Bloomberg News

Egypt’s New Economic Program Limits Tax Rises Amid Unrest

February 25, 2013

Egypt Lays Out Economic Plan Seeking IMF Cash, Exit From Crisis

Opposition groups have opposed President Mohamed Mursi's commitment to parliamentary elections starting in April, and resisted his efforts for a dialogue to bridge differences. Photographer: Jewel Samad/AFP via Getty Images

Egypt’s government outlined an economic plan to win International Monetary Fund loans, with steps to narrow the budget deficit toned down to avoid inciting further unrest.

Sales taxes will increase on six commodities instead of 25 suggested earlier, while the income-tax exemption will rise to 12,000 Egyptian pounds ($1,780) from 9,000 pounds, Prime Minister Hisham Qandil told reporters in Cairo today. The plan would “gradually” increase fuel prices for energy-intensive industries, aiming to cap the deficit at 10.9 percent this fiscal year and narrow it to 9.5 percent in the next.

It’s the latest bid by President Mohamed Mursi and his government to complete a $4.8 billion IMF loan request whose delay has compounded the country’s economic crisis. The economic program was released against a backdrop of mounting unrest and outbursts of violence. Opposition groups have opposed Mursi’s commitment to parliamentary elections starting in April, and resisted his efforts for a dialogue to bridge differences.

Yields on Egypt’s benchmark dollar bonds surged to an eight-month high today as the political standoff persisted, and the main stock index fell to the lowest this month.

“If no measures are taken to deal with the current situation, the Egyptian economy will face grave dangers as the unemployment problem will be aggravated in the absence of investments or the financial surplus necessary” for job creation, the government said in the program distributed today to reporters at the Cabinet.

Public Opposition

The yield on $1 billion of 5.75 percent dollar-denominated bonds due in April 2020 rose 11 basis points to 7.06 percent as of 4:35 p.m. in Cairo, according to data compiled by Bloomberg. That’s the highest level on a closing basis since June 25, one day after Mursi was declared winner in the presidential election.

The EGX 30 Index (EGX30), which has risen 24 percent since June, fell 0.6 percent today.

Egypt signed a stand-by agreement with the IMF for the loan in November, then requested a delay and suspended the tax increases it had linked to the IMF program. The government cited public opposition to its proposals for the U-turn, which came amid growing street protests against Mursi and his proposed new constitution, approved in a December referendum.

The country’s budget deficit would widen to 12.3 percent without the program, the government said. It includes a 0.1 percentage-point fee for buyers and sellers of stocks. The six items that will see sales tax increases include alcoholic and non-alcoholic beverages, cigarettes, iron and cement.

Plunging Reserves

Egypt’s economy has stalled in the two years since the uprising against Hosni Mubarak, as tourists and investors stayed away and foreign reserves plunged. The IMF loan is seen by officials and investors as key to rebuilding confidence and securing other donor funds.

The economic program targets increasing reserves to $19 billion by the end of next fiscal year, from $13.6 billion last month, Investment Minister Osama Saleh said. He told reporters in Dubai that the country’s financing gap may widen “slightly,” while the program would also include a 10 percent tax on initial public offerings.

Mursi, in an interview aired early today on the Al-Mehwar satellite channel, called on the opposition to meet for talks on the parliamentary elections, which he says are vital to stabilize the nation. His secularist and youth activist critics have shunned previous calls for dialogue, and many say they will boycott the four-stage vote, which is set to begin April 22.

Election Boycott?

The National Salvation Front, which includes Nobel Laureate Mohamed ElBaradei’s Constitution Party, will not join the talks because they’re “not serious,” spokesman Khaled Dawoud said by phone today. “Boycotting the elections may be the best option,” though a decision will be reached tomorrow, he said.

The Salafi Nour Party, which follows an ultraconservative brand of Islam and has recently quarreled with Mursi, today said it would participate in the vote and called on other political forces to do the same. Bassam El-Zarqa, a Nour official who recently quit as an aide to the president, called in a televised press conference for a transparent vote.

The latest wave of unrest in Egypt has centered on the Mediterranean city of Port Said, where soccer fans are spearheading a civil disobedience campaign that has spread to other parts of the country.

Mursi said in the interview while he respected the rights of people to voice their opinions, what was happening in Port Said and elsewhere went beyond that. “Civil disobedience should come through the people’s will to express their opinions in peaceful ways, and not by threatening people at gun point,” he said.

The comments risk further inflaming tensions in the Suez Canal city. More than 30 people were killed last month in protests against death sentences awarded to local soccer fans for their alleged role in a stadium riot last year.

To contact the reporters on this story: Tarek El-Tablawy in Cairo at teltablawy@bloomberg.net Ahmed A. Namatalla in Cairo at anamatalla@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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