THE BLOG

Going Nowhere: Does Egypt Have an Economic Plan?

Egypt's economic policy has been in a virtual holding pattern since the end of last year and the government finds itself in exactly the same situation today as it was nearly six months ago: having to implement tough but unavoidable reforms in the face of deep political division and with elections just around the corner.

This could explain why a sweeping reshuffle announced Tuesday replaced the cabinet's entire economic team. The new ministers of finance, planning, investment and petroleum will need to act swiftly and decisively to stave off an economic crisis and articulate a coherent, implementable strategy to revive the stagnating economy.

A government spokesperson said the ministerial changes would not affect economic policy or plans for reform but some economists warned it could send a negative message to investors.

Two of the new appointees with economic portfolios are members of the Muslim Brotherhood, one has a background in Islamic finance and another is seen as a technocrat.

The new finance minister, Fayyad Abdel Moneim, who has a Ph.D in economics from Al Azhar University, is Egypt's fifth finance minister since the revolution and is seen as similar to the outgoing El Morsi Hegazi (who held the job for less than five months) in that he is an academic with no official affiliation to Islamist groups but with expertise in Islamic finance and Sharia compliant banking. He will have to pick up debate in parliament over controversial tax proposals and reconcile the budget for the new financial year with the economic reality in Egypt.

Abdel Moneim will also have to work closely with the new planning minister Amr Darrag, a founding member of Muslim Brotherhood's Freedom and Justice Party and a former member of parliament, to forge ahead with negotiations over an IMF loan that has yet to materialize and remains polarizing.

The new investment minister, Yahia Hamed, is a Brotherhood member and former adviser to President Morsi who also worked on his election campaign. He will be tasked with reassuring investors at a time when confidence has been shaken following legal disputes with foreign and local companies and the introduction of new taxes on share trading and bank loans.

The petroleum minister, Sherif Hedara, who most recently served as head of The Egyptian Petroleum Corporation within the ministry, is a mechanical engineer who faces the mammoth challenge of implementing energy subsidy reform -- a cornerstone of the economic reform agenda -- in less than two months and in time for a July deadline.

The outgoing government didn't seem fazed by the lack of action on reform and it is not clear if the new lineup will be able to breathe life back into policy making.

And while economic policy has remained frozen, the actual economy has continued to deteriorate. Unemployment rose to 12.7 percent, the currency lost 10 percent of its dollar value, and the deficit exceeded 10 percent of GDP.

There appears to be an alarming lack of urgency on the part of Egypt's rulers about the state of the economy which has been limping along over the past two years on what some have described as "Qatari life-support."

Egypt has received about $10 billion in various forms of aid from Qatar, Saudi Arabia, Turkey and most recently Libya but these funds are just a short term "backstop" to cover essentials like food and fuel for a few months -- not to mention unpaid bills to oil companies, debt repayments and the cash needed to keep the currency afloat.

No amount of foreign funding or cabinet reshuffles is going to address the real issues Egypt must overcome in order to move forward: prioritizing jobs and growth, overhauling the public sector, investing in agri-business, food production and infrastructure. The longer these challenges are ignored, the bigger the hole in the budget and the greater the public's resentment of the government.

This policy paralysis can be attributed in part to the notion that the current regime believes Egypt is "too big to fail," as suggested in a recent blog and that the international community will bail Egypt out because of its strategic importance.

The Islamist leaders are loath to implement unpopular measures that could cost them votes but the current policy of relying on the (strings attached) aid from donors is shortsighted and may not provide the political cover hoped for.

The key reforms in question -- reducing subsidies on energy and increasing taxes -- are aimed at tackling the deficit and are framed within the context of the looming IMF deal.

In its latest visit to Cairo the IMF sat down with everyone from the hard line Salafis to socialist opposition leader Hamdeen Sabbahy who warned the loan could lead to a "revolution of the hungry."

The latest changes in government could add further uncertainty to the deal but officials stressed the reshuffle would have no bearing on negotiations because policies remain unchanged.

Incoming planning minister Amr Darrag, who spoke at a private briefing I attended at think tank ECFR in London a few days before his appointment, said his Islamist party was "in full support of finalizing the IMF loan" and that Egypt was "heading towards an agreement in the near future."

He said there was agreement with the fund on "almost everything" and that negotiations centered mainly around the pace of reforms, with the government careful to take social welfare into account.

In his first public comments as minister Darrag said his focus would be on strengthening economic ties with key markets in Asia and Europe.

Still, a final deal remains elusive and the details of the economic plan are unclear.

What we know is that a tax on stock transactions, bank loans and advertisements has already come into effect.

Parliament has suspended debate on income taxes because of disagreements with the Finance Ministry, which has yet to provide concrete figures for expected revenue from the different tax brackets. The new minister will need to resolve this impasse and produce accurate calculations. In his first remarks since being appointed, he said that would be a priority.

And there is a still a big question mark over the ill-fated sales tax that caused an embarrassing u-turn last year, with some reports indicating it could be introduced early next year.

Overall tax revenue is expected to increase by 34 percent in the new financial year according to the budget but it is not clear how that will be achieved, particularly given that much of the tax law is still in progress.

Spending is also set to rise, with the wage bill going up by a fifth and the cost of subsidies -- about a third of state expenditure -- increasing by 12 percent.

Officials confirm phasing out energy subsidies will begin on schedule in July with the introduction of "smart cards" to regulate the distribution of petroleum products. If the new minister is to honor this pledge, he will need to hit the ground running.

Economists say it is unlikely the smart card system will be ready in time for the summer and some question the viability of introducing inflationary taxes in the span of a few months and ahead of elections slated for the fall.

The fact is, IMF or no IMF, Egypt's sums don't add up. The budget for the current financial year ending in June allocates LE70 billion ($10 billion) in spending on energy subsidies but the outgoing petroleum minister said actual spending would hit LE120 billion ($17 billion) in the absence of reform. Where's the extra money going to come from?

It is understandable the government feels the need to downplay the severity of the crisis but it also needs to be realistic. The current budget, which projects a growth rate of around 4 percent, is more akin to wishful thinking than anything connected to reality.

Investment Bank EFG Hermes said the budget assumes a "highly optimistic scenario" for growth and revenue and that the timetable for reform was "highly unlikely, even from a purely logistical perspective."

It is important to remember that the budget and the economic program are not one and the same.

The budget is a set of projected figures for spending and revenue that the finance ministry prepares. It is based on growth estimates and, in theory, the numbers should add up.

The economic program is meant to be a holistic blueprint for the entire economy: measures for growth, employment, investment, an actual P-L-A-N.

If the new economic team is to succeed, it must have a vision for the country, an achievable plan.

For example, we're going to build new roads and transport links, upgrade the crumbling infrastructure, attract foreign investors by providing incentives. We're going to cut red tape, seek new trade deals to boost exports, make the tax system fairer and more efficient. That's a plan. Egypt doesn't have a plan and until it does, it is going nowhere.

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