Filling the coffers: Boosting revenues remains a key aim

The global economic crisis that struck in 2008 propelled Egypt’s main sources of revenue – taxation, remittances, tourism and Suez Canal receipts – into significant declines. The downward trends seen across these important sources of income during 2009 demonstrated that, despites the nation’s relatively robust performance during those difficult years, the country was far from immune to such large-scale exogenous shocks. However, despite low expectations for a revenue recovery in 2010/11, taxation, remittances tourism and Suez Canal receipts all showed gains for the year. One of the most pressing questions arising in the wake of the political unrest of early 2011 thus was what effect that year’s events would have on this nascent return to form.

By the end of the first quarter of 2012 the Ministry of Finance (MoF) was able to make an assessment of the nation’s revenue position for 2011/12, which showed that the effects of the crisis on revenue at that stage were not as severe as many had feared. Total revenues and grants decreased by 1.1% for the 2011/12 financial year according to MoF data, recording LE265.3bn ($42.9bn) compared to LE268.1bn ($44.9bn) during FY 2009/10 – and most revenue segments actually showed gains over the year.

TAXATION: One of the most pleasing outcomes of Egypt’s financial performance over 2011/12 is that tax revenues, which usually account for around 60% of total revenue take, were not undermined by a slowdown in economic activity due to the political unrest, as many had feared. Total tax revenue from the period July 2011 to May 2012 reached LE257bn ($43bn), compared to the LE200bn ($33.5bn) taken over the same period during the previous year, according to the MoF. This 29.4% increase came largely from an uptick in revenues from taxes on income and profits, which showed a 17% gain on the previous year and represented the largest segment of taxation revenue. On the basis of a four-year average, income tax represents 47% of the total take, followed by tax on goods on trade and services (39%). This segment, too, saw gains over the year, rising by 13.4% to reach LE76bn ($12.7bn) compared to the LE67bn ($11.2bn) of the 2009/10 financial year. Revenues from property tax, a smaller contributor to total tax revenue at just 3% of the four-year average, also increased by 7.8% to LE9.5bn ($1.6bn) compared to the LE8.8bn ($1.5bn) taken in 2010/11.

These increases were enough to ensure that declines in revenue from tax on international trade, which dropped by 5% to LE13.9bn ($2.3bn) for the year, did not significantly impact the overall tax take. Equally pleasing is the fact that after years of tax reform (see analysis), Egypt’s tax take now reflects the performance of the economy; the bloated and inefficient tax regime of a decade ago was circumvented wherever possible by businesses and individuals and failed to track Egypt’s economic fortunes.

REMITTANCES: Remittances, which form a significant component of Egypt’s total revenue, are less accurately tracked than taxation due to the substantial number of unrecorded and informal cash transfers to Egypt that take place each day. However, with a population of more than 85m people and more than 4m Egyptians living and working abroad, it is little surprise that the country is one of the top 15 receivers of remittances, according to the World Bank’s “Migration and Remittances Factbook 2011”.

The majority of Egypt’s remittance revenue originates in the oil-rich GCC states, where Egyptians have travelled to in large numbers since the “Open Door” economic policies implemented by Anwar Sadat in the 1970s and 1980s. The bulk of the remainder is conveyed to Egypt from permanent migrants who have settled in Europe, Canada, the US and Australia – and it was the slowdown of these economies in particular which led to a decline in remittance income from a high of $8.69bn in 2008 to $7.15bn in 2009.

However, increasingly buoyant GCC economies, which received a useful fillip from the rising oil prices during 2010, underpinned a remittance recovery that saw private transfers increase to $8.9bn for the period July 2010 to March 2011.

Since that time remittances have surpassed predictions and risen a further 43% to $12.8bn for July 2011 to March 2012. This influx of liquidity has done much to bolster consumer spending during a challenging financial year, and therefore the sanguine GDP forecasts for labour-hungry Gulf states such as Saudi Arabia, Qatar, the UAE and Kuwait is welcome news for government planners.

CANAL RECEIPTS: The global economic crisis also resulted in a reduction in Suez Canal receipts, as the volume of international shipments began to slow. From a high of 21,080 vessels passing through the waterway in 2007/08, just 17,504 made the journey in 2009/10, according to data from the Central Bank of Egypt. Non-tax revenues from Suez Canal receipts took a similar dip over the same period, from LE15bn ($2.5bn) to LE12.7bn ($2.1bn). Exacerbating the decline was an uptick in instances of piracy in the Gulf of Aden, which resulted in some shipping firms taking the decision to avoid the Suez route and take the longer but less eventful trip around Africa’s Cape of Good Hope. Responding to the situation, the Suez Canal Authority froze its transit fees, which normally rise annually, and introduced lower tolls for some ship classes in bid to attract traffic back. This action, combined with a recovering global economy, resulted in a year-on-year increase of vessels in 2010/11, to 18,050, and consequently an uptick in revenue to reach LE15.2bn ($2.5bn). Moreover, the recovery lasted into the following year. Between July 2010 and May 2011 the Suez Canal contributed LE13.7bn ($2.3bn) to Egypt’s coffers in the form of non-tax revenue, which increased in the same period of the 2011/12 year to LE14.4bn ($2.4bn), despite the implementation of the first rise in transit fees in three years in the early months of 2012.

TOURISM: However, where other revenue streams have returned to growth in the years since the global economic crisis and in the face of the domestic upheavals of 2011, the drop-off in revenue from the tourism industry has negated their gains. The tourism sector put in a robust performance in the wake of the global credit crunch in comparison to other revenue streams, with tourist arrivals remaining steady, according to MoF data (2007/08 12.3m; 2008/09 12.3m; 2009/10 13.8m). This was done without resorting to price slashing as seen in other markets – income from tourism remained equally solid, rising from $10.83bn in 2007/08 to $11.6bn in 2009/10.

The impact of the uprising in January 2011 was instantaneous. The first days and weeks of the unrest saw a communications blackout and the cancellation of many inbound flights to Cairo International Airport, while sporadic but much publicised political confrontations throughout the year confounded hopes of an early recovery.

While tourism activity went relatively unhindered in the Sinai region, subsequent unrest in the area has reduced bookings. At the end of 2011 the then-minister of tourism announced that tourist arrivals to the country had dropped by 32%, while a senior official at the Ministry of Tourism told the local press he expected revenues to fall by a similar amount to around $9bn. Preliminary data from the Ministry of Finance suggests that his assumption was correct: during the period July 2011 to April 2012 tourism income reached a modest $7bn.

POSSIBLE STREAMS: The main revenue streams have, with the exception of those derived from tourism, remained strong despite adverse economic conditions at home and abroad. While the tourism sector awaits the political stability that would allow it return to its interrupted trajectory, there are other areas where Egypt might maximise its revenue potential. A programme of tax reform has already succeeded in widening the tax base, and could be built upon by with more efforts aimed at increasing compliance and combating corruption.

Export contracts represent another possible area of revenue expansion, and revisiting some of the large gas export contracts has already become a point of debate in the new parliament. Areas such as these are likely to be of increasing interest to the government in the coming year, as the pressure put on its budget by demands for social justice makes boosting revenues the economic priority of the day.