will raise commodity prices sharply, has created public outrage.
This comes on top of a more than 40% increase in the price of vegetables, fruit, chicken, other meat and electrical appliances over the past three months.
Garhy and his colleagues said they will do their best to shield the poor — almost 27% of the population of 91 million — from the downside of the reform measures by exempting commodities consumed by the poor from the new tax and increasing spending on social welfare programmes.
“We have exempted around 65 commodities categorised as ones consumed by citizens with limited income,” Garhy said. “We have also raised spending on social welfare programmes to $15.8 billion from $3.7 billion.”
His critics accuse him, however, of preferring easy solutions to real reform. One of them is Ahmed al-Tantawi, a legislator who voted against the VAT in parliament.
Tantawi says Garhy is only out to collect money, not from the rich, but from the poor to bridge the budget deficit.
“He is only honestly implementing the instructions of the International Monetary Fund (IMF),” Tantawi said. “Instead of making real reform, Garhy and his government take money from the pockets of the poor, making them poorer.”
He said when parliament debated the VAT in August, he and like-minded members of parliament proposed alternative taxes for bridging the budget deficit of $33 billion, including a real estate tax and taxes on citizens with high incomes.
“Unfortunately, none of these suggestions were listened to because the government only wants to take the easy route of squeezing the poor dry of money,” Tantawi said.
Economists say Garhy and his government have their hands tied and have few options to choose from. They need money instantly to prop up foreign currency reserves — now $16.5 billion — which is why they are applying for a $12 billion loan from the IMF. They also need to bridge the budget deficit and this can be done with additional revenue.
The VAT is predicted to bring in up to $3.6 billion in annual revenues.
“Although this will be a small contribution, the tax is one step on the road to the needed tax reform,” said Yumn al-Hamaki, an economics professor from Cairo University. “Together with the tax, the government will incentivise production, reduce spending and fight corruption, which will redress the economic situation.”
Other economists say Egypt has to slash the $5.4 billion a year it spends on electricity subsidies to reduce the budget deficit on one hand and honour its obligations to foreign petroleum companies, especially after raising the price of buying the natural gas necessary for the operation of electricity plants from these companies on the other.
Garhy said the austerity measures, subsidy cuts and the new tax have nothing to do with the IMF loan but are prerequisites for survival.
“Some people call these reforms bitter and painful, but I like to call them indispensible,” Garhy said. “We have no option but to go ahead with these unpopular reforms.”
“Our economy is diverse and we have a very good chance to make this economy stand on its feet again,” he said. “To do this, we have to take some painful measures or things will get out of control.”