Talking finance: Will the minister reform subsidies?

Hany Qadry, the current finance minister in Prime Minister Ibrahim Mehleb’s Cabinet, might be an unfamiliar name to most Egyptians.

But those interested in fiscal policy will remember him as the prominent assistant to former Finance Minister Youssef Boutros-Ghali, who served under Mubarak from 2004 to 2011 — a figure known for his neo-liberal policies.

One also remembers Qadry’s quiet exit from ex-Prime Minister Hesham Qandil’s Cabinet during former President Mohamed Morsi’s presidency.

Qadry’s return as the finance minister in Mehleb’s Cabinet is reflective of the priorities and fiscal direction of the post-June 30 state. But before reflecting on Qadry’s statements, we need to first understand the Finance Ministry’s disposition in the aftermath of the January 25 revolution.

The story begins with Samir Radwan, who served as the finance minister from January to July 2011. Calling on an expert like Radwan, who has strong ties with the International Labor Organization (ILO), to head the Ministry of Finance was a significant development. Traditionally, a finance minister deals with problems like curbing the budget deficit or public debt — not labor issues, which relate closely to social policies.

In the first public budget after the revolution, Radwan was very critical of Mubarak-era policy. He said the former regime’s success in creating growth did not mend the structural problems that hamper the trickling down of such growth to reach all social groups.

But Radwan’s social reforms, such as raising the minimum wage by nearly LE350, did not mean that he was ready to handle huge reforms like restructuring the fuel subsidy, which would require a wide social dialogue, as a price hike in fuel would definitely affect the livelihood of many Egyptians.

The fuel subsidy issue has become increasingly urgent due to the persistent decline in foreign reserves — Egypt relies on importing a significant portion of its subsidized fuel. This foreign reserves crisis paved the way for Radwan to open a dialogue about borrowing from the International Monetary Fund (IMF).

But IMF loans have an Achilles heel: The conditional subsidy reforms required of borrowers, who have to liberalize fuel prices in a way that imposes austerity measures on significant segments of society. The Supreme Council of the Armed Forces (SCAF) and its transitional government didn’t accept the loan during Radwan’s term, and did not announce the reasons why.

What is significant about the finance ministers who followed Radwan is not any significant decisions they took or policies they adopted, but that they belonged to very different professional backgrounds — and none of them objected to the IMF loan. Former Prime Minister Hazem al-Beblawi (part of the liberal coalition in 2011) supported the IMF loan, as did Momtaz al-Saeed, who came from the bureaucracy of the finance ministry, as well as Morsy Hegazy and Fayed Abdel Moneim, two Muslim Brotherhood ministers who claimed to desire an “Islamic economy.”

Both the state and the various political forces scrabbling for power seemed to share a similar view on the IMF-stipulated restructuring of the subsidy system. There was an immense need for such reforms, due to the incremental increase in budget deficit from 9.8 percent of the gross domestic product (GDP) in 2011 (the fiscal year of the revolution) to 10.6 percent in 2012, and 14 percent in 2013.

We also have to talk briefly about Ahmed Galal’s term in the Finance Ministry from July 2013 to March 2014.

Before he became a finance minister, Galal — a prominent economic expert — handled the question of the IMF rather pragmatically. He had argued that it all depended on how the IMF’s conditions were negotiated.

Surprisingly, however, when he became the finance minister in the first Cabinet formed after June 30, he declared that Egypt didn’t need the loan. This was obviously because he was banking on generous Gulf aid to ease the economic crisis. Everyone is well aware, however, that the Gulf solution is not sustainable.

What we can conclude here is that the critical political situation has forced fiscal policies in a certain direction, regardless of the economic inclinations of the finance minister in office. Additionally, Egypt’s economy is in such dire straits that fiscal reforms are inevitable.

In this context, Qadry told journalists that he expected the budget deficit to reach 12 percent — 2 percent more than his predecessor Galal had predicted. He also assured that without Gulf aid, it could reach 13 or 14 percent of the GDP.

Qadry also claimed that the total government subsidy expenditure over the past ten years, which adds up to LE1 trillion, was inefficiently spent — so we can deduce that he is paving the way for declaring subsidy reform following the presidential election.

Another significant indication of impending reform came when Planning Minister Ashraf al-Araby recently told Reuters that the government would raise electricity prices before the presidential election at the end of May.

And although negotiations with the IMF have been halted for some time now, a recent report by the Bank of America held that Qadry’s appointment was a positive step toward finally obtaining the loan, as he has led negotiations with the IMF before. This might indicate that we are not very far away from IMF reforms.

It seems that even if Gulf aid has rescued the Egyptian economy for now, donor countries are also pushing for fiscal reforms — it is unrealistic to continue lending to Egypt with a continuously increasing budget deficit.

Qadry has also declared that the government is studying a new temporary tax of 5 percent on high income. He might want to appear eager to establish a new, balanced social contract by imposing this tax, but some experts, like former EFG Hermes chief Hassan Heikal, criticized this idea and argued that the temporary tax should be imposed on wealth, not income.

“I have resigned from my post, and I currently have no income, will I not be taxed? The tax should be on wealth, not income,” Heikal tweeted, addressing Qadry.

Wael Gamal, a prominent economic reporter, also argued that this tax is just a temporary increase of the current income tax from 25 to 30 percent.

The move can’t be considered a serious form of progressive taxation policy if it doesn’t come in the form of a permanent wealth tax. There is a dire need to reform government subsidies in a way that puts an end to subsidizing the rich.

In addition, the government should increase the budget of the education and health sectors, as stipulated in the new Constitution, which Qadry declared he would respect.

As for the question of subsidy reforms, there is a need for a democratic environment to guarantee that it will be implemented in a way that respects the interests of the country’s poor majority.

So if Qadry approaches subsidy reform as a quick fix for the fiscal situation, and tries to impose such reforms without real public debate, we might find ourselves returning to the level of anger the public expressed during Boutros-Ghali’s term as minister, which led to the uprising on January 25, 2011.

The original version of this article was published in Arabic here.


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