Cairo, Asharq Al-Awsat—Speaking to Asharq Al-Awsat from his office in Cairo, Egyptian finance minister Ahmed Galal gave his take on the state of the Egyptian economy and government plans to reduce the budget deficit and enact a growth-based economic policy.
Galal is a noted economist, having held numerous senior positions at international economic bodies, including the World Bank. Galal was the managing director of the Economic Research Forum, a leading regional research institution, when he was offered the job of finance minister in the interim government headed by Prime Minister Hazem El-Beblawi . His tenure has seen a huge influx of foreign funds into Egypt, particularly from the Arab Gulf.
In exclusive comments to Asharq Al-Awsat, Galal outlined his economic and institutional reform project, which is seeking to restart Egypt’s stalled economy.
Asharq Al-Awsat: What’s your assessment of the economic situation in Egypt?
Ahmed Galal: Egypt’s economy is suffering from three fundamental problems. The first problem is that of imbalance, namely a deficit-to-GDP ratio of 14 percent, a significant decrease in foreign currency reserves to the point that they could only cover national imports for three months, and so the Egyptian pound was devalued against the US dollar. This resulted in the development of a parallel market for the local currency, along with increased interest rates on public debt, resulting in Egypt’s foreign and domestic debts standing at 90 percent of GDP.
The second problem was represented by a slowdown in economic growth, which last fiscal year fell to just 2.2 percent. This is a very low rate, and means that job creation rates will also be limited, particularly if you take into account that there are 700,000 to 800,000 new people entering the job market every year.
The third problem—and this is the fundamental problem—was the general sense that there was no social justice, which was a correct sense. By social justice, I mean that the distribution of income and wealth across society was getting worse [i.e., more unequal] with the passage of time.
The current government is confronting these problems and trying to help Egypt get out of this quagmire. We are not just trying to resolve these problems in the short term, but are striving to pave the way for economic growth and recovery.
Q: What are your plans to secure this recovery?
Over the past year, the proposed solution was a loan from the International Monetary Fund (IMF) along with some reforms to reduce the budget deficit, in addition to using sukuk [Islamic bonds] as a means to attract investment. That was the vision.
However, when we entered the government, we saw that the solution lies in changing our economic policies from a deflationary approach to one based on expansion [i.e., a countercyclical policy]. This policy requires funds from abroad, whether through the return of tourism, foreign investment or grants and loans. These are the alternatives on offer for an economy that is operating below capacity and requires a shot to the arm to push it forward.
The dilemma was how to follow this approach without upsetting the overall balance. The basic problem was regarding the lack of financing from abroad, and that was resolved with the support the Gulf States have offered us. This assistance has granted us the ability to take a breather and follow this growth-based approach while seeking to achieve financial balance and social justice.
We included all of this in the first phase of our reform program, including an additional EGP 60 billion being added to the state budget. A large part of this additional appropriation is being invested on infrastructure, which will increase employment and serve the development process during the forthcoming stage.
Q: How do you think these policies will affect Egypt’s future economic outlook? Will the next Egyptian government require foreign financial assistance, whether from the IMF or other Arab states?
The government is working on two tracks. First, we are working to deal with the most pressing problems, because these cannot wait. However, on the second track, we are working to put in place a range of economic and institutional reforms that will serve future governments. One of the problems we have responded to is guaranteeing the future supply of commodities and gasoline. We have also responded to urgent public demands, such as those calling for a minimum wage and increasing pensions. At the same time, we have enacted a property tax law, and we are trying to move towards a value-added tax system. These issues will be important to any future government, and the next government will also reap the fruits of the policies being followed by the current government.
Q: There are reports that the government considering introducing progressive taxation and its consequent tax increases for high earners. Can you confirm this?
This is inaccurate—these are rumors. A tax on affluence is not in our plans, particularly as any such tax would be difficult to implement. We are following a growth-based approach, and we cannot do that while enacting new taxes. This does not mean that we oppose progressive taxation on income, nor do we oppose a review of income tax, but it is important that any such tax is imposed at the right time. Now is not the right time.
Q: The minimum wage rise is set to come into force in January. Will it be enough solve the Egyptian wage crisis?
There are a number of reasons behind the wage imbalance, and they will remain with us and with Egypt’s future governments. Egypt’s salary structure is very complex—not just in the government sector, but also the private sector. The employment market and salary structure require a fundamental review.
The minimum wage is a popular issue and an important issue, but it is not the only issue—and it may not even be the most important issue in terms of social justice.
Q: Are there any other plans to stimulate the economy?
What I can confirm at this point is that the most recent budget appropriation will not be the last. There has been a shift in resources and obligations in terms of expenses that have been added, but which were not taken into account in the additional allocation to the budget.
Q: Egyptian officials have said that this additional allocation may be somewhere in the region of USD 3.2 billion. Is this true?
We have yet to announce a definite figure. The Ministry of Finance is studying this issue with the Ministry of Planning. These discussions are ongoing, and all I can confirm at this point is that there will be an additional allocation to the budget.
Q: The United Arab Emirates in particular is seeking to develop a number of projects in Egypt, and these plans were cited in the stimulus plan announced by your ministry. To what extent will such assistance affect Egypt’s stimulus plan?
All of the projects that were supposed to be financed by the government and which are now receiving foreign financing will help develop Egypt’s economy. We thank the UAE and others for their assistance in financing projects in Egypt.
Q: In addition to the UAE, what other countries are injecting funds into Egypt?
The Emirati [financing] model can be viewed as a model to emulate, and it is helping us in our discussions with Saudi Arabia and Kuwait. The Egyptian Minister of International Cooperation, Dr. Ziad Bahaa El Din, is set to begin new round of talks with Saudi Arabia and Kuwait.
Q: How do you intend to contend with Egypt’s budget deficit?
The budget deficit will be reduced to 10 percent, and I am committed to this pledge. I have not plucked this number out of the air—it is based on hard figures. For example, all of our spending is offset, and so we are taking our budget deficit into account. We do not spend money unless it has been allocated, and if we find an issue that requires spending money, we look for ways to finance that expenditure that do not increase the deficit.
A large part of the additional funds we received from the Gulf States were grants, but another important thing is the indirect benefits that we have obtained from this assistance. It has increased Egypt’s currency reserves, and the central bank has cut interest rates, allowing borrowing at a rate of 10.5 percent, rather than 14.5 percent.
Q: Is there any intention to reduce subsidies?
One of the important things that we are trying to begin with is the rationalization of energy subsidies. We do not want to move closer to supporting material supplies, because we are talking about EGP 30 billion in food subsidies, and EGP 130 billion in gas subsidies. When time is of the essence, you must focus on the thing that will have the greatest return—in this case, energy subsidies.