Egypt outlines expansionist economic programme

The new Egyptian government sees some benefits in higher interest rates and plans major tax cuts even at the expense of a slightly larger budget deficit, Investment Minister Mahmoud Mohieldin said on Tuesday. In an interview with Reuters, Mohieldin outlined in the greatest detail yet the strategy of the reformist group of ministers in the new cabinet.
He said he hoped higher interest rates would contain inflation and pave the way to make the Egyptian pound convertible - an incentive to foreign investment.
The cuts in corporate and personal income tax rates, along with a simplification of tax procedures, should also promote investment and any increase in the government's large budget deficit would be "manageable and contain-able", he added.
The government of Prime Minister Ahmed Nazif took office two weeks ago but has so far given few practical details of how it intends to handle the exchange rate or privatisation.
The previous government tried to float the pound in early 2003 but the experiment went wrong, leading to a revival of the currency black market. A privatisation programme thrived in the 1990s but has ground to a halt in recent years.
Analysts say that reconsolidating the exchange rate system is essential to foreign investment because it would reassure investors about the rate for repatriating profits.
Mohieldin, a liberal economist close to President Hosni Mubarak's son Gamal, said it was up to the central bank to decide the timetable for merging the official and black market exchange rates, which have already converged to a gap of only about 1.5 percent. "He (Central Bank Governor Farouk el-Okdah) has a programme that is being implemented. There are many things required ... and on each of them there is a support of monetary policy through the increases in the interest rates," he added.
Interest rates have been trending upwards for the past nine months, from about seven percent on three-month treasury bills in October last year to almost 12 percent this week.
Asked if the advantages of convertibility would outweigh the disadvantages of higher interest rates, he said: "Yes, because of two things - availability of foreign exchange and full convertibility... The second thing is that any investment cannot live in a high-inflation environment."
Asked if unifying the exchange rate would require higher interest rates in future that might deter investment, the minister said rates would not be a major hindrance.
"In the short term, investment should take many things as given and I am not really seeing interest rates, if they are increasing in the short term, as the main obstacle." A stable pound and high interest rates would tend to reduce inflation, which has risen sharply in the last year because of the decline in the value of the pound against the dollar.
The minister gave few details of the tax cuts but said the reduction in personal and income taxes would be "major". To a lesser extent, the cuts would also cover sales tax, and Mohieldin is proposing to Finance Minister Youssef Boutros-Ghali that the government abolish some taxes entirely.
Mohieldin said the cuts would probably add to the budget deficit, which has been projected at 7.5 percent of gross domestic product for the year which began on July 1.
But improvements in tax collection methods and signals that economic growth is accelerating would offset this, he added.
"I am not really concerned about hefty losses that are going to worsen the budget deficit position... because they will be manageable and contain-able," he said.
The minister, who has direct responsibility for 176 public-sector companies, made no forecasts on a revived privatisation programme but said he did intend to resume it.
"I'd like the privatisation to speak for itself. I have the intention and I have the support. We are reviewing the mechanics ... so let me surprise the market," he said. Domestic, Arab and foreign investors have plenty of spare funds to invest in Egypt if the terms are right, he said.