(Photo from Centre for International Governance Innovation website)
The interim government will use a $9bn (EGP 60bn) deposit in the Central bank of Egypt (CBE) in order to finance the two economic stimulus packages, according to Minister of Finance Ahmed Galal.
The deposit has been in the CBE since the Gulf War in the nineties, and the government has never used it, Galal said, but “[former president Hosni Mubarak had made himself the only one authorized to sign off on spending it.”
Galal announced in a press conference with foreign press on Monday that the size of the second stimulus package would be around EGP 30bn. He also stated that the nature of it would be similar to the first package, as it would focus on infrastructure, public projects, and “to meet the government’s commitments.”
The interim cabinet had adopted its first economic stimulus package in August, aimed creating a 3% growth rate over the current fiscal year and reining in the 13.8% GDP budget deficit to 10%. The package includes investments focused on developing infrastructure, which Galal said is pivotal to supporting the economy and private sector growth.
The interim government has been following an expansionary policy rather than an austerity one since it came to power in July, Galal said, a policy undertaken to spur economic growth.
Galal asserted that the government is making progress in fulfilling its promises to stimulate the ailing economy and achieve social justice.
“We don’t spend money on projects we don’t have resources for,” he said in response to a question on how the government would reduce its budget deficit while simultaneously announcing new stimulus projects.
Current economic woes
According to Galal, the government has yet to fully allocate the funds received from Gulf countries over the summer, but the aid has helped in alleviating pressure on the Egyptian pound.
Following the ouster of former President Mohamed Morsi on 3 July, Gulf countries pledged financial aid packages to help boost the economy, including $5bn from Saudi Arabia, $3bn from the UAE and $4bn from Kuwait, in the form of cash grants, deposits and petroleum products.
Reducing interest rates also helped, Galal said, as high interest rates have formed “burdens on the government”.
The Central Bank of Egypt has cut interest rates three times by 150 basis points in total, most recently on 5 December when it unexpectedly lowered rates after keeping them unchanged in November, which was seen by analysts a means of curbing inflation.
Regarding the country’s low credit rating, Galal said that such downgrades have been occurring since 1997, “so, when it is raised, this is a good sign.”
In November, credit rating agency Standard and Poor’s (S&P) raised its long and short-term foreign and local currency sovereign credit ratings on Egypt from CCC+ to B- with a stable outlook.
Galal the 1.5% rate of economic growth during the first quarter of the current fiscal year (which ended in September) “lower than his expectations”, but stressed that improving the real economy takes time.
Structural reforms
The minister said the government hopes to carry out reforms on taxation, but “this needs a lot of time”.
Government revenues from income taxes are set to fall after the implementation of a new decision increasing the limit for personal exemptions from EGP 4,000 to EGP 7,000 annually.
Galal said the government is currently addressing reforms to property taxes, which will be “fully implemented in the next year or the year after.” The new real estate law, which was supposed to take effect in July this year, is expected to bring the government around EGP 3m in revenues after its first phase.
Galal also noted that the government is owed EGP 70bn in tax arrears from some taxpayers and “is considering resolving these disputes.”
The minister stressed that reducing energy subsidies will not be implemented in a “shocking way”, but instead will be implemented gradually, with a plan currently being engineered by the Ministry of Petroleum.
Prime Minister Hazem El-Beblawi announced earlier in November that the government would start cutting fuel subsidies before it leaves office next year.
Challenges for the next government
Galal cited maintaining macroeconomic stability as a major challenge for the next government.
“The next government should work on reforming the labour market,” he said, adding that the pensions system also will be a challenge as it should work on improving the social safety net.
According to the draft constitution, Galal said that spending on health and education should be increased, and “the new government should manage how this money will be spent.”
Galal added that commodities subsidies should be more accurately targeted toward “those who need support”.
Although the government is transitional in nature, Galal said, it has a duty to pave the way for the coming government, and to make “foundational decisions”.
Future vision
Galal said he has a positive outlook for the economy over the next year and asserted that the political and economic roadmaps are being pursued effectively.
“The constitution drafting process was finished on schedule,” he said, “which can be considered a good sign that the parliament and presidential elections will be held on time, too.”
Galal stated that the budget deficit will be reduced by the end of the current fiscal year because the government “has the resources, but we want to guarantee that it will not grow in the years after.”
“The positive impact of both stimulus packages will be felt in the next year,” he added.
