Egypt’s economy is entering a phase of recovery thanks to multiple economic reforms
Subsidy cuts, new taxes and “bitter pills” were introduced to enable a smoother recovery of Egypt’s economy.
From the analytical perspective of the economic situation of Egypt, there are several factors suggesting the recovery of the country’s economy.
Those factors include the growing support of the Gulf countries, where Saudi Arabia, Kuwait and the UAE are pumping billions of US dollars in the Central Bank of Egypt. The Egyptian economy is thus granted the opportunity to withstand the pressures amounting from the collapse of production and decline in tourism.
Government’s attempt to adopt austerity policies aims to boost revenues and cut its deficit while attracting investors. To achieve the desirable outcome, the government has taken several steps:
Fuel prices rose as the government removed a portion of its subsidy. Although this decision has faced a lot of criticism, Egypt’s President Abdel Fattah el-Sisi has defended his recent decision to partially scrap subsidies on fuel, calling them a necessary “bitter pill”.
– Egypt plans to build a new channel parallel to the Suez Canal in a 60 billion Egyptian-pound ($8.4 billion) venture to boost capacity at the vital global waterway.
President el-Sisi pledged to give up half his salary and property and called on the Egyptian people to make similar sacrifices, trying to prepare the public for a period of economic austerity.
President el-Sisi agreed on a law to impose income taxes on both resident and non-resident Egyptians on their commercial, industrial and professional activities abroad, to encourage them to make Egypt “the centre of their activities”.
According to the law, the income tax will apply to professionals such as accountants, doctors, engineers, and teachers who have earned income through providing services in Egypt and abroad, but whose main earnings come from work in Egypt. The tax will only apply to extra earnings.
Egypt has introduced a tax on stock market gains and plans to bring in value-added and property taxes too.
New electricity tariffs aim to trim the state’s subsidies for the electricity sector by 67% over five years to reach 9 billion Egyptian pounds – instead of the 27.4 billion Egyptian pounds that were already allocated in the fiscal year 2014/15.
The new budget envisages a deficit of 240 billion Egyptian pounds ($33.6 billion) in the fiscal year ending June 2015 – as opposed to the initial 292 billion Egyptian pounds.
Egyptian government ministers visited different Arab countries to encourage Arabic investments in Egypt.
There was a review of the decision to reduce the expenses of representation offices abroad and raise the percentage that had been made by the government from 15% to 30%.
The Monetary Policy Committee (MPC) of Central Bank of Egypt decided to raise the benchmark interest rate by 100 bps to 9.25%, aiming to curb inflationary pressures following a cut in the fuel and electricity subsidies. The government has revised the prices of several regulated items within the CPI basket including fuel, electricity, and tobacco as part of the 2014/2015 fiscal consolidation plan.
While the fiscal consolidation will improve the fiscal sustainability over the medium-term, a relative price increase is inevitable. The direct first round effect of these price adjustments led to a level shift up in the headline CPI in July 2014, while the indirect and second round effects could be reflected in both the headline and core inflation rates during the quarter ending in September 2014 at varying degrees, which pose an upside risk to the inflation outlook. Therefore, while the MPC acknowledges the favorable medium-term effect of the fiscal measures, it is mindful to the importance of anchoring inflation expectations.
Against this background and given the balance of risks, the MPC judges that a preemptive rate hike is warranted to anchor inflation expectations and hence limit a generalized price increase, which is detrimental to the economy over the medium-term.
Egypt plans to build a new channel parallel to the Suez Canal in a 60 billion Egyptian-pound ($8.4 billion) venture to boost capacity at the vital global waterway, marking a new era of regeneration after the 2011 revolution.
“Construction of the new passage is scheduled to take three years, though President El-Sisi has ordered it to be completed in a year,” Mohab Mamish, head of the Suez Development Authority, said in a recent televised speech. He added that the project will reduce maximum waiting hours for ships from 11 to three hours.
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