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NEW MEASURES TO COVER WAGE INCREASE
BY LOUIS WASSER
Faced with rampant inflation and growing public discontent, the government has unveiled a raft of measures aimed at easing the burden of rising prices on limited-income families. President Hosni Mubarak kicked off a spree of good news when he announced on April 30, during a pre-Labor Day speech, that the annual salary raise for public sector workers would be doubled. Instead of the 15-percent increase proposed in the government’s draft budget, approximately 6 million state employees would receive a 30-percent increase in their salaries.
“The current extraordinary conditions call for an inevitable structural remedy that can bring about a tangible rectification of the wage-price relationship,” Mubarak said. “True, we have been raising wages and salaries for some years, but the extraordinary conditions this year call for an exceptional raise.”
More good news followed in short succession as the government announced that 2.1 million municipal employees would receive an increase in their bonus payments at a cost of about LE 3 million, and pensions would increase 20 percent. The government also announced that it would allocate an extra LE 1.6 billion to food subsidies, while some LE 4 billion would be earmarked for energy subsidies to domestic households.
The total bill for all this good news is estimated at around LE 18.4 billion. The question then, was how the government was going to pick up the tab without, as it insisted, running up the budget deficit.
The answer came on May 5, when the ruling National Democratic Party (NDP) unveiled a raft of steep price and tax hikes designed to offset the cost of wage increases and higher energy costs. The measures were rammed through the NDP-dominated parliament and approved the same day – a move opposition members said was highly unusual.
Under the new measures, put into effect immediately, the ceiling for vehicle registration fees was hiked a massive 5,500 percent to reach LE 28,000. Cigarette prices increased 25 to 50 piastres per pack depending on the brand, and fuel prices were raised by up to 58 percent. The government also abolished tax exemptions on income from treasury bonds, private educational institutions and energy-intensive industries in the free zones. Together, the measures are expected to generate LE 14.4 billion annually for the state coffers.
While the government claims the measures will tax the rich to subsidize the poor, analysts disagree over to what extent. They could even make life more difficult for those already struggling, they suggest. “Some [of these measures] will affect everybody,” argues Nemat Choucri, co-head of regional research at HC Brokerage. “And some will take from the rich and give to the poor, such as the [vehicle registration fees].”
While it’s not exactly Robin Hood economics, the revised structure of vehicle registration fees “introduces a progressive element of taxation to some extent,” says Adel Beshai, an economics professor at the American University in Cairo.
Registration fees, which had remained static since the 1980s, were increased according to the size of the engine of the vehicle being registered – the assumption being that larger vehicles are typically more luxurious.
Vehicles with engines up to 1,630 cubic centimeters (CC), previously charged between LE 16 and LE 25 per year, are now charged between LE 116 and LE 175 per year depending on the size of their engine. Owners of vehicles with engines between 1,630 CC and 2,030 CC, who previously paid a flat fee of LE 120 annually, will now be charged LE 1,000 per year, with a 5-percent annual reduction to a minimum of LE 200. But steepest of all is the increase on vehicle registration fees for cars with engines over 2,030 CC, which includes most brands of luxury cars and SUVs. Owners of these vehicles will now be charged an annual fee equivalent to 2 percent of the value of the vehicle to a maximum of LE 28,000, with a 10-percent annual reduction. Previously, these owners paid between LE 280 and LE 500 per year.
The revised licensing fees are expected to generate over LE 1 billion in revenue for the government. “This was one decision that shouldn’t have surprised anyone,” explains Hanaa Kheir El Din, executive director of the Egyptian Center for Economic Studies. “Car registration fees is an area where the rich can subsidize the poor. I don’t think that the public is too happy about it or that they will see it like that, but it is one of the areas where the government has some [leeway] to generate revenues with minimum impact on other sectors or costs of living.”
Economist Samir Radwan does not expect the increased fees to greatly discourage purchases of luxury cars. While he acknowledges that the fee increase on vehicles over 2,030 CC is “really harsh,” he argues that this will not greatly discourage purchases of luxury cars. “For those who buy Mercedes or Porsche [luxury vehicles], this is peanuts,” he says.
All Egyptians will be affected to some extent by the government’s decision to raise fuel prices, which will increase transport and production costs. “If the government simply raises the price of gas it will automatically raise the price of all products and services,” explains Kheir El Din.
Much like vehicle registration fees, the increase in the price of gasoline is weighted towards the upper end of the spectrum. The price of 80-octane gasoline, which is used by many poorer Egyptians, was left unchanged at LE 0.90 per liter – as was mazot (fuel oil) and butane. But the prices of 90-, 92- and 95-octane gasoline were increased by 34.6 percent, 32.1 percent and 57.1 percent to LE 1.75, LE 1.85 and LE 2.75 per liter, respectively. The price of diesel was also increased 46.6 percent to LE 1.10 per liter.
Drivers at the pump will not be the only ones reaching further into their pockets – so will companies in energy-intensive industries, as the schedule for eliminating subsidies to energy-intensive industries, originally announced in August 2007, was moved forward several months. These companies will now pay LE 0.57 per cubic meter for natural gas, a 58.3-percent increase.
Altogether, the revenue generated from fuel price hikes is expected to save the government LE 7.5 billion in subsidies. The higher gasoline prices “should only affect consumer purchasing power,” Choucri argues. “What will have a bigger impact is the increase in the diesel price, because a lot of trucks and cars use diesel, so this will lead to higher transportation costs for goods and higher food prices.”
Analysts generally agree that fuel price increases, in particular, will accelerate inflation. Indeed, many retailers responded to the announced fuel price hikes by immediately increasing the prices of everything from fruits and vegetables to milk. Their argument: costs have gone up and the consumer will have to pay the difference.
Adding to the public’s frustration was the simultaneous decision to increase taxes on cigarettes. The tax hike has resulted in retail price increases of between 25 and 50 piastres a pack, with foreign brands hit hardest.
Mohamad Talaat, partner in international law firm Baker & McKenzie – which represents one of Egypt’s three tobacco companies – says that upping the tax on cigarettes represents an easy way for any government to increase revenues because demand is inelastic. “You cannot defend tobacco and you cannot defend smoking. It’s a health hazard,” he says. “Worldwide there is a movement against smoking and against tobacco products, so the government is taking this as a means to increase its resources.”
Talaat points to a number of potentially negative consequences of a rise in the price of cigarettes. “It will increase inflation on the market, and it will just have a negative impact on the mood of the people in general, because Egyptians still happen to be one of the prime consumers of tobacco worldwide.”
Radwan agees. “Certainly the poor will feel [the cigarette increase] harsher,” he says, noting that for many poor working people, a cigarette along with a cup of tea is one of the only luxuries available to them. He points out that proportionally, poor Egyptians spend a larger amount of their income on this luxury, and thus the increase will hit them especially hard.
With inflation already in double-digit territory – 16.4 percent in April, a three-year high – there is a worry among analysts that the new measures will pour fuel on the inflationary fire. “The government’s choice to raise energy prices, prices of cigarettes and registration fees on vehicles simultaneously, while possibly generating savings for the government, will have a compounded effect on inflationary pressures in the economy, which are already high,” a recent report by Beltone Financial argues.
While the new measures are bound to affect different income groups to varying degrees, who will be hit the hardest should not be the question, argues Radwan. “I think it’s not a question of who has been hit harder, but who could stand it better.” While the impact on the poor might be small in absolute terms, proportionately it will be severe due to their low incomes. “Their ability to absorb the shock is much less than the rich, obviously.”
The UN estimates that about 20 percent of Egyptians live below the poverty line, earning less than $2 per day. The new measures could tip the balance for millions of others. “The very poor class [below the poverty line,] we know how to deal with them... but it’s the second layer, the near poor, that is the critical one,” says Radwan. “Any shock like inflation or whatever can really lead them to fall below the poverty line.”
The full impact of these measures will only be known with time, but this has not stopped some from arguing that the recent measures don’t go far enough. While measures like the vehicle registration fees increase are seemingly progressive in their nature, Beshai argues that this theme should be expanded to include fees for yacht licensing and taxing real estate in compounds surrounding Cairo, as well on the coasts of the Mediterranean and Red Seas. “It should be taken further... [to include] capital gains tax and taxes on windfall profits, which have been tremendous in this country in the last nine to 11 years.”
While Radwan hails the government’s measures as a step towards rational fiscal policy, he argues it is not enough. “The impact of the 30-percent [wage] increase will disappear by next year... So I think now we have to move from this short-term confrontation of the problem to a long-term stable policy of prices and incomes.”
The point, he argues, is not to quibble over questions like, “did the poor get a little more or a little less from these recent measures?” – but rather to work to move towards eliminating subsidies and providing citizens with the means to provide for themselves.
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