Described as a no-nonsense technocrat, Dr Ahmed Nazif, appointed in July, is, at 52, the youngest prime minister in Egypt’s modern history and has assembled a formidable economic team, mainly from successful private sector businessmen.
Well aware that reform has been stalled for years and 650,000 new jobs need to be found each year, the new team has introduced a swathe of bold measures in the customs and tariffs areas as well as general taxation, with significant banking reforms expected imminently. Speaking to The Banker, the new minister of foreign trade and industry, Rachid Mohamed Rachid, outlined a long-overdue reduction in customs and tariffs from 15% to 9%, thereby helping strip away opportunities for corruption and streamlining trade.
Taxes slashed
Along with tariffs, the new team has also taken an axe to personal income and corporate taxes. The maximum personal tax rate has been slashed in half from 40% to 20%, and the new tax law, due to be approved by parliament in November, will also cut corporate tax to 20% with the exception of the export and oil sectors, where it remains at 32% and 40.6% respectively.
“These measures are helping us move to integrate fully into the global economy and to create new jobs,” says Mr Rachid. The cost of customs and tax reforms has been put at EŁ3bn ($481m) a year by the minister of investment, Dr Mahmoud Mohieldin. This figure, however, is viewed as insignificant compared to the overall stimulative effect of the fiscal reform package and the continuing reduction in subsidies.
Another major part of the new team’s reform programme is banking. In a key decision, all the government’s minority stakes in banks are to be sold. And after dithering for years, the government has also decided to privatise one of the “Big Four” public sector banks, selling up to 100% to private or foreign buyers. Analysts suggest Bank of Alexandria – the smallest – is the most likely candidate, and an official announcement is expected very soon.
The government’s minority stakes in joint venture banks such as Misr International Bank (MIBank) and Egyptian American Bank may prove interesting, but with six state banks – Commerce & Development Bank, Mohandes Bank, Islamic International Bank for Investment, Misr Exterior Bank, Nile Bank and United Bank of Egypt – being folded back into their parent groups for regulatory reasons, there are potentially a lot of banking assets on the market and not many buyers. One active foreign bank – Barclays – recently acquired 100% of its previous joint venture, Cairo Barclays. How much appetite there is for Egyptian bank assets remains to be seen and progress on acquisitions is likely to be slow. At present, says Dr Mohieldin, Egypt is over-banked, with 54 banks, but under-branched in certain areas.
Regulatory shake-up
As part of the overall reforms, Dr Mohieldin also suggests that Egypt’s next step will be to set up a single regulator, merging a number of existing regulatory bodies into one similar to the UK’s Financial Services Authority. But, as with the tax reforms, such moves are expected to take time.
On the economy, both ministers acknowledged the strengthening role of the central bank under the leadership of Farouk el-Okdah. Recently, the exchange rate has stabilised and the parallel exchange market has disappeared following a series of interest rate hikes. Dr Mohieldin noted concern over Egypt’s expanding budget deficit, which is nearing 6.5% of GDP, but he was much more positive over the current account surplus of 5% of GDP and an estimated balance of payments surplus of $1bn next fiscal year.
With an unprecedented spirit of co-operation, the new economic team is keen to make a difference and boost growth from 4.1% to the 6% level needed to satisfy the demand for 650,000 new jobs each year. The team has made a good start and introduced much-needed customs and tax reforms, with more change in the pipeline. But the key is whether they can convince investors, both local and foreign alike, to buy into the wide range of privatisations becoming available, and make them believe that the new government genuinely has a fresh vision and is able to implement it.
