Egypt's Fiscal Policy

Wafik Grais, 17 Feb 2015

Fiscal policy reform in Egypt is crucial for several reasons—improving the social protection framework, including the subsidy system's efficiency, ensuring better coordination with monetary policy, and fostering economic growth. Yet reform is difficult due to political dynamics, high poverty levels,[1] strong reliance on social safety net subsidies, and a weak information database on subsidy targeting.

 

Fiscal policy underwent major changes from 1991 to 2013. The 1991 adoption of the Economic Reform and Structural Adjustment Program[2] led the government to adopt more effective policies. Real GDP growth soon accelerated to over 4 percent in 1995/96, up from low stagnant rates in 1991/92, while the inflation rate declined markedly. Fiscal rationalization together with debt relief from the Paris Club contributed to significantly lowering the ratio of external debt to GDP and, to a lesser extent, the debt service ratio.[3]

 

Despite reducing fiscal deficits to 1.1 percent in 1996/97 (IMF 1996), the government returned to a more expansionary path in 1997 (El-Refaie 2001). Over 2005/06, the government adopt a new tax law with uniform  personal income and corporate moderate tax rates and tariff levels[4] to stimulate economic growth and expand the tax base.

 

Since the events of January 25, 2011, fiscal policy reform has been a huge challenge. As the budget deficit expanded in response to social demands, the need for enhancing economic growth, creating new jobs, and providing private sector incentives required adopting an expansionary policy. At the same time, the same deficit expansion signaled the need for a more restrictive fiscal policy. The challenge of dealing with the dilemma led to the government's inability to conclude an IMF loan and to frequent changes cabinets.[5]

 

Characteristics of Egypt’s fiscal policy include a relatively high debt-output ratio, low tax buoyancy and yields on the revenue side, and rising wage and untargeted subsidies on the expenditure side (Alba, Al-Shawarby, and Iqbal 2004). The persistent structural budget deficit has had significant serious implications on the levels of debt-to-GDP ratios (Youssef 2007). On the revenue side, structural problems continue, associated with high reliance on indirect taxation, significant tax arrears, bias of the tax structure against wage-paid employees, and an inefficient tax administration system (Atlam et al. 2012).

 

References

 

 


[1] According to Central Agency for Public Mobilization and Statistics (CAPMAS) data, Egypt’s poverty increased to 25.2 percent of the population in 2010/11 compared to 21.6 percent in 2008/09. “Extreme” poverty decreased to 4.8 percent of the population in 2010/11 from 6.1 percent in 2008/09. These figures are according to the poverty line in Egypt, which is estimated at LE 256 per person per month, or LE 8.5 per day, while the “extreme” poverty line is calculated at LE 171.5 pounds per person per month or LE5.7 per day (CAPMAS 2012).

[2] For more information on Egypt’s ERSAP, see AfDB (1999) and Abdel-Khalek (2001).

[4] For more information on the tax reforms approved in June 2005 for personal income tax and January 2006 for corporate tax laws, see OECD (2010).

[5] For more information, see World Bank (2012).

 

 


Wafik Grais is an International Senior Adviser specializing in Islamic finance, financial regulation, investment financing, private equity management, and corporate governance with expertise in SMEs and green growth financing. He was co-founder and chairman of Viveris Mashrek, a Cairo-based, financial advisory services company specialized in private equity investments in SMEs, licensed by Egypt's Financial Supervisory Authority. He spent 28 years in international finance notably with the World Bank in Washington DC where he held several senior positions both in operations and at corporate levels. He holds a Ph.D. in Economics.

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