Reconcile or bust

Published on Al-Ahram weekly online, by Niveen Wahish, Dec. 27, 2012.

It never rains but it pours. This week the economy has been plagued with one piece of bad news after another. It is as if, following the completion of the referendum, officials have suddenly woken up to the gravity of the economic problems Egypt is facing. That, or they now feel able to come clean about the situation.  

Egypt’s Finance Minister Momtaz Al-Said announced that the budget deficit for the first five months of fiscal year 2012/13 has reached LE80 billion, or 4.5 per cent of GDP, and is projected to reach LE200 billion by the end of the year. The deficit for the same period last year was LE58.4 billion … //

… Former minister of finance Samir Radwan sees things differently.
“Official statements about nearing bankruptcy are not new. The threat has been raised several times since the revolution and now appears to be the default option when the government wants to decrease protests and anger in the streets,” said Egypt’s first post-revolution minister of finance.

Egypt’s economic woes are not the making of economists but of politicians. The polarisation prompted by the new constitution is a major obstacle to building the broad consensus on tax reforms needed to acquire the $4.8 billion loan from the IMF. A week before the referendum on the constitution the government imposed sales tax increases on a variety of goods and services only for President Mohamed Morsi to put the new taxes on hold in the wake of public discontent.

Genena points out that the referendum gave Morsi “statistical support” but hardly a ringing endorsement. “To be able to secure support for reforms that will affect the population he needs to reach out to the opposition. If he does not Egypt will be caught in a vicious circle that could undermine the regime.”

Politicians, says Genena, appear to have lost touch with what matters most to the public — their bread and butter. People have had it with a political process that is dragging on interminably, something made clear by the low referendum turnout. Only around 30 per cent of the voting population actually went to the polls.

But a constitution is now in place and with legislative powers in the hands of the Shura Council things should start moving. If the Shura Council approves the tax increases and this is not accompanied by public discontent, Genena predicts negotiations with the IMF will resume. The IMF has repeatedly stipulated that there must be broad consensus on Egypt’s economic reform programme for it to approve the loan. It has also said that the reform should not negatively affect the most vulnerable groups.

Concluding the IMF deal or any other loan will be a very good signal that the Egyptian economy is moving “out of the woods”, says Genena, while any delay will be negative and make a further depreciation of the pound inevitable in February or March.

The Beltone report provided two scenarios for the pound in fiscal year 2012/13: with an IMF loan and associated funding the exchange rate should stabilise around LE6.2 to the dollar. Without the loan the rate could hit LE7 towards the second half of the fiscal year and would average LE6.5 in the preceding months.

More pessimistic scenarios include the reappearance of a flourishing black market on which the exchange rate could jump to LE8.

Amid worries over pressure on the pound and possible smuggling a law was passed this week limiting the amount of cash travellers can carry in and out of the country to $10,000.

As former minister of finance Hazem Al-Beblawi has said on television: “This is a situation that economists will not be able to fix; it is all in the hands of politicians.”
(full text).

Links:

France repeals 75% tax on high income, on Russia Today RT, 29 Dec. 2012: France’s Constitutional Council has annulled a 75% tax rate on income above 1mn euros due to be introduced in 2013, which has already forced a number of wealthy residents to leave the country …

Iran to relocate airport after discovering oil under the tarmac, on Russia Today RT, 28 Dec. 2012;

India gang-rape victim cremated as UN chief calls for action to protect women: UN secretary general Ban Ki-moon urges Indian government to act urgently following death of 23-year-old Delhi student, on The Guardian, by Jason Burke, Dec. 30, 2012;

World news in 2013: the stories to watch for, on The Guardian, by Saeed Kamali Dehghan, Harriet Sherwood, Henry McDonald, David Smith, Alexandra Topping, Kate Connolly, Tom Kington and Jonathan Kaiman, December 30, 2012;

The best photographs of 2012 – in pictures, on The Guardian, Dec. 25, 2012.

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