OBG talks to Hany Kadry Dimian, Minister of Finance

Interview: Hany Kadry

What do you see as the most important priority for stimulating higher levels of growth?

HANY DIMIAN: The most important priority is restoring confidence, which depends on political stability, as well as a credible economic strategy for the medium term. There must be a drive to implement structural reforms that target energy, roads, education, health and housing, all while enhancing partnerships with the private sector. Egypt can attain real annual growth of between 6% and 7%, but this will require more precise coordination among different government ministries.

In which sectors do you see the most potential for increased export revenues?

DIMIAN: The recovery of the tourism sector must be a priority. Further to this, the Suez Canal project will boost revenues and reinforce the country’s geostrategic advantage as a global trade and logistics centre. Oil and gas can also benefit from an increase in export revenues as a result of the subsidy reforms. Investing in infrastructure, especially roads and ports, is integral to this vision, while information and communication technology must also be taken into account.

To what extent can the budget deficit be addressed through spending cuts alone?

DEMIAN: Spending cuts have to be part of any fiscal adjustment. Priority should be placed on making cuts as fairly as possible. Any planned fiscal adjustments should be implemented with a view to maintaining social cohesion. Energy subsidies offer the opportunity to increase savings for the state as a result of reforms, which can be redirected to education and health care. Moreover, there is room to improve how food subsidies and other social benefits are targeted. In this regard, focus should be placed on tackling the leakage in the bread subsidy. Thirdly, wage expenses should be restrained via natural attrition and more controlled recruitment. Improving tax administration, closing loopholes, and reforming cash flow and overall expenses management are also areas that the government must work on to reduce expenditure. Other measures include the implementation of more sophisticated debt management techniques. Tapping international capital markets to diversify sources of funding could also reduce pressure on the domestic market.

What kind of tax reforms could help to improve revenue collection?

DIMIAN: The replacement of the sales tax by a valueadded tax (VAT), which is expected to be effective by the end of 2014, will be a critical reform that is likely to yield 1.6% of GDP during its first year. Businesses will also be more incentivised to invest because the primary feature of the VAT design is to allow firms to deduct taxes on business inputs, while obtaining refunds on paid taxes. Taxes will thus reduce the cost of investment, boosting cashflow and improving the overall business climate. It is also important to bear in mind that any reform will have a significant impact on prices, and consumers will still benefit from certain exemptions, such as for basic food items and essential services such as health and education.

What measures could be implemented to help reduce the level of informal activity?

DIMIAN: Reducing the size of the informal sector should not be done through penalties, but rather by removing obstacles that make the formal economy inefficient. Policies should focus on regulatory reforms that can encourage informal actors to realise that it is in their best interest to join the formal economy. The creation of a non-cash economy could serve as a mechanism to pull more actors into the formal sector. Bank lending to small and medium-sized enterprises must also be enhanced, given that smaller players tend to be engines of job creation and multiply internal economic linkages. Reducing our fiscal deficit will create more room for the private sector, including small firms, thereby enforcing a level playing field for everyone.