A boy carrying bread on his head walks away from a crowd of riot police along a road which leads to the U.S. embassy, near Tahrir Square in Cairo, Nov. 29, 2012. (photo by REUTERS/Amr Abdallah Dalsh )

Budget Deficit Threatens Egypt With Bankruptcy

Author: Al-Hayat (Pan Arab) Posted December 15, 2012

Cigarette packs disappeared from the street vendors’ booths, supermarket owners stopped stocking the usual large quantities of foodstuffs, and mineral water bottles once again became scarce. This is despite President Mohammed Morsi’s decision, in the morning of the day before yesterday [Dec. 11], to stop — or maybe postpone — the implementation of his decree issued earlier that same day regarding changing the tax rate.

SummaryPrint As Egypt faces severe political and economic crises, the repercussions of the increasing deficit could bankrupt the state, Amina Kheiri reports.
Author Amina Kheiri Posted December 15, 2012
Translator(s)Kamal Fayad

The business community’s reaction was to be expected — both from a historical and cultural standpoint — and only came to confirm that merchants often rush to take preemptive measures of this sort, in order to guarantee the highest possible profit margin.

The population’s reaction, on the other hand, took the form of delayed and simmering anger, ready to boil over when the president resumed implementation of his original decision to hike taxes, once he felt assured that the “boiled Constitution” will be ratified.

Jurists not affiliated with “political Islam” denounced the decisions and their deferral, because they aimed to tackle the Egyptian financial crisis by burdening the vast majority of people with the cost of fixing it, through a decrease of subsidies and a near total lack of a social security net.

Malek Adly, the head of the Egyptian Centre for Social and Economic Rights at the Egyptian Initiative for Personal Rights, said that the essence of the problem did not only lie in these policies’ lack of justice — itself an important revolutionary gain — but also in the fact that they were adopted in the midst of a severe political crisis caused by a constitution that the Muslim Brotherhood and its leader were using to try and end the transitional period in a manner that suited their own interests alone.

He pointed out that the purpose of issuing decrees to amend the laws taxing income, sales and real estate transactions was to create new income tax brackets, the most important of which was the bracket that imposed the same tax rate on people earning between 45,000 and 1 million Egyptian pounds ($7,290 and $162,000).

This clearly indicated the continuation of the old policies espoused by the former finance minister —  and fugitive to London — Youssef Boutros Ghali, which were based on reducing the number of brackets and imposing on them convergent rates that did not reflect the principle of progressive taxation, according to which the tax rate increases the higher the yearly income is.

Adly denied that these deferred decisions to impose higher sales taxes only affected leisure goods and goods harmful to health, such as cigarettes and alcoholic beverages, because they also included food items such as cooking oils, as well as fertilizers, water-based cement, disinfectants and pesticides.

Adly thought that the two years of acute political crises that followed the previous regime’s fall transformed existing structural problems into short term urgent crises that necessitated speedy state intervention to rectify the severe financial imbalances — either in the budget deficit (equaling 170 billion Egyptian Pounds [$27.55 billion] in the 2011-2012 fiscal year), or the balance of payments deficit and dwindling foreign reserves, which have reached a point that portends an inability to provide the country with its minimum needs of imported energy resources.

In terms of numbers, the budget deficit in the first quarter of this year amounted to 50 billion Egyptian Pounds ($8.1 billion), or 200 billion pounds ($32.4 billion) for the full year, which equates to approximately 13% of GDP — an amount that threatens to bankrupt the state.

Adly declared that “this deficit, supplemented by the increased inflation rate, would make it very difficult for the government to fulfill its pledge to the International Monetary Fund (IMF) to cut its budget deficit to 8.5% of GDP by the end of the 2013-2014 fiscal year.”

Praise

It is worth mentioning that Andreas Bauer, the head of the IMF’s mission in Egypt, during his visit to Cairo last month, praised the Egyptian government and the economic program it had adopted to deal with the urgent economic and social challenges, as well as to address any remaining weak points.

At that time, the IMF welcomed “the general financial reforms and the Egyptian government’s plan to reduce wasteful spending and reform energy subsidies so that they only benefitted the most disadvantaged of people. It also commended the government’s economic reform program and its attempts to reform the taxation system through the implementation of progressive tax rates on income, in addition to expand the general tax base imposed on sales,” and other currently deferred decisions.

Adly affirmed that the deteriorating economic situation pushed the government into adopting harsh austerity measures in order to placate the IMF, particularly because [Prime Minister] Hisham Kandil’s government aimed to spend the first payment of the IMF’s loan next January.

Such harsh austerity policies and economic decisions are usually taken during periods of political harmony, as well as when the rulers enjoy a great deal of legitimacy and popularity; conditions that are currently absent in Egypt, according to Adly.

He added: “The divisions and disputes between the various political forces, in conjunction with the heightened expectations of Egyptians for a better life after the fall of former President Mubarak’s regime, will make implementing such austerity policies a costly affair; a cost that the president, his supporters and party will have to pay at the first upcoming democratic elections. Amending the tax laws and then deferring their implementation can only mean that the worst is yet to come.”

It should be noted that Morsi issued decree No. 100 of 2012, which prescribes raising the cost of imported fuel oil used in electrical power plants from 1,000 to 2,300 Egyptian Pounds ($162 to $373) per ton, which complements previous decisions to raise electricity prices, all in the context of the policy to reduce energy subsidies.

Morsi had also previously issued a presidential decree that deregulated the price of automobile gasoline (95 Octane), and another that set the price of subsidized gas cylinders at 8 pounds ($1.30) starting next month, while raising the non-subsidized price to 30 pounds ($4.86).

Read More: http://www.al-monitor.com/pulse/business/2012/12/budget-deficit-threatens-egypt-with-bankruptcy.html

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