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Egypt confuses a war on poverty with a war on the poor

Western observers might do better for Egypt by advising how to effectively collect a progressive income tax

Abdallah Schleifer

Published: Updated:

Three years of relative inertia in response to the accelerating economic crisis in Egypt have ended. Most decisively, and most controversially, with the announcement of dramatic cuts in the subsidy of petrol or gasoline which have significantly raised prices of petrol and natural gas and have taken effect immediately.

As for the price of electricity, it was raised with less fanfare a day prior to the petrol and natural gas subsidy cuts.

The crisis is real enough. Annual rates of growth have sharply declined, there has been a massive flight of capital over the past three years and a reduction in gross national product as unrest and uncertainty have led to reduction in hiring and staffing, to the closing of factories and shops and with growing unemployment, reduced consumer spending – these factors have reinforced each other in a vicious circle. The growth of government debt which has motivated this radical measure is only part of the problem.

As for Western advisers, they might do better for Egypt by advising how to effectively and aggressively collect a progressive income tax

Abdallah Schleifer

Even remits of hard currency from the hundreds of thousands of Egyptians working abroad in oil rich Arab countries have diminished, in part because that degree of employment abroad has decreased given the post- revolutionary chaos that has afflicted Libyan oil production and distribution – an industry that had once employed many Egyptians.

Until generous support for Egypt started to flow in from Saudi Arabia and the UAE following the overthrow of the Muslim Brotherhood -dominated government of Mohammad Mursi, the hard currency reserves declined dramatically, not just to prop up an economy in which state revenues have been declining for several years but largely attempting to prop up the Egyptian Pound (EP) which has lost considerable value over the past three years , thus contributing to a rise in prices of imported goods.

Tracing the crisis

Some aspects of the crisis predate the January 2011 uprising – during the last decade of Mubarak’s rule the application of neo-liberal economics stimulated growth rates, foreign investment and growing reserves but at the same time the percentage of the population living below the poverty level significantly increased and spending on critical public sector services such as state hospitals and government schools stagnated.

When President Abdel Fattah al-Sisi announced the increases in the cost of energy (which is what cutting subsidies amounts to) he called upon traders (wholesalers) not to take advantage of this development by raising food prices. This appeal referenced to other times when traders have taken advantage of a political crisis to raise prices, but in this case even without any attempt to artificially raise prices of basic commodities, quite legitimate secondary price increases are already underway and more will follow.

Taxi fares and the fares of privately operated mini-buses upon which increasing numbers of the working class and middle class rely on for transportation have gone up by 13 percent, and the head of the Cairo Chamber of Commerce’s poultry division said chicken prices will go up by 25 percent within days because of added transportation costs.

Indeed Greater Cairo does not grow its own food – everything is either trucked in from the countryside or imported from the port cities so one can expect all food prices to go up above and beyond any additional cuts in subsidies that directly target the cost of subsidized bread and other , more limited, subsidies for cooking oil and other basic items.

Of course subsidies have consumed an increasing portion of both government budgets and increasing government deficits. But the most immediate question about the cut in subsidies is its timing.

Bad timing?

This month’s Ramadan Fast (think not just of food, but in summer time not drinking any water or any other liquids from dawn to dusk) was already difficult because of successive heat waves, coupled with the return of power cuts, which over the past few weeks are not only occurring every day but as many as three times a day and frequently disrupting the preparation of food for the most important gathering of families in the entire year.

Can it just possibly be that the president, the prime minister and the rest of the cabinet – not to mention the tycoons and moguls of the private sector -all have expensive quiet generators at home? A bit down the income graph will be homes stocked with the new Chinese –manufactured fans and lamps that run on rechargeable batteries when the electricity cuts out. At 500 Egyptian Pounds for just one rechargeable battery driven fan, that is a bit more than half a month’s salary for a good portion of the Egyptian population.

Certainly there is growing sensitivity to public shock and media criticism. The Egyptian military has declared it will sell food at a discount to help alleviate “the economic burden of the great Egyptian people.”

Sisi has already taken significant and much more positive steps to deal with the economic crisis prior to the subsidy cuts when he announced plans for the army and a foreign contracting firm to build one million units of housing for low-income families, in landscaped and fully serviced communities the length of the country, as well as plans to massively modernize the vast slums that have grown around Cairo and lack running water, sewerage systems, tarred roads and street lighting.

But these two really significant public work projects that will generate employment for at least hundreds of thousands of workers, as well as affordable new or upgraded housing for the poor, will not begin until after Ramadan. It would have been advisable if these substantial subsidy cuts had also been delayed, but well past Ramadan and not until both public works projects were underway and dramatically reducing unemployment and underemployment.

Sara el-Khalili, managing editor of the AUC Business Review, took it a step further: “This is definitely not the right time for imposing such austerity measures. The newly imposed policies will crush the middle and lower classes. Egyptians have been suffering for a very long time, and .the government needs to consider other alternatives and think of more innovative solutions to overcome the budget deficit and save the economy.”

Devastating for most Egyptians

Cutting subsidies on things so basic as petrol, natural gas and electricity are like a flat rate tax on consumption, easily absorbed, almost as a trifling affair by the rich and the upper middle class, but devastating for that 40 percent or more of Egyptians living below the poverty line, and the millions more living not too far above it.

That is why even in starkly capitalist economies like the U.S. and the UK, not to mention France and Germany, the very poor are exempted from income tax and the percentage of tax upon income progressively increases as income increases. That is not the case with the universal and flat tax effect of subsidy cuts.

But a step in the right direction was taken by the government when it authorized a new 10 percent tax of the profits of all transactions in the stock market, just prior to the subsidy cuts.

The Egyptian economist and social critic Galal Amin recently observed that when a government is very corrupt, subsidizing the essential needs is the easiest way to divert attention from the issue of corruption. So if you cancel subsidies, you have to solve in parallel, if not prior to canceling subsidies, the income distribution problem and fighting corruption.

The starting place in both these cases is the collection of income tax. Officially, Egypt has a progressive income tax system but tax evasion on the part of the wealthy is so vast that billions of dollars a year of government income from income taxes are lost. This widespread evasion is facilitated by the limited staffing of the government body responsible for collecting income tax and its staff’s low salaries and thus vulnerability to bribery. The income tax department should be both expanded and reorganized with assistance from state security and the judiciary.

As for Western advisers, they might do better for Egypt by advising how to effectively and aggressively collect a progressive income tax, than how to implement austerity measures in a country where most of the population is already enduring what can only be described as austerity.

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Abdallah Schleifer is a veteran American journalist covering the Middle East and professor emeritus at the American University in Cairo where he founded as served as first director of the Kamal Adham Center for TV and Digital Journalism. He is chief editor of the annual publication The Muslim 500; a senior fellow at the Foreign Policy Research Institute (USA) and at the Royal Aal al Bayt Academy for Islamic Thought (Jordan.) Schleifer has served as Al Arabiya Washington D.C. bureau chief; NBC News Cairo bureau chief; Middle East correspondent for Jeune Afrique; as special correspondent (stringer) , New York Times and managing editor of the Jerusalem Star/Palestine News in then Jordanian Arab Jerusalem.

Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.