By MONA DEIAA, translated by Samar Samir, Rany Mostafa, and Sara Ghali
CAIRO: Facing major economic challenges and going forwards with reforms are “musts” to attract more investment and widening the protection umbrella of the most-impoverished brackets, Minister of Finance Hani Qadri said he will tell the participants of Euromoney Egypt Conference due to be held Tuesday and Wednesday.
In an interview with Youm7 Friday, the minister announced certain measures taken by Egypt to enhance its financial situation concerning drafting new amendments to the Sales Tax Law; he also announced that a mission of the International Monetary Fund (IMF) will arrive in Egypt in September to conduct a review for the economic outlook in Egypt.
2.5% increase in prices
Egypt is drafting new amendments to the Sales Tax Law to apply the value-added tax (VAT) system, through which prices could witness a one-time increase of 1.5-2.5 percent, Qadri said, adding that the amendments are expected to be completed in three weeks and come into force this year.
The amendments draft will be published on the official website of the ministry for discussions before being approved, Qadri said.
The IMF has studied the inflationary effects of price rises in case that a VAT was applied and has expected that prices would rise by 1.5 percent, while the government expected that the prices will jump by 2.5 percent in the worst case, Qadri continued.
He clarified that the approval of the new amendments has been delayed due to holding several discussions with the concerned bodies of the Federation of Egyptian Industries, Federation of Egyptian Chambers of Commerce, and other industrial entities.
Regarding negative social and economic effects due to expected price rises, Qadri said ministerial meetings are studying such effects on various social brackets; those who are affected will be compensated in case, he added. However the compensation mechanism has not yet been determined.
Egyptian society has been divided into ten brackets; each represents 10 percent of population. Due to the expected price hike, the rate of monthly spending for the poorest bracket will increase by 0.5 percent, while the richest bracket’s spending rate will go up by 5.3 percent, he noted.
Foods exempt from VAT
Food goods and vehicles will not come under the VAT, Qadri added.
The VAT system will be applied on owners of companies, projects with capital of 500,000 EGP or above, he noted. Under the Sales Tax Law, those who own trade activity with 54,000 EGP and industrial activity with 150,000 EGP are subject to the currently applied tax law.
To encourage competitiveness, the minister announced a new tax system on unregistered traders that may be introduced as a tax to be taken from their annual profits.
Awards for invoice collectors
New amendments aim to control billing as those who refuse to give purchase bills will be fined the value of purchased goods, Qadri said.
Privileges will be given to consumers, traders or manufacturers who issue invoices; such privileges will be granted in the form of a partial refund of taxes paid provided that they own tax bills on purchased goods and services.
“We will make a draw in all governorates and grant financial awards for around 1,000 citizens who get invoices in each governorate,” Qadri said, adding “an annual draw with prize of 5 million EGP will be granted to a number of citizens who raise invoices for their purchases.”
This system aims to get rid of phenomena of false invoicing, the minister said.
The bonds, a new financial instrument for the current year
The government is working on amending a number of economic legislatives, besides applying the adding value, until reaching “legislative stability, to correct the economic path,” the minister said.
From the legislations that are under-amending: law organizing tenders and bids, bond law and customs law. Qadri announced tendering bonds as a financial instrument during 2015/16 FY to cover the financial gap in the domestic or foreign markets.
The amendments of the bond law were reviewed by the Islamic Bank to ensure compliance from the economic side, to be sent to Al-Azhar to be approved legitimately.
About the amendments of the tenders’ law, some of its articles were amended to suit the update of the stock and the services’ markets. It is now in the review stage inside the ministry; the Ministry of Finance received suggestions from ministries and governmental bodies, and the law is to be subjected to limited social dialogue, then is to be presented to the economic group in the prime ministry.
Qadri offered no comment regarding postponing the capital gains tax.
IMF mission to visit Egypt before Eid al-Adha
An IMF mission is scheduled is to visit Egypt this month before Eid al-Adha, to review the economic scene in Egypt amid the global events, according to Qadri.
It is expected that the macro-economic structure is to be amended totally; this amendment could be adjourned to the main mission visiting Egypt in the first quarter of 2016.
According to Qadri, it is ‘early’ to amend the economy’s expectations according to the changes the global economy witnessed. Moreover, it is not determined whether it could reach the major economies, but until now, the “changes are in favor of Egypt.”
“I say this with full awareness, as the global prices are declining and Egypt is a pure importer for the preliminary products.”
The minister referred to the risks that could affect our tourism exporters negatively, but said the chance should be seized to grab more confidence in the Egyptian economy.
He likened the situation to that happened in 2008 in the global financial crisis, when Egypt witnessed the attraction of direct and indirect capitals as an alternative to the affected markets.
The decline in oil’s price will not decrease the power subsides, Qadri said, adding that the decline in global prices has not affected the general budget positively, which he justified by the existence of importance variables other than the global oil price, such as the exchange rate and the change in the consumed amounts, which go in different directions.
He added that the decline of petroleum products subsidies by 40 billion EGP did not reflect positively on the deficiency of the budget, because of the financial situation of the Egyptian General Petroleum Corporation. “The Arab brother countries provide financial facilities for the purchase of the petroleum products. The Corporation has late payments for foreign partners that will be fully paid by the second half of 2016. The late payments reach $6.4 billion, while only $3.1 billion were paid.”
The budget deficiency opposes the expectations and records 11.5 percent, compared to the previous year
The general financial indicators are on the top issues to be discussed with the IMF, especially the trends of the budget’s deficiency.
The deficiency recorded a decline during the fiscal year 2014/2015 by 0.7 percent, compared to the previous year, totaling 11.5 percent.
The minister referred to that by excluding the grants received during FY 2013/14 and 2014/15; we find that the total deficiency increased by 4 percent points, which was described by the minister by “unprecedented success for the financial policy in Egypt.”
The budget targeted in the last year achieved a total deficiency of 10 percent of the domestic product, but the reality is that the targeted rate was not achieved but raised to reach 11.5 percent, Qadri added.
The financial gap and the Arab aids
The minister estimated the financial gap of the economy as $36 billion. He noted that the government is relying on filling the gap by managing the economy through a reforming system, including structural and legislative reforms.
“We receive aids from the brother countries for the Egyptian economy to answer the immediate needs, in forms of financial facilities, such as petroleum products, to get over a temporary period of foreign currency’s insufficiency; besides, there is a support from the political leadership till the economy comes back to its right path,” the minister said.
How will the Egyptian government fund mega national projects amid an increasing budget deficit expected to reach 8.9 percent by the end of 2015?
Minister Qadri explained the government policies currently developed to fund these projects include encouraging foreign investments and supporting partnership-based investment plans with the private sector through Preferred Provider Organization (PPO) and Purchasing Power Parity (PPP) plans.
He added that the government embarks on obtaining soft long-term loans from international banks including the International Bank for Reconstruction and Development (IBRD,) the European Bank for Reconstruction and Development (EBRD,) the Islamic International Arab Bank and the African Development Bank.
“Infrastructure projects will be funded through governmental investments to ensure their rapid implementation,” said Qadri.
As for a potential recurrence of a short-term funding method adopted in the drilling of the new Suez Canal, Qadri said “the distinctiveness of the canal required developing new financial norms rather than traditional ones.”
In response to skeptics in the economic return of digging a new channel, Qadri said “We have started to see signs of positive impact and economic return of the new waterway but it is too early to talk about details now.”
The crossing toll is a part of the benefits gained from the new canal but “the real fruit stems from the related development projects and logistic services provided to the ships,” he added.
Zohr gas field
The proceeds of the new gas field found off of Egypt’s Mediterranean coast will fund development projects, said Qadri.
“The new gas field will have a positive financial impact as it will save the state’s hard currency used to import gas,” he said.
The importance of the new discovery is not limited only to the amount of gas it provides, said Qadri, but also to the geological structure of the area which indicates a high possibility to discover new fields in the future.
Minimum wage policy
Qadri denied the ministry is considering raising minimum wages for government employees in the near future adding that minimum wages were been already raised by 60 percent from 700 EGP per month ($95) to 1,200 EGP per month in 2014.
“Instead, the government last month has increased the exempted tranche of the income tax to 6,500 EGP instead of 5,000 EGP as monthly income,” said Qadri.
The government intends to direct its financial surpluses to support public services and social plants including mega housing projects for low-income and middle class citizens, according to Qadri.
“Eleven billion EGP of the current fiscal year’s public budget has been allocated for housing projects while 3 billion EGP has been assigned to support healthcare for most impoverished segments,” the minister said.
“The government has a strong will to complete the reforms required to bolster the Egyptian economy,” and to widen the umbrella of the social protection programs, said Qadri.