Rasha and Saeed* stand to lose about LE85 of their monthly income if the government’s latest cost-saving measure passes through Parliament.
That’s 1 percent less spending money available for the two parents and their four children. The government is proposing to cut 1 percent off of public servants’ salaries and 0.5 percent off pensioners for a year’s period as the coronavirus pandemic rips through the nation’s economy.
The measure amounts to an “obligatory donation,” says Saeed, who works in the Real Estate Tax Authority along with his wife. They have a combined household income of LE8,500 a month.
The cut is just one of a host of other measures that, together, explain the government’s general policy in bridging the gap created by the pandemic.
“Is the government really going to dip its hand in our pockets? Again?” Saeed says. The collective pockets he’s referring to are those of public servants who’ve seen stunted salary growth since a new civil service law passed in 2016.
The law — issued in 2016 as part of the procedures that paved the way for a US$12 billion loan agreement with the International Monetary Fund in the same year — severed the link between basic and variable pay so that when the former increases, the latter remains unchanged, resulting in meager annual raises in compensation.
Saeed’s question has a clear answer, according to Amr Adly, a professor of political economy at the American University in Cairo.
“The easy way for the government to raise funds is to target those with stable incomes, especially public servants,” he says. Authorities favor payroll taxes as they rely on clear, stable databases and are easily deducted from the source, he added.
Politically, “the clear rule according to [American economist] Mancur Olson is that it’s easier to burden a large number of people with seemingly small amounts [like deducting 1 percent off of public servants] than charging a smaller number of people — investors for example — larger amounts in the form of exceptional taxes,” Adly says
With the government opting for a wider tax base, consumers will be hit harder than producers or investors, who have recently received tax breaks to dodge potential liquidity crunches, he added. The government is trying to fuel growth and avoid a coronavirus-induced economic contraction, he says.
But the drop in purchasing power, which comes alongside electricity price hikes of between 16–30 percent set to kick in as of July 1, will eventually weaken demand, Adly explains. This will indirectly impact investors, he says.
The salary cuts are just the latest in the government’s quest to boost revenues in the 10 weeks since it announced it needed to take measures to counter the pandemic’s economic fallout.
Authorities announced in March a LE100 billion package to fight the spread of coronavirus and soften its impact. Finance Minister Mohamed Maiet said at the time the funds will be sourced from the current budget’s reserves.
Yet the budget for the fiscal year ending on June 30 accounts for about LE68 billion in reserves. The shortfall will be sourced from spending items that are “unspecified” in the budget, according to Yasser Omar, the secretary of Parliament’s Budget Committee.
“The ‘other expenses’ entry in the budget includes allocations that are directed to reserves whenever needed,” Omar says. “These items are [intentionally] left ambiguous in the budget because they pertain to security bodies.”
The below figure shows the budget’s reserves in addition to the “unspecified” amounts that Omar referred to.
Using budget reserves gives the government relative liberty in spending without Parliamentary approval — not that Parliament has always been keen on economic oversight in the past.
“The Finance Ministry doesn’t need to get Parliament’s approval except for additional expenses that require additional borrowing to cover,” Omar says.
Lawmakers also passed amendments to the 1984 State Financial Resources Development Law, raising fees on a number of goods and services. The changes, which will go into effect once the president signs off on them, include:
The government has also said it is negotiating with the International Monetary Fund to secure two loans through the lender’s Rapid Financing Instrument and Stand-By Arrangement mechanisms.
Egypt has already received the RFI’s $2.77 billion, while the SBA’s $5.2 billion still awaits the approval of the IMF’s executive board.
While the government is trying hard to avoid economic contraction, “it will not be able to drastically increase spending — even to support investors — because it’s utmost priority remains keeping the budget deficit at acceptable levels to be able to borrow on international markets at reasonable interest rates,” Adly says.
Interest rates on foreign debt are determined according to the borrower’s reliability, from the creditor’s point of view. The budget deficit is on top of the list of parameters used to determine the likelihood of default, and interest rates are set accordingly: the riskier the borrower, the higher the rate.
Foreign funding is necessary to replace the exit of foreign investors from Egyptian treasury bills, say Noaman Khaled, an economist at the Cairo-based investment firm CI Capital. Hard currency is necessary to repay foreign loans and finance imports, he adds.
Overseas investors pulled over 50 percent of their T-bill holdings between March and February, according to the Central Bank of Egypt’s monthly report.
Egypt’s net foreign reserves fell by $9 billion in the three months of the pandemic through May but were offset by nearly $8 billion of inflows from the IMF and the international bond market.
The government sold $5 billion worth of international bonds in May, its biggest issuance ever. The sale included $1.25 billion in four-year notes, $1.75 billion in 12-year notes and $2 billion to be repaid in 30 years.
The following table provides an overview of the government’s effort to raise funds since mid-March.
|FY 2019/2020||$5 billion||Borrowing on the international bond market|
|FY 2019/2020||$2.77 billion||Borrowing from the International Monetary Fund (Rapid Financing Instrument)|
|FY 2019/2020||LE100 billion||Budget reserves and “unspecified expenses”|
|FY 2019/2020||LE100 billion||Law to increase budget allocations|
|Legislation that hasn’t passed yet; expected in 2020/2021||Unspecified||Amendments to State Financial Resources Development Law|
|Legislation hasn’t passed yet; expected in 2020/2021||Approximately LE3 billion||Law to deduct 1 percent from public servants and 0.5 percent from pensioners|
|IMF loan that hasn’t been approved yet; expected in 2020/2021||$5.2 billion||Loan deal with the International Monetary Fund (Stand-By Arrangement)|
*Source: Yasser Omar, the secretary of the budget committee in Parliament, Finance Ministry and statements to the press by Deputy Finance Minister Ahmed Kouchouk
The Cabinet has approved amendments to the income tax law, which has introduced more progressive tax brackets, with those earning more than LE400,000 per year being slotted into a new 25 percent tax bracket at the top end. Maiet has said he expects the new income tax scheme to be implemented at the start of the new fiscal year.
However, the government’s plan doesn’t mention raising or introducing other new taxes, which would theoretically be the main source of government revenue. Instead, real estate taxes and stamp duties have been eased.
Amendments to the real estate tax law will see unused land within the premises of industrial plants exempted, extending the already existing exemption of unused land that’s not attached to buildings.
This amendment is a milestone in the troubled story of real estate taxes, being a key demand from the business community since 2016.
But the exemption could practically complicate levying real estate taxes on industrial properties to begin with, according to MP Ashraf al-Araby, the former head of the Egyptian Tax Authority who supervised the drafting of the tax in 2008.
Investors “know very well” that the exemption renders the law ineffective, says Araby, who currently sits on Parliament’s Economic Committee. “Classifying land attached to factories into used and unused and negotiating with investors would take human resources that far exceed those available to the Real Estate Tax Authority.”
The change in taxation revenues can be seen clearly in the difference between government targets in the current fiscal year and in the next fiscal year. Whereas the target for growth in real estate taxes for next year comes in at about 3 percent, the growth target for the current year was over 41 percent.
In mid-May, Parliament also amended levies on stock market trading.
The implementation of the capital gains tax, a 10 percent levy on profits made through trading stocks, was postponed until the end of 2021. Foreign investors were exempted from the tax altogether.
Stamp duties charged on sellers and buyers of stocks were also lowered from LE1.5 per LE1,000 to LE1.25 for foreign investors and LE0.5 for Egyptian investors. Additionally, same-day trading was exempted from the levy.
The tax on dividends was also halved to five percent.
The capital gains tax has been the focus of a decades-long struggle between stock investors and the Finance Ministry, with the former generally gaining the upper hand. It was first implemented for four years after the stock exchange was reopened in 1992. Following the 2011 revolution, calls for a capital gains tax to be implemented briefly returned to public discourse but such a move was quickly suppressed under pressure from investors.
Stamp duties were levied in May 2013 but were also frozen a little over a year later after the government, to investors’ dismay, imposed a 10 percent tax on capital gains and dividends. In May 2015, implementation of the capital gains tax was postponed for two years, while dividend tax remained in effect.
After the two years passed, Parliament froze implementation for three more years, expiring in May 2020.
Stamp duties, meanwhile, were set at LE1.25 per LE1,000 in 2017, increasing to LE1.5 the following year and LE1.75 in May 2019.
The last increase was again blocked by Parliament — a move cheered by investors — and the levy stabilized at LE1.5 per LE1,000 before the latest amendment a few days ago.
For Adly, the tax policy of the government during the coronavirus pandemic is in line with its history. Real estate taxes and stock market taxes remain a low priority for the government.
“The government hasn’t opted to change its tax policy,” he says. “Instead, it dug its heels in.”
*Name changed to protect the source’s identity