In London, Egypt Pledges Reform, Seeks Investor Support

With Egypt’s presidential election approaching fast, representatives from the Egyptian government and financial community travelled to London this week to seek support from international investors for the country’s much needed reform programme.

Speaking at an Egypt day event at the London Stock Exchange on Friday, Hany Qadry, Egypt’s finance minister, said he hoped to see “massive participation” in the presidential election on May 26 and 27 and parliamentary polls that will follow in the autumn.

Abdel Fattah al-Sisi, the former defence minister who led the coup that ousted Mohamed Morsi, the elected Islamist president, from power last year, is widely expected to coast to an easy victory in the upcoming presidential poll.

With Egypt currently relying heavily on emergency financing from regional neighbours, al-Sisi’s economic plans have been criticised for being vague.

However, Qadry was frank in admitting that near-term growth prospects remain relatively weak and that policymakers’ room for manoeuvre remained limited because of the large budget deficit. Nevertheless, he emphasising the necessity of implementing wide ranging economic and social reforms.

Restoring Egypt to the 6-7 per cent GDP growth rate it enjoyed before the 2011 revolution was “not possible in the near future”, admitted Qadry, who is likely to retain his position in the new administration.

Growth in Egypt is currently running at between 2 and 3 per cent and Qadry said the government aimed to improve both the rate and quality of growth by phasing out the large payments of energy subsidies that have strained government finances and led to misallocations of capital across the economy.

“We mean business with the reforms but there will be no surprises,” said Qadry, promising that the government would take steps to inform companies and educate the public why the removal of energy price subsidies was necessary.

Although profit levels for energy intensive companies will fall as subsidies are withdrawn, Qadry said the savings to the government could be re-allocated to improving social protection and expanding the reach of the social solidarity fund from which 1.5m households currently benefit to 3m to 4m families in the poorest villages.

Reforms of the tax system that would not affect the poor were also promised. Egypt’s tax base remains small compared to the size of its economy but Qadry promised new measures to limit tax avoidance and a temporary levy for three years on higher income groups who will be able to direct their contributions to social projects of their choice.

A new wider VAT system is also planned and Qadry complained that the failure by previous administrations to implement long agreed property taxes had deprived the government’s social budget of billions of dollars.

Forecasting a small improvement in growth to 3 to 3.25 per cent in the fiscal year ending June 15, Qadry said the government would be prepared to tolerate a deterioration in the government’s budget deficit in the forthcoming year.

Even with the help of billions of dollars in financing from neighbours, Egypt’s budget deficit will reach 11.5 per cent of GDP in the current fiscal year ending June 2014.

Without structural reforms and the continuing support of its regional partners, the deficit could hit 14.5 per cent of GDP in 2014/15.

Qadry said the government’s priority was to stabilise the structural budget deficit by implementing its reform programme and that revenues from the sale of telecom licenses could help reduce the overall deficit to around 10 per cent of GDP.

It is also hoped that completing the political transformation and undertaking reforms will also allow financing from the IMF to re-start which would relieve Egypt’s reliance on its neighbours for handouts.

The representatives of Egypt’s financial industry had a spring in their step with the stock market up 80 per cent since the start of July following the overthrowing of president Morsi and the outlawing of the Muslim Brotherhood.

The first initial public offering since November 2010 has just been completed with Arabian Cement raising around $110m in a heavily oversubscribed offer. Another 8 or 9 IPOs are in the pipeline.

Egypt is also about to launch its first domestically listed exchange traded fund as part of renewed efforts to attract capital into the country.

Aladdin Saba, the chairman of Beltone Financial, a Cairo headquartered financial services group, which will manage the ETF said its launch coincided with the start of a new era for Egypt.

Millions of ordinary Egyptians who have never heard of ETFs will be hoping that Saba is right.

Source: The Financial Times