Cairo grasps the nettle of reform

24 September 2004
The ruling National Democratic Party (NDP) launched its annual three-day conference on 21 September with a firm focus on economic reform, capitalising on a busy fortnight in which a range of reformist legislation has been announced by the new cabinet. Chief among the reforms are a draft corporate and income tax law, a privatisation programme which deals principally with the banking and industrial sectors, and a restructuring of the tariff regime. The flurry of activity comes a week before finance ministers from across the region are due to attend a 1 October meeting on reform in Washington hosted by US Treasury Secretary John Snow.

The draft tax reform bill aims to reduce the standard corporate and income tax rates to 20 per cent from 40 per cent, eliminate existing loopholes allowing tax evasion, and speed up reform of the tax administration system. The preferential 32 per cent tax rate for the industrial sector will also be reduced to 20 per cent; however, the oil sector will remain subject to a 40.55 per cent rate. Partial and full tax exemptions, which principally apply to small and newly established companies, those operating in public free zones and firms operating in target sectors such as agriculture and tourism, are expected to be gradually phased out.

However, it remains unclear whether original proposals to eliminate tax exemption on paid-in capital will remain in the draft law. 'We expect the bill to be finalised in time to present it at the new session of parliament in November,' says a senior Finance Ministry official. 'These are new concepts to be discussed, but we expect it to become law before the end of the financial year [in June].'

The Finance Ministry estimates a drop in annual tax revenues of £E 3,500 million ($565 million) to £E 5,500 million ($889 million) in the next three years, but argues that this will be offset by the impact of its fiscal stimulus package. In particular, authorities have taken aggressive steps to relieve the government burden of subsidies, which has been growing since flotation of the currency in January 2003 led to a significant rise in the cost of imports. On 8 September, retail diesel prices were increased by 50 per cent. Direct and indirect energy subsidies cost the government an estimated £E 23,000 million ($3,715 million) a year.

The government in early September also eliminated services fees and import surcharges inconsistent with the General Agreement of Trade & Tariffs (GATT) and reduced the number of tariff classes to six from 27. The move follows the cancellation of customs duties on a range of industrial goods in August, including imports of cement. Ad valorem tariff rates, which previously reached as high as 3,000 per cent on certain goods, now range from 2 per cent to 40 per cent for the six new classes of products. .

The government has also announced a wide-ranging privatisation programme, which will include the sale of a number of minority stakes in the banking sector (see Banking & Finance). The Investment Development Ministry on 20 September announced the planned sale of government stakes in 10 other companies: Nasr City Housing & Development, Paints & Chemical Industries (Pachin), Societe Egyptienne d'Entreprises (Mokhtar Ibrahim), Delta Sugar, Kabo, Medical Union Pharmaceuticals, Misr Mechanical & Electrical Projects (Kahromika), Maamoura Housing & Development, Alexandria Mineral Oils Company and Rowad Misr for Tourism Investment.

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