Cairo, Asharq Al-Awsat—Egypt is a country known for civil disobedience based on economic troubles, and particularly the day-to-day difficulty ordinary people have affording the necessities of life: there were the bread riots of the 1970s, and during the 2011 revolution one of the most popular slogans was “Bread, Freedom, Dignity.”
In a country where up to half the population live around or below the official poverty line, the many economic problems continue to be at the center of political life as Egypt heads into presidential elections to be held by July. Here, Asharq Al-Awsat speaks with newly appointed finance minister Hani Kadry Dimian about the economic reforms, particularly to the tax system, his government plans to implement to alleviate the problem.
Dimian has worked in the Ministry of Finance since 2004, and in 2007 he became a deputy minister of finance. Awarded a master’s degree in International Affairs by Columbia University, he has also led the Egyptian team that negotiates with the International Monetary Fund.
Asharq Al-Awsat: Can you tell us about some of the difficulties facing the Egyptian economy? What are some of the temporary solutions the government is working on?
Hani Kadry Dimian: The Egyptian economy is facing many challenges, including high inflation, which has reached 10 percent. Other problems are related to the economic structure and political circumstances. We are currently working to attract investors to the Egyptian market, as well as developing an approach to tackle the current crisis in an active effort to promote economic growth, security and social justice.
I would like to stress that it is wrong to restrict social justice to the question of wages. It’s a question of the quality and value of life enjoyed by all and how to achieve a decent life that protects social rights for all groups, as well as adopting effective and timely economic measures. This requires changing the way we think about the national economy and economic management, looking at each sector separately. We can then expand our scope beyond the national economy to a balanced outcome that ensures all can take advantage of the nation’s potential.
Q: How could this be achieved?
Through cooperation between all the institutions of the state. This requires time and effort, especially because the demands of different groups within society are many and varied. Dealing with each group individually is tedious, but developing plans and then implementing them ensures that they will be realized in the future, provided that state institutions, the press, the media and all of society work together to pull Egypt out of its economic crisis.
This will not and should not be led by generous support from abroad. Perhaps one of the most important aspects of the cooperative effort to rebuild the Egyptian economy is the responsibility borne by all income earners under the new tax measures, with the exception of those who rely on social welfare and the poor.
Q: How is the Egyptian budget deficit calculated and why has it reached 10 percent?
The deficit was based on assumptions that encouraged reform programs in certain periods. It also assumed growth rates higher than the actual rates, so it [the deficit] was thought to be around 10 percent to 12 percent. But [predicted] growth rates usually tended towards the higher end. We are now making every possible effort to deal with this issue and achieve such results. But, frankly, I think that the Egyptian budget deficit must be calculated in a fundamentally different way in order to reveal the real problem. It must exclude investment spending and income, just as it must also exclude foreign grants and extraordinary income and spending. These changes would raise the level of the structural deficit, which in reality is probably closer to 13 or 14 percent.
This isn’t the time to expand on the budget deficit or the public debt to gross national product (GNP) ratio, but we will begin to control the GNP through a new program. The specifics of the program have yet to be announced; however, the program will aim to reduce the deficit by 2 percent of GNP. It will be implemented in phases, which are set to begin next year, through real structural measures. If we are talking about [a deficit of] 11 percent or 12 percent this year, we will work to get it down to 10.5 percent next year, even taking into account an increase in spending on health, secondary and tertiary education and scientific research, spending on which is expected to reach up to 10 percent of GNP in the coming years. By 2016–2017, we will need 140 billion Egyptian pounds to cover this spending.
From here, we have to confront these challenges with all seriousness and clarity, especially because the commitments arising from the general budget are long-term commitments. We in the Ministry of Finance are aware of this and are constantly facing crises. The government is aware of these challenges, too.
It must be clear that the general budget income is to be employed for the benefit of wider groups in society. Neither the state nor the government should horde this income; rather, it should be recycled and funneled back into the broader society. We collect tax and non-tax income from certain groups that are able to make a difference and lead growth in other categories—including the categories that originally contributed resources for the benefit of all of society.
Q: Can you tell us about the new tax and subsidy regulations, and specifically the tax imposed on those in high income brackets?
This was a proposal from the previous government headed by Hazem Beblawi; it was put forward by a group of businessmen who pitched the proposed tax to former [finance] minister Dr. Ahmed Galal. It is a tactic used by some countries in crisis, and it places a tax increase on high earners of 5 percent over a temporary period ranging from two to five years. In my estimation, this tax will continue for three years—the legislation is clear on this. It has been put in place to reinvigorate Egyptian production, but it is ultimately intended only for exceptional circumstances and then it is to be lifted shortly thereafter.
In general, concerning the tax reform procedures, we rely on two principles. The first is widening the tax base, not increasing the tax burden on an already exhausted society, increasing pressure on an economy that is unable to achieve the minimum required growth rates, or targeting particular groups.
It is a grave error for the economy to grow by 6 or 7 percent only to have the growth rate fall to 2 percent, as it did during the last two years. The intention is to distribute the burden across the largest possible number of people and the highest wage earners, with the exception of low-income groups, the groups most deserving of welfare and to whom the state provides support in order to improve their standard of living. Performing these tasks—namely, redistributing income to those of limited means and implementing economic and financial policies that drive growth and investment—is the constitutional responsibility of the Ministry of Finance and the government.
We encourage free-market mechanisms that balance rights with duties, and we will continue to support these mechanisms as well as all ways of encouraging investment. It will revitalize the systems and frameworks of participation between the public and private sectors. We have a number of projects ready that will need significant investment.
The second principle is that of progressive tax. It is important that we distinguish this from raising the tax rate. Progressiveness here refers to a tax structure in which the tax rate increases as income rises, increasing first by 10 percent more than the previous tax bracket, then 25 percent, etc. The higher the income, the higher the tax bracket and therefore the tax rate. There are a variety of taxes, including real-estate tax and value-added tax, all of which restore confidence in the economy.
Q: Will the government continue to pursue its policy of expansion?
First, let me say that the political situation dictates economic conditions. We have an economy that grows by 1 percent and at the same time experiences 10 percent inflation and high pressure on the state budget and the foreign exchange market. With the passage of time, all of these factors shake confidence in the Egyptian economy. The government’s number-one priority is to restore that confidence and once again grease the wheels of the economy. Economic recovery is the best form of protection and the first line of defense for low-income people, because it creates job opportunities rather than simply handing out subsidies. Along with the Minister of Industry, I will research new ways of supporting employment programs, in addition to working with the Federation of Industries and agricultural unions to provide vocational training for those entering the job market, in order to endow them with the skills and qualifications to succeed.
As for the current economic situation, we must adopt a balanced policy to rebuild confidence by emphasizing the mechanisms of the balanced free market—in other words, a free market made up not only of rights, but of rights and duties. Looking at the experiences of all countries that support free-market principles, we see that they need strong foundations and legislation that focus on power and the establishment of the principles of consumer protection on the one hand and fair competition on the other.
At the same time, we must create opportunities for investors and support their economic activity by removing obstacles in licensing, land and energy sources. This will help stimulate the economy and benefit the broader community, whether in the form of direct or indirect taxes or in the form of social participation in programs that support the community.
Q: How can the Egyptian government move from collecting revenue to implementing projects on the ground?
I think that the implementation of some projects was stalled for organizational reasons. There are some projects that may be disrupted despite an abundance of resources because the tenders remain unresolved or because nobody bid on the contract due to profit uncertainty. It could also be that the structure of the market inhibited their growth. For instance, one contractor may have the desire to start on a new project, but is busy with several others, and no other contractor bid on that project. Other factors include the impact of the market structure as well as the issue of delayed signings and general hesitation. As such, there must be legislation to protect the public employee at various levels as long as he does not profit directly or indirectly from performing his work other than through his salary. He must obtain full protection during the course of performing his duties so that he can be reassured and advance. We must act within the bounds of our reality without any slogans. The issue can be summed up as a legislative problem.
Q: Some accuse the Ministry of Finance of dealing with tax law as jibaya (a term for a harsh, imposed tax that dates back to the Mamluk era), especially after the imposition of the income tax, property tax and sales tax. How would you respond to that?
The sales tax is based on advanced foundations. As for the issue of turning tax into jibaya, this kind of talk is inaccurate to say the least. We look at the income tax as a percentage of the GNP to which we all contribute. The tax rate in Egypt is less than anywhere in the world, and there is a flaw in the distribution. In Egypt the tax base is less than 20 percent, compared with most countries of the world where the tax bases fall between 35 percent and 50 percent of the population. This is linked to the structuring of wages as well. In 2010, wages totaled approximately 80 billion Egyptian pounds but will rise next year to 185 billion Egyptian pounds, an increase of 124 percent in only three years. The popular pressure on governments has prompted some [state] officials to raise salaries without regard to the financial burden on the state budget, as this was not accompanied by the counterbalancing actions elsewhere in the budget.
Q: What about the rationing programs for energy subsidies initiated by the former minister?
I will complete what Dr. Ahmed Galal began. Energy subsidies cannot continue as they are—reserved for just low-income earners. In order to achieve social justice we must redirect 300 billion Egyptian pounds towards energy subsidies. The total expenditure over the past 10 years on grants, benefits and subsidy programs amounts to 1 trillion Egyptian pounds. Did it improve people’s living conditions equivalent to this amount? Have poverty rates improved? Is there justice in the distribution of income? We must find new mechanisms to improve living conditions other than subsidy programs that waste public money.