Home / / Egypt threatened by full-blown economic crisis

Egypt threatened by full-blown economic crisis


Comments / 506 Views / Monday, 28 November 2011 00:00


CAIRO (Reuters Breakingviews): Egypt finds itself without a government at the worst possible economic time. Amid deadly clashes, and with elections likely to be delayed, its financial situation cannot be ignored and requires immediate action. The pound is under pressure, investors are wary. Social spending is beyond the country’s means. Taking action now could limit the fallout. But without a proper government, the odds this will happen are low.

The economy has huge vulnerabilities. The budget deficit is will reach 10 percent of GDP in 2011. Waning tourism, shrinking foreign direct investment, and the central bank’s costly defence of the pound all have depleted Egypt’s foreign reserves by 40 percent, to $22 billion, this year. Egypt now has only three months worth of imports in liquid reserves and is under increasing pressure to let its currency devalue.

The immediate priority is to go back to the International Monetary Fund and take the $3.2 billion 12-month facility mindlessly turned down in the summer. Even that aid is now looking like a paltry sum compared to the size of the crisis. Egypt has low external debt, but its over reliance on domestic banks has driven T-bill yields up to 14 percent. And 22 percent of total government spending already goes to serving interest payments.

Subsidies -- mostly on cheap fuel -- soak up a further 33 percent of total spending. That is greater than spending on health or education, and benefits the rich disproportionately. Phasing out subsidies would show investors that Egypt is prepared to tackle its deficit and the population that the government is willing to start honouring its “social justice” commitment.

Egypt also needs to reform its taxes. The country currently has no tax on capital gains. Income tax doesn’t amount to more than 20 percent for most top earners -- lower than the global average, according to the Carnegie Middle East Center. Corporate tax is also capped at 20 percent for most companies. Egypt may have many low-tax neighbours but many long-term investors might be willing to pay for their access to a big market.

Subsidy and tax reforms aren’t new ideas in Egypt. But with the economy now seen as broken, the important decisions that can’t wait for a full political transition might be easier to agree.


Share This Article


COMMENTS

Today's Columnists

“Prime Minister is after me”: Mahindananda

30 June 2016

“The Prime Minister is after me,” claims Parliamentarian Mahindananda Aluthgamage. The former Sports Minister says Premier Wickremesinghe is intimidating him on a personal level following his involvement in matters with regard to the C...


BBS’ threat of an Aluthgama repeat

30 June 2016

The threat of repeating Aluthgama is tantamount to admission of responsibility for the pogrom of Aluthgama on 15 June in 2014     I have been accused by many in comments to my articles that I continue to ...


A closer look at the paddy value chain

30 June 2016

Except for a very few farmers in the country, the majority of paddy farmers are small-scale  operators     Introduction The popular notion about rice millers is that they exploit the paddy farmer...


Brexit success and the response of universities

29 June 2016

 W.A. Wijewardena in his Daily FT column on 27 June questions whether the UK Universities and the research sector is the biggest casualty in the aftermath of Brexit. Apart from the financial implications, if Brexit is a sign of a trend toward...


Columnists More