Interview: Hany Kadry Dimian
How is the government balancing the budget?
HANY KADRY DIMIAN: The government is carrying out its medium-term fiscal consolidation plan while restructuring expenditures to better meet social needs and build a stronger platform for growth. We are doing this by reducing non-productive recurrent spending and using a portion of the savings to redirect spending to essential services and infrastructure projects.
This shift began with the 2014/15 budget, when the combined allocation for health and education exceeded fuel subsidies for the first time in decades. This was due to the major energy subsidy reform that we enacted in July 2014 – amounting to 2% of GDP – and was a direct result of that reform, not the later sharp drop in global oil prices. The government has also taken bold steps to contain wages.
These reforms have created fiscal space enabling the government to raise spending on health, education, low-income housing, the upgrading of informal housing and the expansion of social safety nets in the 2015/16 budget. In addition, we increased capital expenditure to LE75bn ($10.2bn), which is up by 25% over the preceding fiscal year. However, given our fiscal constraints, we have been working diligently on improving the domestic business climate to encourage the private sector to play a bigger role in service delivery and infrastructure investment.
What impact will the value-added tax (VAT) have on government revenues?
DIMIAN: Revenue reforms such as the property tax, unifying the income tax rate at 22.5%, the 10% dividend tax and amendments to the mining law will begin to yield proceeds in 2015 and going forward, reflecting recent progress in issuing related executive regulations. The VAT has many objectives beyond generating revenues, which we expect to reach about 1.3% of GDP annually. It will promote tax fairness by applying a single new unified rate and widening the tax base, and also improve businesses’ cashflow by working to ensure speedy tax rebates for direct and indirect inputs. This should allow businesses to grow more quickly, to invest more in their operations and to generate new employment opportunities.
At the same time, we are protecting the vulnerable and low-income social groups by exempting the main products and services that they use in daily life from VAT. Food, health, education and public transportation are among the items exempted from the VAT. We project that there will be a temporary, one-off increase in inflation of around 1% - 1.5% during the first year of implementation. But by contributing to reducing the budget deficit, the VAT is an important policy tool to help us contain the main source of inflation in our economy – and this will benefit all Egyptian citizens, especially the poor and underprivileged.
Which specific factors contributed to the timing of the 2015 eurobond issuance?
DIMIAN: We went to the international market when we had a good story to tell about the content and quality of our reforms. As political stability and domestic security improved following the adoption of the July 2013 political roadmap and subsequent May 2014 presidential elections, the government focused on rebuilding confidence by implementing tough fiscal and structural reforms. These included tax measures, energy subsidy reform, a new civil service law, measures to restructure and control wages, liberalisation of the electricity sector, amendments to the investment law, a new competition law, a micro-finance law, the resolution of investor disputes, and repayments of arrears to foreign oil companies.
These developments created the right backdrop for the eurobond issuance, which we launched successfully and at a coupon rate, about two notches higher than the actual sovereign rating, while the rating agencies either raised or improved Egypt’s rating.
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