An investment summit in Sharm Al-Sheikh on March 13-15 has been preceded by some political switches at the highest level as well as changes to the tax rates on corporates. President Abdel Fattah Al-Sisi reshuffled his cabinet on Thursday, March 5. The most important change he made was to replace Interior Minister Mohamed Ibrahim with Major-General Magdi Abdel Ghaffar, a former director of the National Security Agency (NSA). The new top cop was for some time the chief of a special directorate within the agency dedicated to combating Islamic extremism, and before that an officer in the Central Security Forces and the State Security Investigation Services (SSIS), a notorious internal security body which the NSA was founded to replace in 2011.
Mr Ibrahim had long been very controversial for his ruthless actions against pro-Moursi protesters in August 2013, which resulted in hundreds of lives lost, especially since the recent emergence of recordings in which he appeared to authorise the use of live ammunition against the crowds. There has also been criticism of his performance in the past weeks as more bomb attacks have taken place in Cairo. He has been retained in government, however: he was given a senior position as advisor to Prime Minister Ibrahim Mehleb, with the rank of ‘deputy prime minister’.
General Abdel Ghaffar is relatively unknown, and certainly less hated than Mr Ibrahim, but it is too soon to conclude that the new appointment will calm tempers among Islamists. To the contrary, the Pro-Legitimacy National Alliance, a pro-Moursi front for the Muslim Brotherhood (MB), is calling on Egyptians to turn out against the Sharm Al-Sheikh investment summit. In this regard, there have been some signs lately that Mr Sisi’s government is prepared to soften its attitude to the MB in order to defuse some of the more radical opposition that keeps the terror risk high, but the situation is very complex and is affected by regional and global politics.
On the economic front, Investment Minister Ashraf Salman announced on Wednesday, March 11 a number of important tax measures aimed to increase investment and economic output. The tax ceiling on the top income bracket – companies and individuals earning more than E£1m a year – will be brought down from 25% (or 30%, for companies earning more than E£10m a year) to 22.5% for a 10-year period, and a temporary 5% supertax introduced last year for individuals in that bracket will be cancelled.
Mr Salman said that the new rules will be introduced in the 2015/16 budget, which will run from July. Other recent measures have been aimed at reducing the budget deficit. In February, cigarette prices were raised, and proposals have been aired to change the public education system to make more students pay full tuition (currently most tuition is waived and students pay a nominal fee, and buy their course materials). These measures come in the lead-up to the three-day Sharm Al-Sheikh summit that brings together 2,000 potential investors; analysts expect more capital-friendly policies to be announced then.
Economic policy was always going to be a major headache for Mr Al-Sisi and his government – it needs to fix a structural budget deficit and boost output by attracting investment, while being seen to address the cost-of-living concerns of the population. The regressive measures announced this week get the solution half right. Investors will be pleased by the new tax structure, but it will be difficult to implement a value-added tax (VAT) – which is supposed to replace the sales tax – without increasing the cost of living.
In other news, the British oil and gas company BP has announced that it signed the final agreements of the West Nile Delta (WND) project. The company aims to develop 140 billion m3 worth of natural gas resources off the coast of Egypt. According to BP, it will start production at WND in 2017, with output rising to a peak of 12.3 billion m3 p.a. (equivalent to about 25% of Egypt’s current gas production). The company estimates that the investment will total $12bn.
It is somewhat surprising that BP has committed to such a large-scale investment in the current global oil price environment where oil companies are slashing their capital investment budgets. It is even more surprising when one considers that Egypt still has over $3bn in outstanding arrears to oil companies, of which around $1bn is reportedly owed to BP. However, according to the New York Times, the project will benefit from the fact that BP can use BG Group’s existing infrastructure (including pipelines), which will cut costs. Moreover, as the gas will be for domestic use, BP is guaranteed of a market for its gas.
Egypt’s gas production has declined to such an extent in recent years that the country has gone from being a fairly sizable gas exporter over the 2006-10 period to a net-importer. In order to import gas, the Egyptian government has hired a Floating Storage and Regasification Unit to convert imported liquefied natural gas (LNG) back into gas before offloading it into the country. This will cost significantly more than buying locally-produced gas from BP, so the government has ample incentive to make sure the WND project is successful.
Francois Conradie (Political Analyst) & Jacques Verreynne (Economist)