Egypt plans to introduce VAT

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JEDDAH - Egypt is set to introduce VAT and reduce energy subsidies as the government recently turned down loans from the IMF and World Bank of over $5 billion on concerns about running too large a deficit and associated higher external debt, Fitch Ratings said in its special report "Egypt Reins in the Deficit, But Outlook Dependent on Politics" made available Sunday.

IMF backing for Egypt's economic program would have boosted confidence during the political transition, but the government said it will proceed with its main agenda anyway despite the expected impact on inflation and real incomes.

Other multilateral support will still go ahead and bilateral support from Saudi Arabia and the US has already begun to flow.

Pledged external support still exceeds $20 billion (7 percent of GDP).

The daily Al Borsa quoted Egypt's Trade Minister Rachid Mohamed Rachid as saying earlier that Egypt in July will resume its gradual elimination of energy subsidies to industries that are not energy intensive.

The government suspended a plan to reduce the subsidies after the 2008 global economic crisis.

"With the start of the new fiscal year, the government will resume the policy it laid down three years ago to eliminate energy subsidies to factories," the paper quoted the minister as saying. Egypt's fiscal year starts July 1.

Energy-intensive industries already receive energy at international prices, Al Borsa cited him as saying.
"The second half of the current year will witness the first stage of price rises, then annual increases will be implemented to reach world prices," Rachid said.

Cement firms obtaining licenses in the coming period will be responsible for providing their own energy, should the Petroleum Ministry decide not to supply them with their needs. They may resort to importing oil and gas if needed, Rachid said.

Energy subsidies cost the government 60 billion Egyptian pounds ($10.95 billion) in fiscal year 2007/08, up from 57 billion pounds in fiscal 2006/07. Of this, the government spent 20bn pounds on gas subsidies to energy-intensive companies.

Egypt's budget deficit rose to 65 billion pounds in the seven months to January 31, up from 39 billion pounds in the same period a year earlier, a Finance Ministry report said last month.

Fitch Ratings said in the report that Egypt's decision to rein in its budget deficit in FY2011/12 "sends a strong signal at a politically sensitive time, when expectations are high, that Egypt sees the need to resume fiscal consolidation as soon as possible."

The ratings agency affirmed Egypt's 'BB' Long-term foreign currency Issuer Default Rating (IDR) on June 28, removed it from Rating Watch Negative and assigned a Negative Outlook.

Egypt aims to reduce the budget deficit in fiscal year ending June 2012 to 8.6 percent of GDP, significantly down on the likely 9.5 percent or more in FY2010/11 and an even bigger drop compared with the 10.9 percent of GDP draft budget, the report said.

The political events of January-February 2011 badly hurt the economy, with the GDP declining by 8.8 percent qoq and 4.2 percent yoy in Q111, the biggest contraction on record, Fitch said.

Tourism was hardest hit, down 80 percent in February, and investment dropped by 26 percent, with a net outflow of FDI.

However, tourism - a key economic driver, showed improvement since February. Arrivals are still down a third yoy but 4x higher than in February.

Yet, Fitch said the economy could still contract yoy in Q211 and growth for FY2010/11 will be around 1.5 percent, rising to perhaps 3 percent in FY2011/12.

The current account deficit did not widen appreciably in Q111, despite the drop in tourism, as exports continued to grow, workers remittances held up and higher oil prices helped.

However, reserves still fell by almost a quarter by May as FDI dried up and foreign portfolio investment exited. The reserve decline slowed in May, as outflows stabilized, tourism recovered and oil prices rose further.

© The Saudi Gazette 2011