Sherine Abdel-Razek looks at the outgoing cabinet's efforts to put Egypt's economy back on track
Solving the energy crisis, devaluing the pound, restructuring ration cards and digging a New Suez Canal are some of the developments that former prime minister Ibrahim Mehleb's cabinet introduced to the economy during its 18-month tenure.
This was a cabinet of technocrats that took many bold steps to restructure the economy and adopted new socially friendly measures to lift the burden from Egyptian families but neither gained the support of the business arena nor the approval of the layman.
While the set of policies adopted during the period has so far failed to make a significant difference to the poverty and unemployment figures, businessmen also have room to complain. Naguib Sawiris, one of Egypt's wealthiest businessmen, told Reuters two weeks ago that he had not invested any of the $500 million he pledged to his country in March because of the slow pace of reforms promised by the government.
The Mehleb cabinet came to power in February 2014, with the weeks preceding its appointment being overshadowed by crippling strikes across the country by bus drivers, postal workers, doctors, pharmacists and steel and textile workers. The reasons for the strikes and sit-ins were different, but one common plea was the rollout of the newly introduced minimum wage to all workers in both the public and private sectors.
Another gloomy feature was an acute natural gas shortage resulting in daily blackouts even in the winter months when demand is less than during the summer peak levels. While the country was helped by generous Gulf aid, the consequences of the toppling of former president Mohamed Morsi limited the economy's capacity to grow.
With the foreign media calling Morsi's toppling a "military coup" and reporting the violent scenes that erupted after the crackdown on his supporters, many countries warned their nationals against travelling to Egypt. Further foreign direct investment (FDI) became a far-fetched dream, and major donors froze their aid to Egypt.
Cutting expenses: The most important task on the new cabinet's to do list was to tighten the budget deficit and cut the subsidies on fuel and other items.
In May the government started implementing a gradual plan to phase out energy subsidies that in recent years have consumed a fifth of public expenditure. Going a step further than previous governments, which had shied away from tackling subsidies to avoid a public backlash, the cabinet raised the prices of fuel and natural gas by more than 70 per cent and also introduced a five-year phase out plan for electricity subsidies.
The moves were translated into savings in the subsidies bill from LE100 billion in 2013/2014 to only LE61 billion in the 2015/2016 budget. Egypt's fuel subsidy bill for the first half of the current fiscal year fell by about 30 per cent, the Finance Ministry said in March, thanks to sharply lower global oil prices and last summer's subsidy cuts.
A smart card system for subsidised fuel purchases has also been studied and was about to be implemented in June when president Abdel-Fattah Al-Sisi asked his government to postpone it until all consumers had received their cards. In the first phase, the cards will not be used to limit purchases of subsidised fuel but will enable the government to monitor the amount of fuel being consumed per vehicle and thereby to crack down on smuggling.
Another controversial step, this time aimed at containing the public-sector wage bill that represents 25 per cent of budgetary expenses, was the introduction of the civil service law in March. This aims to reform Egypt's administrative apparatus by dealing with bureaucracy and improving performance as well as the wage structures in government bodies.
In addition to setting transparent rules for vacancies and applicants, the law increases the proportion of basic salaries to 80 per cent of overall wages, a long called for reform. Bonuses, traditionally dependent on seniority, would be calculated based on performance under the new law.
The law has stirred up a lot of criticism as it fixes annual salary increases at five per cent. Moreover, many categories of workers are exempted, and civil servants fear that leaving their bonuses to the assessments of their bosses will encourage nepotism or lead to them being sacked for reasons not related to work.
The demonstrations in protest at the law earlier this month were the biggest outpouring of discontent with the government's economic policies during Al-Sisi's 14 months in office. However, the cabinet stressed that the law would be enforced.
The Cairo-based Egyptian Centre for Economic Studies, a think tank, estimates the law will save as much as LE22 billion, compared with projections based on the past trajectory of wages. Salaries increased at an annual average of 18 per cent over the past three years.
Inflating revenues: An integral component of the cabinet's early reform plans was tax reform. This included enforcing a long-suspended property tax, introducing a 10 per cent capital gains tax on stock exchange transactions and dividends, and a five per cent temporary surcharge on the highest-earning Egyptians, whether companies or individuals, for three years.
However, the cabinet gave in to business arena pressures and backed down on the temporary tax, lowered the highest tax rate from 25 per cent to 22.5 per cent, and annulled the capital gains levy to appease investors during the countdown to the Egypt Economic Development Conference (EEDC) in March. The International Monetary Fund (IMF) criticised the decision to delay the capital gains tax on stocks, saying it would leave the poor to bear the brunt of government cost-cutting.
While still not fully applied, the value added tax (VAT) has been dominating the attention of Hani Kadri, the minister of finance, who estimated earlier this year that the VAT could raise government tax revenues by around LE32 billion.
Egypt expects LE422.4 billion in tax revenues in the current fiscal year ending in July 2016, up from LE267 billion collected in the previous fiscal year.
Bridging the current account deficit: The tightening of the country's other persistent deficit, that of the current account, was another heavy task. Mehleb's government had to deal with the changing structure of Gulf support as since December last year it has been clear that the oil-rich countries want to replace aid to Egypt with investment.
This was reflected in a 77 per cent decline in official transfers in 2014/2015 to reach $2.7 billion. The decline in the imports bill due to lower oil prices and a decrease in international food prices failed to offset the decline in the country's exports and led to 14 per cent widening in the trade deficit.
Export proceeds decreased by 15.5 per cent on the back of the fall in international oil prices that also lowered the value of Egyptian oil exports, which represent around 48 per cent of total Egyptian exports, by 30 per cent.
The depreciation of the pound also failed to make things easier for exporters due to supply constraints, according to Prime Holding. These constraints include the foreign currency shortages that have deprived domestic industries from acquiring imported materials as well as energy constraints and the still deteriorating security conditions in some of the most important markets for Egyptian exports, such as Yemen, Iraq, Libya and Syria.
Reaching out to foreign investors: The government did its best to make use of the EEDC to present Egypt as a favourable investment destination, and in large part it succeeded.
Deals worth $60 billion were signed at the conference with major multinationals, another aid package of $12.5 billion was offered by the Gulf countries, and there was a clear tone of political support for the government in speeches delivered by international officials.
Most of the deals were in the energy sector and in electricity or oil and gas, whether in down- or upstream operations. The major gas find by the Italian oil giant Eni in the Mediterranean, expected to help Egypt cover its gas needs for years to come, was the outcome of one of the deals inked during the conference.
Another major deal was signed with the German industrial giant Siemens in which the latter will invest 10 billion euros ($10.5 billion) in increasing Egypt's energy production capacity by up to a third by 2020.
Banking on the improved perception of the Egyptian economy, the government tapped the international bond markets in early June with a $1.5 billion offering that was three times oversubscribed. Robust global demand for Egypt's first bond issue in five years has encouraged it to consider revisiting it later this year, and the finance minister also noted that the country would issue a sukuk soon as it has submitted a draft sukuk law to the Islamic Development Bank for advice.
In March, the government passed an investment law to facilitate investment procedures in the country, including the establishment of a "one-stop shop" for investors to obtain licenses and permits, which are currently issued by a baffling 78 different state bodies.
The EEDC together with several presidential visits abroad have helped put Egypt back on the investment radar, and this was reflected in a 55 per cent increase in FDI during 2014/2015 to reach $6.4 billion.
Prime Securities attributed this to the recovery in oil and green field FDI, which rose by seven and 69 per cent, respectively, as well as the acceleration in real estate purchases by 480 per cent.
On the other hand, portfolio investments in the stock market declined by 152 per cent to an about $639 million outflow in the last fiscal year compared to an inflow of $1.23 billion a year earlier, primarily due to the decline in foreign net investments in bonds due to the repayment of expired bonds.
Depreciating the currency: Egypt has been suffering from a sustained dollar shortage as political turmoil following the 2011 uprising against Hosni Mubarak unnerved foreign investors and tourists, traditionally major sources of foreign currency. The successive governments have supported the pound by withdrawing from foreign reserves.
The central bank has eased its grip on the dollar several times since December 2012 when it introduced the auctions to cover banks needs of dollars. However it was the beginning of 2015 that witnessed a steep depreciation after the CBE held the rate steady at LE7.14 for six months.
Moreover, the CBE introduced restrictive measures on access to foreign currency (to ease pressure on the pound). This included imposing a cap on dollar deposits at banks making it more difficult for firms to import goods and slowing growth on both the micro and macro levels.
The recent devaluations in currencies of emerging markets following the Yuan's depreciation had left the Egyptian exports and investments more expensive especially in the light of the local high inflation rates.
Uncertainty about the government's plans for the exchange rate has undermined foreign direct investments as so long as investors think the pound will weaken, they will avoid placing money into Egypt
Investment Minister Ashraf Salman argued last week in one of the Euromoney's sessions that it would be better for Egypt to allow its currency to weaken rather than to deplete its forex reserves. This suggest that the authorities are slowly changing its priorities as in a recent years, ministers have shied away from openly discussing currency developments, except to argue that the stability of the pound was of utmost importance.
Most experts expect the pound to decline from LE7.83 per dollar currently to LE8.25/ by the end of next year.
Dealing with the energy crisis: Keeping the lights on was the Mehleb government's most impressive achievement and the most celebrated.
The energy sector has struggled over the past few years, with the output of natural gas used in power stations and factories declining by around 20 per cent. This was one result of increased consumption encouraged by heavily subsidising fuel.
The government diverted gas that was intended for export towards the domestic market as a result, and some foreign energy firms struggled to fulfil supply contracts, according to Capital Economics. The problems were compounded by the fact that the government was slow in making payments to the gas and energy companies, in turn racking up huge energy-related debts. These factors made it unprofitable for firms to raise their investment in the country and thus expand gas production.
Egypt became a net fuel importer in 2015. However, Sherif Ismail, the oil minister in Mehleb's cabinet and the new prime minister, has made significant progress in addressing these problems. The government has repaid a large chunk of its outstanding energy debts, and at the end of 2014 arrears with foreign energy companies stood at $3.1 billion, down from $6.4 billion at the end of the 2013/14 fiscal year.
Agreements have also been struck with a number of foreign energy companies including Eni and Edison to raise the price that the government pays for gas consumed domestically.
Improvements in the gas sector will help the economy. "If gas production returns to its previous peak over the course of the next five years, we estimate that this will boost GDP growth by as much as 1.5 per cent a year," stated a Capital Economics research note. "There could also be positive spillover effects if it helps to alleviate electricity blackouts [electricity generation in Egypt is heavily dependent on gas.] In addition, the boost to export earnings could be as much as $1.5 billion a year, which would make a significant dent in the current account deficit," it added.
One shortcoming of the Mehleb cabinet's energy policies was amending the environment law to allow for the use of coal for power generation and cement production. But the cabinet issued feed-in tariffs at which it will buy energy produced by commercial and household producers to redistribute electricity through the national grid.
This will encourage investment in the sector. Tapping nuclear power through agreements with Russia was another important development in the sector during the cabinet's tenure.
Digging the canal: Completing the digging of the New Suez Canal in one year, together with putting together a comprehensive plan to develop the land surrounding it, attracted a lot of attention during the cabinet's 18 months in office.
The new canal will allow two-way traffic and reduce waiting times. According to the government, this will raise the number of ships passing through the Suez Canal from 49 per day at present to 97 by 2023, boosting revenues from $5.3 billion annually at present to $13.2 billion by 2023.
Doubling the number of ships passing through the canal could increase receipts by the equivalent of 2.5 per cent of 2014 GDP, according to Capital Economics calculations. Annual GDP growth could be around 0.3-0.4 per cent faster simply through an increase in Suez Canal traffic.
However, experts say that freight traffic through the Suez Canal and global trade volumes are related. "The degree of support [for Egypt's credit quality] will depend on an acceleration in global trade growth, which seems unlikely to materialise quickly," a statement by the credit agency Moody's released last month read.
A graph in the statement showed that in the light of historical average growth, Suez Canal revenues would register at just below $5.6 billion in 2023. For revenues to reach the projected $13.3 billion, Moody's said Egypt would need a 10 per cent increase in world trade growth.
Helping the poor: The introduction of smart ration cards for bread and other subsidised food items and/or a new cash transfer system were highly celebrated policies of the government.
As a result, around 70 million Egyptians who are ration-card beneficiaries now have the right to choose from a variety of products instead of the monthly quota of only certain commodities. Under the old system, consumers only had the option of buying poor quality rice, sugar, and cooking oil. Now the list of items available include more than 50 commodities, including meat and poultry.
A similar system has been adopted for bread, permitting five loaves of bread per family member per day.
Bread demand thanks to the new system has dropped by between 15 and 20 per cent as consumers rationalise their consumption. Under the old system, which gave unlimited numbers of subsidised loaves, people used to feed the cheap bread to cattle and chickens.
Minister of Supply Khaled Hanafi said in March that the smart cards had helped cut Egypt's wheat imports by as much as 20 per cent. Egypt is the world's largest wheat buyer, and it imports twice the wheat of the EU countries.
Other social safety net projects included the cash transfer programmes, which, funded by the World Bank, provide income support and expand social inclusion to almost 1.5 million poor families with young children, the elderly, and persons with severe disabilities.
The Takaful or Solidarity programme gives cash to families on condition that their children attend school and undergo regular medical checkups. Another plan, Karama or Dignity, covers the elderly and disabled.
© Al Ahram Weekly 2015
