MAJOR STRUCTURAL REFORM DEVELOPMENTS
A new International Monetary Fund (IMF) programme is in place.
The programme, a US$ 5.2 billion one-year standby arrangement, was signed in June 2020. Coupled with a US$ 2.8 billion rapid financing instrument approved by the IMF in early May, this will help the government tackle the economic impact of the Covid-19 crisis and reinforce the progress on macroeconomic stabilization and structural reforms carried out under the previous US$ 12 billion extended fund facility (EFF), which ended in 2019. The new programme’s primary focus will be on enabling the government to finance spending on health services and social protection by bolstering the balance of payments and the state budget. Among the other pertinent features of the IMF programme is reforming the National Investment Bank, the state development bank, through the hiring of an international auditor to evaluate its financial position.
The parliament approved a new Banking and Central Bank Act.
The legislation, approved in May 2020, gives the CBE increased discretionary powers to regulate the banking sector. Another provision of the law puts the CBE in charge of licensing companies that want to offer credit risk guarantees. The law will also allow the CBE to provide short-term bailout funding to struggling banks. Under the legislation, future boards and chairpersons of state-owned banks will be appointed by the prime minister and will be subject to some form of competency approval from the CBE.
Reforms to subsidies have advanced.
In June 2020, the government announced increases in electricity prices, which went into effect in July. Residential users will face an average increase of 19.1 per cent, following a 21.2 per cent rise in July 2019. Electricity prices remain subsidized, and the plan for abolishing electricity subsidies completely was extended from 2021 until 2025. In August 2020, the metro fares on all lines in Cairo were increased by 50 per cent on average, following a previous increase in May 2018. The fuel indexation mechanism that was introduced in 2019 ensures that retail fuel prices remain at cost recovery and that the budget is unaffected through regular quarterly adjustments to reflect changes in world oil prices and movements in the exchange rate.
The long-awaited SME (small and medium-sized enterprise) law was approved.
Under the new law, approved in August 2020, the government will grant tax and custom incentives to the micro, small and medium-sized enterprises (MSMEs) sector. MSMEs will be given preferential tax rates ranging from 0.5 to 1.0 per cent according to the volume of their revenues and will be excluded from stamp duty taxes and fees for registration of articles of association for five years. The law includes a range of tax exemptions for MSMEs, and provides support in securing land and credit, and in marketing their goods and services. Companies will be entitled to exemptions from stamp duty and fees for company registration, land contracts and credit agreements for five years from the date of their registration and will not be liable for capital gains tax. The law will also create a special income tax regime for MSMEs. One of the key advantages cited for the new law is that it would help MSMEs to gain better access to credit, as the process of formally registering these businesses for tax purposes would make it easier for banks to make risk assessments.
The Sovereign Fund Law and the Public Enterprises Act have been amended.
The amendments, approved by parliament in June 2020, provide value-added tax refunds to any company that is more than 50 per cent owned by the Sovereign Fund of Egypt (SFE) and its sub-funds, and limits the scope of legal action that can be taken against the fund, shielding the SFE and its co-investors from third-party lawsuits. The Public Enterprises Act amendments reclassify listed companies in which the government holds up to a 75 per cent stake and brings them within the scope of the Companies Act, introduces a cap on board compensation, and puts in place new regulations requiring SOEs to provide evidence that their subsidiaries are economically viable.
- Growth has slowed in the fiscal year 2019-20. The Covid-19 crisis has contributed to a sharp rise in unemployment, but inflation has slowed, a primary surplus was achieved, and the current account deficit narrowed.
- In response to the Covid-19 crisis, the authorities took a range of measures. The government introduced a stimulus package and fast-tracked the release of overdue payments to contractors and export subsidies. The Central Bank of Egypt (CBE) announced a new debt relief initiative for those at risk of default and issued loan guarantees to banks to on-lend to private sector companies active in the manufacturing, agriculture and contracting sectors.
- Structural reforms advanced. The government continued with subsidy reform through increases to electricity and public transport prices, and a series of laws were passed, including the new Banking and Central Bank Act, the SME law, the Unified Economic Operators Registry Act, and amendments to the Sovereign Fund Law and the Public Enterprises Act.
- The authorities should step up measures to promote alternative water solutions. Water security is at the forefront of Egypt’s national security. To stem the worsening of its water shortage, systematic investments are required to promote efficient water utilization in agriculture, industry and beyond.
- Further steps to strengthen competition and promote a level playing field are needed. Approving the revised Competition Law would ensure the institutional independence of the Egyptian Competition Authority and empower it to regulate mergers and acquisitions that meet certain thresholds.
- Upgrading digital infrastructure and advancing digitization would create much-needed job opportunities in a post-Covid-19 world. The Covid-19 crisis has accelerated the move to remote working, online education and e-government services, and there is now an urgent need to upgrade available platforms.