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SEEKING THE RIGHT BALANCE
Egypt is not the only country feeling the pinch of price hikes on food and fuel. Here, as elsewhere, higher prices have left large segments of the population more vulnerable to hardship. Given these pressures, the benefits of economic reform that average citizens have a right to expect have just receded a little farther into the future. That’s why the state stepped in to help people cope, and why the private sector must also do its part.
I’ve previously written about the three-way balance between the state, the people and the private sector, and how the burden of change throughout the reform process must be equally shared. When the government recently announced a 30-percent salary increase for state employees, the private sector was asked to do the same.
While many private sector employees earn more than the average civil servant, this is not always the case. A decent minimum wage, one that maintains our labor competitiveness while enabling a more balanced relationship between employer and employees, must be considered. Following the salary increase announcement, the cabinet and parliament were called upon to find the budgetary means to cover the cost. The resulting economic package is a step in the right direction, but it also raised several concerns.
For instance, when fuel price hikes were announced shortly after the salary increases, people had the feeling that what the state had given with one hand, it had taken away with the other. The salary increase was a positive display of the state’s concern for its citizens, but the compensation package, although well intended, was perceived as being hastily composed and not entirely sound.
The fuel price hike needed to be better explained, especially since fuel subsidies cost the state more than five times what it spends on health, and twice its education budget. If citizens were more aware of these inequities, and of how the state and private sector are seeking a better balance, they would be more likely to accept the inevitable increases in fuel and other costs.
Another concern relates to altering the free-zone status of energy-intensive industries. Egypt’s energy-intensive industries should purchase fuel at market value, uncushioned by subsidies, as part of a well-articulated and phased-in formula. But to suddenly subject industries in free zones to a corporate tax and customs duties not only confuses the issue, it changes the conditions under which these companies agreed to operate.
Predictability is a key feature of productive investment environments, and such changes, for however valid a cause, can negatively affect investors’ perceptions. Moreover, the benefit of the proposed corporate tax – estimated by some experts at around LE 600 million per year, and by others as far higher – is not worth the risk of the potentially negative impact of this decision.
Meanwhile, the proposed real estate tax, and a possible revision of capital gains tax on real estate transactions, which would both make significant contributions to state revenue without harming either investors or the underprivileged, were not put forth as part of the package.
Instead, the corporate tax exemption once allowed to private schools has been canceled, which may well lead to higher tuition costs. So long as these institutions are able to meet international standards while maintaining reasonable profits, the tax may be fine. But the impact should be monitored, especially since there are currently no state-sponsored alternatives to these schools, and the private sector has been called upon to help raise the standard of local education.
Overall, the salary increase signaled the government’s wish to act on the public’s behalf to increase their support for the reform process. But a more thoughtful and comprehensive compensation package is needed to best protect the interests of the three parties involved. Debate can slow things down, but it can also produce better ideas. Moreover, when the public is allowed to voice its opinions before decisions are made, citizens will see themselves as participants in, rather than victims of, the process.
In the end, we’re all investing in Egypt’s future – politicians, citizens and the business community alike. The decision-makers’ challenge is to strike the right balance, so that reform – and the undeniable growth it has brought about – proceeds unimpeded.
OMAR A. MOHANNA
President, AmCham Egypt
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