Economy in a week: Tax talks

This week sees the World Bank’s Spring Meeting on tax talks, a conference on how to boost Egypt’s ranking on the World Bank’s ‘Doing Business’ report, and a World Bank loan granted for micro and small enterprises (MSEs) for US$300 million. Other news covers the use of coal, which the government and industry conveniently concur upon. Finally, the minister of planning says restructuring the subsidy system will eventually lead to cash subsidies for impoverished areas.

Since the constitution passed in January, talks of progressive taxation, value added tax, inclusion of the informal sector, and a five percent tax on those who earn an annual income of more than LE1 million have been making headlines.

Yet there has been no definite conformity on if the tax base should be widened, or if the government should progressively tax the current base.

Last week saw the World Bank’s Spring Meetings in Egypt, as experts exchanged their opinions on the best way to increase government revenue through taxation.

Planning and International Cooperation Minister Ashraf al-Araby said there are two main options: the first is broadening the tax revenue sources, which entails imposing tax on capital gains for example, while the second is widening the scope of the tax base, which includes finding tax evaders. The latter, he says, is what the government should be focusing its efforts on to generate sufficient tax revenues, as reported by Al-Mal newspaper.

Currently, tax revenues stand at less than 15 percent of gross domestic product, which is below the global benchmark in developed and developing countries, according to Finance Minister Hany Qadry.

His ministry is in the process of amending the current tax law, Qadry said, to broaden the tax base and tighten restrictions on tax evaders.

Some financial experts believe increasing taxation on the available tax base is an easy way out for the government, as it skirts away from the responsibility of finding mechanisms for identifying tax evaders.

Araby was critical of the Ministry of Finance’s approach to implementing taxation, saying their statements give rise to market confusion – At one instance, they issued a statement on taxing banking deposits, while at other times they discussed taxing financial profits from companies, he said.

The problems faced by the tax authority are not a result of legislative issues, he added, but rather the executive branch that fails in applying these legislations, affirming the need for restructuring the tax authority’s management.

An official source from the Ministry of Finance stated that they are studying different proposals for a new system of taxation, including widening the tax base, according to Al-Mal. The ministry is awaiting the completion of a report that states how much of the financial revenue base is un-taxed. However, until now the picture is not complete, the source added.

Riding the coal train

The search for alternative sources of energy to make up for the energy gap in Egypt seems to have settled on coal.

Minister of Industry, Trade and Investment Mounir Fakhry Abdel Nour said there’s no way of evading the use of coal to generate energy within the current period, adding that the government is currently awaiting to implement international standards in factories to start using it.

Fakhry added that industries in Egypt are facing a multitude of challenges, namely a lack of energy sources, which has impeded the growth of industrial sectors, in effect leading to decreased production and increased unemployment.

Over the course of 2013 and early 2014, the government has decreased the share of natural gas allocated to the industrials sector, and instead has channelled that share to electric power generators to keep the city alive. Nonetheless, power shortages have become a regular occurrence in many governorates around Egypt, even affected the capital, Cairo.

The government opened the door for energy-intensive industries to start importing natural gas at international prices to power their factories, yet many of them have found financial solace in the cheaper alternative: coal.

Regardless of environmental effects, the government and energy-intensive industries are in concurrence to proceed with utilizing coal as a means to produce energy due to its cheaper price. The government argues that if safety and environmental standards are to be applied (i.e. clean coal technology) there would be very little harmful emissions.

Counter-arguments state that future generations have to pay for mistakes of the past, such as misallocation of energy subsidies to energy-intensive industries, adverse distribution of energy resources (energy-intensive industries use over nearly one third of electricity production in Egypt) and minimal expansions on the renewable energy front.

This has led to the current precarious situation, whereby the government is faced with a choice of either halting production due to shortage of energy, or proceed to generate energy using coal at social and environmental risks.

The use of coal is to be tied to bridging the energy gap in Egypt, according to Abdel Nour. Previous estimations say energy supply in Egypt should meet demand by 2017/2018.

Minister of Petroleum Sherif Ismail stated recently that coal should represent no more than 10 percent of the energy mix by 2025.

Cash subsidies to replace in-kind, says Araby

The Minister of Planning and International Cooperation Ashraf al-Araby said Egypt will start expending cash subsidies to those in need, according to Ahram Gate online portal.

Araby clarified that 80 percent of the energy subsidy goes to the upper strata of the population, which makes up about 20 percent.  Adjusting such malfunctions in the energy subsidy system will create allowance to give out cash subsidies to impoverished areas in Egypt, adding that the government has a clear vision regarding the initiative and is receiving technical assistance on the program’s implementation.

The system will be tied to several conditions so that poverty is prevented from being passed on from one generation to the next. This includes conditioning the cash subsidy to specific targets such as children’s education, while making sure both males and females receive the same treatment.           

The minister’s advisor Gamal Bayoumi told Ahram Gate that the current government is aiming to save over LE100 billion from restructuring the subsidy system over the next couple of years.

The scheme will increase the price of energy over four phases, each of which will take between six to 12 months, and can save up to LE126 billion by the end of the fourth phase.

Introducing smart cards for subsidized bread

Supplies Minister Khaled Hanafi said in a statement last Sunday that Egypt will introduce a smart card system for subsidized bread. The initiative, which will be launched nationwide in July, saw a pilot scheme instigated in the city of Port Said, which will be implemented in other cities in the coming period.

Based on the same logic of the fuel smart card system, the scheme hopes to ward off smuggling and waste of the government’s supply of wheat, in an attempt to allocate subsidies to those who need it.

Towards a better investment climate…and a ‘Doing Business’ report ranking

Investment Authority Head Hussein Fahmy had an extended meeting last Wednesday, which encompassed many ministries and government entities, in addition to representatives from the private sector, investors’ association and major law firms.

The meeting’s main purpose, as stated by EgyNews, was to showcase the government’s milestones during 2014 and to address ways of improving the investment climate in Egypt, with the intention of upping the country’s ranking on the World Bank’s “Doing Business” report.

Fahmy said that the Ministry of Investment has put together a plan based on two main axes, the first of which is making use of the Doing Business report in Egypt, while disseminating the best practices to all governorates. The second will implement a set of procedures and legislation that contribute to improving the business climate.

Meanwhile, the Minister of Finance Hany Qadry just returned from the US after meeting with World Bank representatives and concluded a US$300 million loan aimed at financing MSEs.

“The project will reach out to remote, rural and underprivileged areas in Egypt,” said World Bank Lead Economist and Project Team Leader Sahar Nasr. “It will unleash opportunities and provide income-generating activities to youth, women and entrepreneurs in marginalized areas.”

BOP performance

The Balance of Payments recorded an overall surplus of about US$2 billion from July through December for fiscal year 2013/14, compared to a deficit of $500 million in the comparable period a year ago.

The main impetus behind the surplus came from a drop in the trade deficit and a boost in the official transfers.

The trade deficit shrank by 16.8 percent, to stand at $15.4 billion in first half of fiscal year 2013/14, compared to $18.5 billion a year ago. The falling value of the Egyptian pound was a cause for imports to drop by 7.4 percent. Exports, on the other hand, expanded by 7.5 percent, with petroleum exports expanding to $6 billion against $4.6 billion last year.

Official transfers (government-to-government transfers) were up to $6 billion in the same period, compared to $629 million a year ago. Remittances dropped slightly to $8.4 billion from $9.1 billion in the first half of 2012/2013.

The services surplus account witnessed a steep drop in foreign revenue earners, mainly on the back of a drop in tourism by 66.4 percent, to stand at $1.8 billion versus $5.5 billion in the comparable period.

Sherif Zaazaa 

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