Egypt’s government has proposed tax changes and reform of energy subsidies to cut a budget deficit running at about 11% of gross domestic product, Reuters reported in a broad story outlining all the austerity measures.
An IMF team is in Cairo to negotiate a $4.8 billion finance package for Egypt. Talks are scheduled to end on November 14. Some of the key details are as follows and mostly concern the biggest weight on the economy, i.e. energy subsidies:
– total elimination of the subsidy on 95 octane gasoline, a step that will be officially announced this week
– raising the price of natural gas piped to homes, which will come into effect next month. The price increase would be “tiny”, officials have said.
– The government has delayed a programme to use smart cards to distribute canisters of cooking gas, or butagas, by several months to ensure the system works properly
– The government would not touch the price of subsidised diesel
– The government had drafted a law to raise the sales tax on both commodities and services to 11% from 10%. That includes tax on telephone services, and sales tax on other goods such as cars, cigarettes and tobacco, beer and alcoholic drinks, non-alcoholic beer, carbonated mineral water, coffee beans, water-resistant cement and reinforced steel.
All these measures have already taken a long time to enforce, so it’s lucky Egypt’s lenders are putting up cash support.
Egypt said on Sunday it had received a third tranche of $500 million from Qatar, the same Reuters story said, part of a $2 billion loan secured by Egypt in August to help stave off a financial crisis and which Qatar is depositing at Egypt’s central bank.
The state news agency MENA quoted Egypt’s Finance Minister Mumtaz El-Saeed as saying the third tranche of the loan arrived on October 30 and that the last tranche was expected to arrive “soon” but did not give an exact date.
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But if donors fail to show up Egypt can rely on the thorough corruption investigators to retrieve billions of dollars and deposit in president Mohammed Morsi’s specially made “Renaissance” account (which generous citizens can also donate to..).
The only other detail in the report is that governmental authorities are working on collecting up to around $9 billion from specific persons associated with the former regime and who have been found guilty of corruption.
The report, which is quite fuzzy on details, does highlight an important fact: Mubarak and his cronies were not as rich as initially thought. In fact, to insist that the former president and his family are worth at least $70 billion only serves to glorify a regime whose biggest failing was to neglect rather than shrewdly steal mountains of cash.
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An eye-opening profile into the chief executive of DP World, the world’s third largest ports operator in the WSJ.
Mohammed Sharaf’s personal relationship with ships started long before he began work in the industry, when, in 1961, he was shipwrecked at just six months:
MV Dara, the ship transporting him, his mother, brothers and sister sank after an explosion, just outside the port of Dubai. The incident cost Mr. Sharaf his mother, a sister and one brother, while another brother was considered lost. He survived with a caretaker before reuniting with his family in the U.A.E.
DP World, in some ways, represents the old and new Dubai.
It is a reminder of Dubai’s beginning as a successful sea port where a tiny settlement developed from a small fishing and pearl-diving community to an oil-rich sheikhdom.
But it is also an example of over-spending and spiralling debt. The company currently has a net debt of $3.5 billion and has had to let go of some of its key assets. Last month it said it was pulling out of its operations in the port of Vostochny, the largest container terminal in Russia’s far east and one of the key gateways for the country’s container network.
Egypt’s first private-sector electricity station began operations in Alexandria yesterday in a move that appears to rattle, if not, break the mould of the seven state-run energy companies operating the nation’s power stations.
TAQA Arabia, a subsidiary of Citadel Capital, the Egyptian private equity firm, is running the $400 million station, which will have a production capacity of 11 megavolts and will be fuelled by natural gas.
Up until the early 1960s, electricity generation and distribution was practiced by private companies. But in 1978, after a transition to nationalisation, seven regional electricity distribution companies were established under the supervision of Egyptian Electricity Authority, according to the Ministry of Electricity.
Some of these companies have now been split into two, but fundamentally Egypt’s electricity power supply is state-owned.
The station was acquired by TAQA as part of a Build, Own, Operate, and Transfer (BOOT) financing scheme.
BOOT projects are used to fund large-scale public infrastructure without affecting the country’s debt profile. Private developers are allowed to recover their costs of construction through ownership and operation of the plant for a fixed period before handing it over to the state.
Citadel’s project will provide power to a particular company (the state-owned Egyptian Styrenics Production Company, according to Ahram Online), but it could signal a move toward expanding this scheme elsewhere.
Egypt’s gas shortages have caused some of the worst electricity black-outs in recent years. But with electricity demand growing, could Egypt consider limited privatisation of the electric power sector?
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1) Egypt expects to reach a loan agreement with the IMF by mid-December after talks this month focusing on limiting the budget deficit and a minimum level for its foreign reserves. Ahram Online reported that the loan amount, initially set at $4.8 billion has been reduced slightly to $4.5 billion.
2) The cabinet also approved a new 10% tax on major transactions on the Egyptian stock exchange, including initial public offerings (IPOs). The president said in August there would be no new taxes.
3) Finally, the cabinet approved two new tax brackets for high-income individuals. A 22% tax will be levied on individuals with annual incomes between 1 million Egyptian pounds and 10 million pounds, while annual incomes higher than 10 million pounds will be taxed at a rate of 25%. The new structure looks something like this, according to Ahram Online:
First segment (LE5,000 – LE20,000): 10 per cent
Second segment (LE20,000 – LE40,000): 15 per cent
Third segment (LE40,000 – LE1 million): 20 per cent
Fourth segment (LE1 million – LE10 million): 22 per cent
Fifth segment (LE10 million and up): 25 per cent
The move to implement taxes on corporations and individuals after previous cabinets had failed to do so signals how the current government is forced to impose hard austerity measures that were initially played down.
The decision to levy a capital gains tax comes despite repeated assertions by bourse officials that such a tax would not be “suitable” for the Egyptian market.
Last year, the finance minister at the time, Samir Radwan, proposed a 10% tax on stock dividends in the hopes of offsetting Egypt’s rising budget deficit. But the proposal was quickly rejected by investors and bourse officials and Radwan was removed in a cabinet reshuffle. How policies change.
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In my latest FT report, I write how escalating disputes between labour unions and employers in north Africa are threatening to derail economic recovery after the uprisings that ousted long-ruling dictators in the region.
Emboldened by the spirit of political change, thousands of workers in Egypt and Tunisia have staged a series of protests and are now in deadlocked talks with companies over demands for a minimum wage.
The piece puts together a series of examples of how the quest for a minimum wage can also be detrimental to a country’s economic fortunes. But it also shines a light on the lack of conversation between labourers and their employers.
Some of the companies quoted in the report include Kraft Foods, which has commenced legal action against strikers and DP World, which shut down its Ain Sokhna port twice this year.
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As UAE-based Dana Gas restructures its $1 billion sukuk payment, averting a potential seizure of its Egyptian assets, the “region’s debt market barely blinked,” according to this Reuters feature on sukuk, or Islamic bonds.
Not long ago, a billion-dollar payment miss would have triggered a crisis of confidence in the market; now, it is almost ignored.
In case you were wondering, Egypt continues to attract investment from foreign oil partners and the billion of dollars they are owed by the Egyptian government is not putting them off, the head of the state-run gas company Egyptian Natural Gas Holding Co told Bloomberg yesterday.
Chairman Mohamed Shoeib was so positive in fact that he said his company’s debts to overseas partners “aren’t that high,” without being more specific.
It’s a strange comment at a time when Egypt clearly owes even small and medium sized oil companies such as UK-based Dana Petroleum (not to be confused with the UAE-based Dana Gas) tens of millions of dollars.
There are two recurring economic problems in Egypt: the demands of the massive labour force and the energy subsidy issue. Both are old problems but have been propelled into the limelight post-revolution because budgetary constraints have intensified the situation. These are discussed below.
In just the latest bout of labour unrest, industrial action has significantly disrupted operations at an Egyptian port run by DP World, the world’s third largest port operator.