(Bloomberg Opinion) -- As it tries to mitigate the economic fallout from the coronavirus pandemic, Egypt’s government has begun to plan for a recovery. Prime Minister Mostafa Madbouly recently participated in a symposium on “opportunities and priorities” in a post-pandemic era. More significant, the government is also pursuing new financing from the International Monetary Fund.
While the last IMF bailout and the economic reforms that followed helped stabilize Egypt’s finances and secure access to private-sector borrowing, it failed to address many of the structural problems that prevented a sustainable economic recovery. The pandemic has increased the urgency of a new round of reforms, focusing on inclusivity, resilience and sustainability.
Since 2016, Egypt’s has received positive international headlines as its GDP growth steadily rose by over 5% annually—it was on track to grow 5.7% this year, before the pandemic hit. But this growth was far from inclusive: millions of Egyptians have grown poorer, with the poverty rate rising from 27.8% in 2015 to 32.5% in 2018. The private sector, outside of oil and gas, has contracted nearly every month since the bailout, due in large part to weak consumer demand.
Much of the government’s debt-driven stimulus, particularly in infrastructure and housing, has been channeled through security-sector enterprises, with no-bid contracts. Companies affiliated with the security sector have taken advantage of their privileges—such as exclusion from the regulations, taxes and customs applied to private businesses—to expand at the expense of private-sector actors. These anti-competitive practices have further depressed private-sector activity; investors are often reluctant to compete with privileged entities.
The reform agenda’s failure to deliver inclusive growth has led, in turn, to an economy lacking in resilience. Growth has been insulated to a handful of sectors, most of which are vulnerable to external shocks: tourism, remittances, foreign direct investment in hydrocarbons and Suez Canal revenue, all of which are expected to decline because of the pandemic and the steep fall in oil prices. And then there’s Egypt’s dependence on fickle short-term carry-traders who have exited its debt markets in a dramatic fashion.
With most of Egypt’s growth sectors and hard-currency sources in retreat, the unsustainable nature of the economy the government has sought to build is coming into sharp relief. There may be a temptation by the government to double down on its dependence on the military as an economic actor as the private sector appears even weaker than before, but this will only repeat the mistakes that brought Egypt to this point.
In 2016 the IMF claimed it would deliver a more inclusive economy with greater private sector participation, attracting investments and an expansion social welfare programs. Reality fell well short of expectations and these mistakes should not be repeated.
Madbouly is right to look for opportunities to redirect Egypt’s economic trajectory, but he should be prepared for a re-ordering of priorities, starting with a commitment to building an inclusive economy.
He should start with social spending to reduce poverty and raise household spending power. The existing Takaful and Karama social programs are a positive start, but they only cover around a third of Egyptians living below the poverty line. Every Egyptian in need should have access to assistance.
It is reassuring that the government plans to increase spending on education and healthcare, which have been underfunded for ages. But it is essential that the increases are real and substantial, rather than an exercise reclassification of line items in the health and education budgets to inflate their size. What is needed is a realignment of spending priorities toward investing in Egypt’s human capital.
As part of the drive for more inclusive growth, all government contracts should go through a competitive tender process, and participating companies must pledge to use registered employees and ensure companies they subcontract do the same. This will help combat the problem of a huge informal workforce. The government cannot overcome its excessive dependence on debt without expanding the formal economy and the country’s tax base.
In 2016, the government, with the encouragement of the IMF, opted to increase tax revenues by implementing a VAT regime, the easiest way to quickly increase revenue ahead of the massive borrowing being planned. The new levy, however, added to already elevated levels of inflation and disproportionately hurt the working and middle classes.
Expanding tax base through a progressive tax regime is essential. Moreover, security-sector companies should be subject to the same taxes as private sector companies, not only to raise revenues but also in the interest of fair competition. This same fairness should be extended to all regulatory and customs regimes.
Increased social spending and investment in human capital, coupled with opening space for the private sector, will help build an economy that is better positioned to create jobs and deliver sustainable, diversified growth. More capital going to taxable businesses will help the government address its woefully inadequate tax to GDP ratio and help reduce its dependence on international assistance and emergency financing.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Timothy Kaldas is an independent risk adviser and nonresident fellow at the Tahrir Institute for Middle East Policy.
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