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SWP639
Public Finance in EgyptIts Structure and Trends
Sadiq Ahmed
WORLD BANK STAFF WORKING PAPERSNjumber 639 _-
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WORLD BANK STAFF WORKING PAPERSNumber 639 £*)C 7
Public Finance in EgyptIts Structure and Trends
Sadiq Ahmed
!T '. LC .
The World BankWashington, D.C., U.S.A.
Copyright © 1984The International Bank for Reconstructionand Development / THE WORLD BANK1818 H Street, N.W.Washington, D.C. 20433, U.S.A.
First printing April 1984All rights reservedManufactured in the United States of America
This is a working document published informally by the World Bank. Topresent the results of research with the least possible delay, the typescript hasnot been prepared in accordance with the procedures appropriate to formalprinted texts, and the World Bank accepts no responsibility for errors. Thepublication is supplied at a token charge to defray part of the cost ofmanufacture and distribution.
The views and interpretations in this document are those of the author(s) andshould not be attributed to the World Bank, to its affiliated organizations, or toany individual acting on their behalf. Any maps used have been preparedsolely for the convenience of the readers; the denominations used and theboundaries shown do not imply, on the part of the World Bank and its affiliates,any judgment on the legal status of any territory or any endorsement oracceptance of such boundaries.
The full range of World Bank publications is described in the Catalog of WorldBank Publications; the continuing research program of the Bank is outlined inWorld Bank Research Program: Abstracts of Current Studies. Both booklets areupdated annually; the most recent edition of each is available without chargefrom the Publications Sales Unit of the Bank in Washington or from theEuropean Office of the Bank, 66, avenue d'Iena, 75116 Paris, France.
Sadiq Ahmed is with Country Programs Department 1 of the World Bank'sEurope, Middle East, and North Africa Regional Office.
Library of Congress Cataloging in Publication Data
Ahmed, Sadiq.Public finance in Egypt.
(World Bank staff working papers ; no. 639)"This study is an extended version of paper prepared
for a recent economic report on Egypt coordinated by theEgypt Division of the Europe, Middle East, and PNorthAfrica Regional Office"--
Bibliography: p.1. Finance, Public--Egypt. 'I. Title. II. Series.
HJ1456.A35 1984 336.62 84-5213ISBN 0-8213-0359-7
Abstract
The study focuses on a number of key issues pertaining to Egypt's
public finances. After describing briefly the composition of the Egyptian
Government's official budget document, the study moves on to discuss the
recent budgetary trends; the structure of taxes with special emphasis on tax
performance; the composition and trend of public expenditure; the implications
of the government budget for income distribution and resource allocation; the
financial contribution of public sector enterprises, and finally, the
financing of the budget deficit. The paper makes specific recommendations
relating to each key aspect discussed, i. e. tax effort, public expenditure,
fiscal role of public enterprises and deficit financing.
Extracto
El presente estudio se centra en algunas cuestiones clave que se
plantean en la esfera de las finanzas pfiblicas de Egipto. Tras una breve
descripci6n de la composici6n del presupuesto del Gobierno, se examinan
las tendencias presupuestarias recientes, la estructura tributaria --con
especial referencia a la actuaci6n de los impuestos--, la composici6n y
tendencias del gasto puiblico, las repercusiones del presupuesto guberna-
mental en la distribuci6n de los ingresos y la asignaci6n de los recursos,
la contribuci6n financiera de las empresas del sector puiblico y, por
filtimo, el financiamiento del deficit presupuestario. En el documento se
formulan recomendaciones especificas en relaci6n con cada una de las cues-
tiones clave examinadas, por ejemplo, las medidas en materia tributaria,
el gasto publico, la funci6n fiscal de las empresas estatales y el finan-
ciamiento del deficit.
Cette etude porte sur un certain nombre de problemes cl6s li6s
aux finances publiques de l'Egypte. Apres une breve description de la
teneur du budget national 6gyptien, on examine les tendances budgetaires
recentes, la structure des imp6ts et notamment la performance fiscale, la
composition et l'evolution des depenses publiques, les implications du
budget national sur la distribution des revenus et l'affectation des res-
sources, la contribution financiere des entreprises du secteur public et
enfin le financement du deficit budgetaire. L'6tude presente enfin des
recommandations pr6cises sur chacun des principaux aspects decrits, a
savoir l'effort fiscal, les d6penses publiques, le r6le financier des
entreprises publicques et le financement du deficit.
Acknowledgment
This study is an extended version of a paper prepared for a
recent economic report on Egypt coordinated by the Egypt Division of the
Europe, Middle East and North Africa Regional Office. The study
benefitted from comments by Eugenio Lari, Vinod Dubey, Alberto Favilla,
Francis Colaco, Kemal Dervis, John Wall, Amar Bhattacharya and Zmarak
Shalizi. Cooperation from the Ministry of Finance of the Egyptian
Government is gratefully acknowledged.
PUBLIC FINANCE IN EGYPT: STRUCTURE AND TRENDS
Table of Contents
Page No
Introduction and Suimmary ix
Chapter 1; Budget in Relationship to the Public Sector I..... The Role of the Government in the Economy . . 1The Structure of the Public Sector . .1....... Budgeting Procedure in Relationship to thePublic Sector . . 2Agencies Responsible for BudgetImplementation . . 3
Chapter 2: Struc:ture of the State Budget and MainFiscal Trends ................................... 5A Brief Description of the Budget Document ...... 5Fiscal Summary Account Used in this Study ....... 10Main Fiscal Trends .............................. 10Scope of Fiscal Policy .......................... 14
Chapter 3: The Structure and Development of TaxRevenues . . 16Tax Trends . . 16Development of Main Taxes . . 20Agricultural Taxation . . 27Evaluation of the Tax Structure . . 29Tax Effort Analysis . . 30Economic Effects of the Tax System . . 35Strengthening the Tax System . . 40
Chapter 4: AnaLysis of Public Sector Expenditure . . 44Composition and Structure . . 44Growth and Structure of AutonomousExpenditure ..... . 46Growth and Structure of BudgetarySubsidies ... 49An Analysis of Food Subsidies ................... 51The Rate of Subsidy ............................. 53Hidden or Implicit Subsidies . . 55Investment Expenditure . . 56Economic Effects of Government Expenditure ...... 57Policy Measures for RationalizingPublic Sector Expenditure . . 61
Page No.
Chapter 5: The Fiscal Role of Non-Government PublicEconomic Sector ................................ 65Fiscal Linkages Between the Treasury andthe Public Economic Sector . . 65Savings Investment Gap ......................... 67
Chapter 6: Financing Public Sector Fiscal Deficit ......... 73The Sources of Financing Budget Deficit ........ 73Public Sector Savings-Investment Gap . . 76Public Finance in Egypt. Summary andConclusions . ....... 77Implications for Further Research .............. 81
Annex I ITC Analysis: Data Sources and EstimationTechnique .82
Annex 11 Estimation of Subsidy per Unit .88
- ix -
Introduction and Summary
Egypt's public finances are unusual in several respects compared to
those of other countries at similar income levels. The public sectors
dominance in its economy requires the mobilization and expenditure of a vast
amount of resources. Total public expenditures are 60% of GDP, total revenues
are 40% of GDP and public sector deficit is 20% of GDP. There are very few,
if any, developing countries in the world with such high proportions. These
heighten the normal fiscal issues of the efficiency, equity and development
impact of public sector economic operations.
The 1952 Egyptian revolution marked the emergence of a dominant state
sector in the economy. Total public sector expenditure increased rapidly from
about 20% of GDP in 1952/53 to 60% in 1982/83. Two other striking features
underlying recent fiscal developments in Egypt are: the high levels of
overall budget deficit and instability in the budget. The level of deficit
has centered around 20% of GDP, fluctuating widely from 17% in 1977 to 27% in
1979. The high level of deficit and the instability are both results of a
basic structural weakmess of the budget. Budgetary revenues are quite
susceptible to 'exogenous' influences while expenditures have moved closely in
line with domestic inflationary pressures. The exogenous influences are
transmitted through the growing dependence of the budget on petroleum and Suez
Canal revenues. For example, the ratio of exogenous revenue to total revenue
increased from 11% in 1976 to 35% in 1980/81 and then fell to 25% in 1982/83.
Although foreign resources and various forms of domestic savings have
financed a considerable portion of the budget deficit, between 30% and 50% has
- x -
been financed by borrowing from the banking sector. Increasing reliance on
bank financing has caused an expansion in the supply of money in the economy
at a rate faster than the rate of expansion of the demand for money. The
imbalance has generated significant inflationary pressures in the economy
causing problems for resource allocation as well as income distribution.
Since the end of 1981 world petroleum prices have been falling
consistently and the indications are that, while prices could recover somewhat
in the medium-term, they are unlikely to show large real increases. Given
this dim prospect for continued reliance on oil revenues, the need is greater
now than ever for Egypt to restructure the government budget. The challenge
for policy makers lies in reducing the reliance on unstable sources of revenue
and monitoring expenditure increase in line with resource availability, but
without adversely affecting economic growth.
The level of taxation in relation to the tax capacity and the method
of taxation are two important fiscal issues. These are examined in Chapter
3. The analysis shows that in terms of 'tax effort' Egypt's tax performance
compares favorably with other developing countries. Also, total tax revenue
has a buoyancy value exceeding unity with respect to GDP. Although the level
of taxation in Egypt is not a major concern, there are problems regarding
equity and incentive aspects of taxation. These include: relatively strong
reliance on indirect taxes, insignificant role of personal income and property
taxes, large dependence on schedular taxes with tax rates varying according to
the source of income, significant tax exemptions which are subject to abuse
and low tax compliance. A number of possibilities exist to improve the tax
- xi -
system in Egypt. The important measures are as follows:
(a) The process of moving towards a unified global income tax should
continue and should be further strengthened.-/ In order to ensure
"horizontal equity" (equal treatment at similar levels of income),
the tax base should include all sources of income. Also, the present
effort to increase compliance should continue.
(b) Tax exemptions should be based on a careful evaluation of relative
costs and benefits of such exemptions. Tax breaks should be granted
only for limited duration and should be carefully monitored to ensure
tbat they are being utilized for the stated objective.
(c) A broad based sales tax at ad valorem rates and with minimum rate
differentials should be introduced. With the growth of domestic
production, the scope of the sales tax should be increased and the
reliance on import tariffs and excise taxes should be reduced.
(d) Evaluation of custom duty liability should be based on the use of an
exchange rate which reflects the cost of procuring foreign exchange
in the market rather than the artificial and obsolete official
exchange rate.
The three main characteristics underlying the recent trends in public
sector expenditures are: the large role of 'autonomous' expenditure; the high
level of budgetary expenditure on subsidies; and the slowdown in the growth of
public sector investment. The increase in budgetary subsidies is a reflection
of the government's policy of protecting the living standards of the poorer
people in the face of a growing concentration of incomes and rapid inflation.
The rapid growth in public investment expenditures in the seventies indicates
1/ Global income tax is defined in the Egyptian context. See page 20.
- xii -
both the response of the government to ease up the physical infrastructure
bottlenecks which had gained prominence with the surge in the level of
economic activity, and the attempt to reorganize the industrial base into a
more modern and capital intensive structure. The slowdown in public
investment since 1979 is partly due to physical absorptive capacity
constraints and partly due to a slowdown in the resource availability. The
analysis of public expenditure in Chapter 4 indicates that there is
significant scope both for reducing expenditure and increasing its value.
Public investments have played a major development role, but there is
significant inefficiency in the use of resources, particularly in the
industrial sector. Subsidies have provided an important safety net for low
income groups and helped avoid major social crises, but much can be done to
lower subsidy expenses and target benefits to the really needy. The growth in
autonomous expenditure can also be slowed down substantially by revising
government service employment practices and reducing transfer payments to the
public sector. Some important expenditure management measures are:
(a) Better targetting of subsidies on essential goods to really needy
consumers through a more effective rationing system;
(b) Frequent adjustments in the selling prices of subsidized goods to
reflect cost increases;
(c) Eliminating completely subsidies on non-essential goods such as meat,
fish, eggs and poultry;
(d) Phasing out the guaranteed graduate employment policy;
(e) A more careful choice of investment projects based on each project's
economic viability determined by using economic prices.
- xiii -
Taxes on an average finance about 40% of total public sector
expenditures. The major non-tax sources of revenue include surplus from
petroleum, Suez Canal and public sector companies. Public economic sector
savings finance about 20% of total expenditure. The analysis of public
economic sector's fiscal performance in Chapter 5 shows that despite the fact
that 'public economic authorities' (Suez Canal and Petroleum Authorities
mainly) have generated a large surplus, particularly since 1980/81, in
aggregate the public economic authorities and the public sector companies
(state enterprises) both suffer from negative savings-investment gap. In the
case of public sector companies the gap has also increased over time. The
main reason for the poor financial performance of public sector companies is
the lack of autonomy including the lack of effective control over price and
wage setting and employment decisions. Economic authorities, other than Suez
Canal and Petroleum authorities, suffer from financial constraints due to
government control over the pricing of their products. Thus, over the long
run the greatest scope for reducing the public sector budget deficit is to
raise public sector savings by increasing prices of goods and services which
are linked to the budget. This constitutes a very large group which includes
electricity, petroleum products, natural gas, rail transport, interest subsidy
on housing and many manufactured products.
Some amount of deficit financing seems inevitable. It is pointed out
in Chapter 6 that there is some scope for mobilizing private savings by
improving the attractiveness of public debt instruments. Public foreign
borrowings may also be expected to continue to play an important role in
Egypt's development efforts. Public borrowings, both from abroad and from
- xiv -
the domestic private sector, have significant costs and, therefore, should be
utilized cautiously. In particular, the use of foreign resources in the
future needs to be planned in such a way that the economy is able to earn or
save adequate foreign exchange in order to service its debt liability as well
as to lower future borrowing requirements. Effective use of foreign
borrowings requires both a proper choice of projects and major structural
changes in the economy, including a reform of the public economic sector and
rationalization of prices.
Chapter 1
Budgel in Relationship to the Public Sector
I. The Role of Government in the Economy
1. Prior to the Second World War, the role of the Government in the
Egyptian economy was quite limited. The Government did not participate
directly in any production activity and public investment was confined to
irrigation, transport infrastructure and utilities including electricity.
Policy interventions were small and fiscal measures were passive. The war
period (1939-45) witnessed a surge of controls some of which continued after
the war. It was, however, the 1952 Revolution which marked the emergence of a
dominant public sector in the economy. The transformation was completed in
1961-62 and despite liberalization measures introduced since 1974, the
Government's role in the economy is enormous. For example, the state accounts
for 54% of GDP, 40% of total employment and 70% of total investment in the
economy. Reflecting the Government's greatly expanded role in the economy,
total public sector expenditure increased rapidly from about 20% of GDP in
1952/53 to 60% in 1982/83. Public sector revenue growth, however, has not
matched expenditure growth. Mobilizing resources to finance the public sector
expenditure has become a major challenge for policy makers in Egypt.
II. The Structure of t;he Public Sector
2. The public sector in Egypt comprises four major bodies: the Central
Government, local government, public authorities and public sector companies.
-2 -
The Central Government includes the general administration and public service
authorities. The public service authorities, as distinct from the public
economic authorities, do not constitute separate entities and they carry out
essentially governmental functions such as higher education, public health,
agricultural research and planning. The local government is organized on a
regional basis into 25 governorates. Although the local government is
separate administratively, it has very limited financial autonomy. The
Central Government controls the budget of the local government which is
approved by the national legislature as a part of the State budget. The local
government has jurisdiction over certain types of tax and non-tax revenues,
but the bulk of its expenditures is financed through Central Government
transfers. The public economic authorities include activities such as the
petroleum corporation, railways, the Suez Canal, ports, electricity and water
supply. The public sector companies consist of state enterprises which engage
in a wide range of commercial, industrial and agricultural processing
activities. Together with public economic authorities, they constitute the
basic vehicle for the implementation of government interventions in the
economy.
III. Budgeting Procedure in Relationship to the Public Sector
3. Before July 1980 the budgetary procedure followed a complex
accounting mechanism involving a number of separate budgets and special
funds. In July 1980 the budgetary procedures were somewhat simplified and the
fiscal accounting was shifted from a calendar year basis to July 1 - June 30
period. The State budget, which includes the budget for the Central
Government, the public service authorities and the local governments, now also
-3-
includes a number of special purpose funds which had previously been outside
the main budgetary framlework. Public sector companies and public economic
authorities have their own respective budgets. These are, however, linked
with the State budget through gross transfers to or from the State budget, and
through the investment component of the State budget which accounts for the
total public sector investment. One important change in budgetary procedure
implemented in July 1980 is that the responsibility for the financing of
public investment was transferred to the newly constituted National Investment
Bank (NIB). However, the Ministry of Finance (MOF) is still responsible for
all transactions relating to past investment expenditure. Finally, since the
beginning of 1980 both the State current and investment budgets have been on a
cash basis. Although tlhe budgets of the public economic authorities and
public sector companies remain on an accruals basis, the transactions between
these entities and the State budget are shown on a cash basis.
IV. Agencies Responsible for Budget Implementation
4. The two main agencies responsible for implementing the budget are the
Ministry of Finance and the National Investment Bank. The MOF is responsible
for preparing the budget document and after it is approved by the legislature,
it is responsible for aLl financial transactions excepting those related to
new investments. The financing and disbursements of new investments are
undertaken by the NIB.
5. The NIB was established under Law No. 119 in June 1980. It is
governed by a Board of Directors under the chairmanship of the Minister of
Planning. The day to day affairs of the NIB are managed by the Deputy chairman
- 4 -
of the Board. The two main objectives of the new institution were first, to
provide a better linkage between the annual State budgets and the Five Year
Plan and second, to institute a better coordination and more strict quality
control in terms of project choice, financing, implementation and follow up.
The Plan determines the total number of projects to be financed within the
Plan period. Therefore, in each fiscal year there are a certain number of new
and on-going projects which need to be financed. The NIB is responsible for
arranging for the financing of these earmarked projects. The funds are
disbursed as loans and the borrowing agencies, including the Central
Government, are required to pay back the principal with interest on the basis
of an agreed schedule.
6. The original provisions of the law underlying the establishment of
the NIB included a very significant role for the bank in matters of project
selection, implementation and follow up. So far, the role of the NIB has been
limited to the financing of the investment budget. Project selection and
follow up procedures continue to be controlled by the Ministry of Planning.
-5-
Chapter 2
Structure of the State Budget and Main Fiscal Trends
I. A Brief Description of the Budget Document
1. The budget document is presented in the form of three separate
accounts or sub-budgets and a summary account which consolidates all three
sub-budgets. The sepaLrate accounts are:
- the current budget
- the capital budget
- the investment budget
The current budget is subdivided into two parts. The first part, called
Chapter 1, includes the wages bill (excluding armed forces) on the expenditure
side and tax collecticns on the revenue side. The second part (Chapter 2)
consists of all other current expenditure items and all non-tax current
revenue. The items under the consolidated current budget are shown in Table
1. The expenditure side of the current budget includes current expenditures
of central government, local government and public service authorities on
purchase of goods and services for current consumption, interest payments on
local and foreign debt and expenditure on consumer subsidies. The revenue
side includes tax collections by Central and local government, revenue
proceeds from various service charges and transfers of profits from public
economic authorities and public sector companies.
-6-
Table 1: The Current Budget
Revenue Expenditure
1. Income Taxes 1. Wages
2. Custom Duties 2. Subsidies
3. Business Profits Taxes 3. Defense4. Consumption Taxes 4. Interest on Domestic and
5. Miscellaneous Taxes Foreign Debt6. Local Government Taxes 5. Special Pension and Social7. Service Fees Security Fund8. Other Fees 6. Commodity and Service9. Activity Revenues Requirement10. Current Transfer Revenues 7. Other Current Expenditure11. Current Domestic Revenue Items12. Central Government Share in
Public Sector Company Profits13. Central Bank Profits14. Economic Authorities
Surpluses tranferred to GOE(EGPC, Suez)
2. The Capital Budget: The items entering the capital budget (Chapter
3) are shown in Table 2. Revenue items are shown under 'financing of capital
commitments' and expenditure items under 'capital commitments'. On the
commitments side the capital budget includes amortization payments on foreign
and local debts, financing of public economic authority current deficits and
capital transfers from the Treasury to public authorities and public sector
companies to finance their capital account deficits. The financing of the
capital budget has a foreign component and a domestic component. The foreign
financing component consists of non-project loans obtained from outside. The
domestic component includes capital transfers from public authorities and
public sector companies and a part of surplus generated in the current budget.
3. The Investment Budget: Under the new arrangement, control over the
investment budget (Chapter 4) lies with the NIB. The financing of the
investment budget is shown in Table 3. This is also based on foreign and
- 7 -
domestic sources. The foreign component consists of all project loans. The
domestic component includes self-financing of investment by public authorities
and public sector companies, the social security surplus, savings
certificates, postal savings, government bonds held by public sector companies
and public economic authorities, surplus carried over from the previous years'
investment budget, repayment of principal and interest on investment and
domestic borrowings from loans extended by NIB and domestic borrowings from
the banking system including private banks. In addition, if the current
budget generates a surplus, a part is apportioned to the investment budget.
Table 2: The Capital Budget
A. Capital Commitments Financing of CapitalCommitments
1. Domestic Public DebtInstallments 1. Royalties of American
2. Foreign Public Debt Installments Act No. 4803. Loans to Cover Current Deficit 2. World Bank Financing
of Economic Aut;horities 3. Loan from other countries4. Loans to Finance Capital 4. European Market Revenues
Transfer for Economic 5. Due Installments andAuthorities Capital Resources
5. Treasury Participation in 6. Current Surplus BalanceCapital Transfer for Companies after Deposits for the
6. Due Installments and other Investment BankCapital Commitments 7. American Commodity Loan
Table 3: The Investment Budget
A. Investment Expenditure B. Financing of Investment
1. Government Investment 1. Foreign Credit Facilities(Central Government) 2. Self-financing(Local Government) 3. Saving Certificates(Service Agencies) 4. Social Security and Pension(Unallocated) Funds Surplus
2. Economic Authorities 5. Government Bonds3. Public Sector Companies 6. Investment Bank Surplus4. National Investmient Bank from Existing Investment
7. Development Loans8. Postal Savings9. Net Installment and Interest
on Loans Extended by NIB10. Surplus from Current Budget
- 8 -
4. Consolidated Treasury Budget: The Consolidated Budget groups all
expenditure and revenue items separately (Table 4). Total expenditure is
obtained as the sum of all expenditures in the three sub-budgets. Total
revenue is obtained as the sum of current budget revenue, capital transfers
received by the Treasury from public sector companies and public economic
authorities (item 5 of financing component of capital budget), investment
self-financing and installment and interest on NIB loans (items 2 and 9 of
financing component of the investment budget). 'Gross deficit' is defined as
the difference of total expenditure and revenue. Financing of the gross
deficit distinguishes between foreign financing (obtained as the sum of
foreign financing components of capital and investment budgets) and domestic
financing (obtained as the sum of all domestic financing components of the
investment budget except financing from the banking system, i.e., items 2
through 8). Net deficit is defined as the amount of bank financing required
to finance the budget deficit.
Table 4: Consolidated Treasury Budget
A. Expenditures C. Gross Deficit = A - B
1. Wages D. Financing2. Other Current Expenditures3. Capital Transfers 1. Foreign Financing4. Investment 2. Domestic SavingsTotal Expenditure Channels
B. Revenues Total Financing
1. Tax Revenues E. Net Deficit (Borrowing2. Non-tax Current Revenues from the Banking3. Capital and Transfer System)
Total Revenue
- 9 -
5. Budget by Levels of Government: The State budget contains a
disaggregation of fiscal transactions by levels of government. The accounts
indicate quite forcefully the fact that Egypt has a highly centralized
structure of government financial authority. The lack of financial autonomy
at the local government level is illustrated in Tables 5.1 and 5.2. On the
average local government accounts for 13.6 percent of total government
expenditures but collects only about 4 percent of total government revenue.
The bulk of the expenditure is financed through
Central Government transfers.
Table 5.1: Distribution of Revenue by Levels ofGovernment (Actual Shares)(In Percentages)
1976 1977 1978 1979 1980/81 1981/82 1982/831/
Central Government 95.58 95.86 95.71 95.60 96.54 99.66 96.82
Local Government 4.42 4.14 4.29 4.40 3.46 3.34 3.18
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0
1/ Budget shares
Source: Ministry of Finance
Table 5.2: Distribution of Expenditure by Levels
of Government (Budget Share)L/(In Percentage)
1980/81 1981/82 1982/83
Central Government 86.4 86.6 86.2Local Government 13.6 13.4 13.8
Total 100.0 100.0 100.0
1/ Excludes investment expenditure of public economic authorities andpublic sector companies.
Source: Annual Budgets, Ministry of Finance
- 10 -
II. Fiscal Summary Account Used in this Study
6. The consolidated budget account used in this study is somewhat
different from the Egyptian fiscal summary account. The consolidated
account is shown in Table 6. Tax revenue is divided into 'direct taxes' and
'indirect taxes'. Non-tax revenue is broken down into 'transferred profits'
and other non-tax revenue. Total government revenue is defined as the sum
of tax revenue and other non-tax revenue. Transferred profits (revenue
items 12 to 14 under the current budget) and investment self-financing are
grouped together which defines 'public economic sector surplus'. Total
public revenue is defined as the sum of total government revenue and public
economic sector surplus. Total expenditure is disaggregated into five
categories: Central, local and service agencies current expenditure, public
economic authorities current deficit, subsidies, net capital expenditure,
investment expenditure. The first category includes all current expenditure
items shown in the current budget except consumer subsidies which are shown
separately as the third category. The second category is expenditure item
number 3 of the capital budget. Category 4 is obtained as the difference
between all capital expenditure items, except number 3, and domestic capital
receipts including repayment of investment loans to NIB. Category 5
(investment expenditure) is self-explanatory. The concepts of gross deficit
and financing of the deficit are similar. Finally, total public expenditure
and gross deficit are shown on the basis of commitments rather than actual
cash transactions. Hence arrears are reallocated to the accounts of the
years in which actual expenditure occurred.
III. Main Fiscal Trends
7. Three major features which have dominated the recent fiscal trends
in Egypt are: (a) the increase in total government expenditure as a
- 11 -
proportion of GDP, (b) the high levels of overall 'budget deficit', (c)
instability in the budget. Table 6 contains a summary of the fiscal
operations since 1976. Total expenditure as a percent of GDP has increased
from 55% in 1976 to 60% in 1982/83 and the average overall fiscal deficit
has remained at around 20% of GDP. The deficit has fluctuated widely from
17% of GDP in 1977 to 27% in 1979. The instability in the budget is
essentially due to the fact that government revenues have fluctuated
relatively more severely than government expenditures. The coefficient of
variation of government revenue as a proportion of GDP has been about 16%
compared with 10% for government expenditure as a proportion of GDP.
8. The high level of deficit and the budget instability are the
results of a basic structural weakness of the budget. Budgetary revenues
are quite susceptible to exogenous influences while budgetary outlays have
moved closely in line with domestic inflationary pressures. The exogeneous
influences are transmitted through the growing dependence of the budget on
petroleum and Suez Canal revenues. The ratio of exogenous revenue to total
revenue increased from 11% in 1976 to 35% in 1980/81. More importantly, the
ratio has fluctuated quite significantly, jumping from 15% in 1979 to 35% in
1980/81 and then falling to 27% in 1981/82. Estimate for 1982/83 indicates
a further reduction in the share of exogenous resources to about 25%.
9. The fluctuations in the fiscal contribution of petroleum and Suez
Canal is caused by two interrelated factors - fluctuations in the
international price of oil and fluctuations in the levels of economic
activities in the Western world. International oil prices reached an all
time peak during 1980/81 period; the weighted average crude oil price for
- 12 -
Table 6: EGYPT - SUMMARY OF FISCAL OPERATIONS(In millions of Egyptian Pounds)
1982/831976 1977 1978 1979 1980/81 1981/82 (Estimates)
Indirect taxes 907.0 1416.3 1421.3 1671.5 2354.9 2740.2 3287.0- Foreign trade 537.8 979.4 919.8 905.0 1329.4 1573.2 1651.0- Consumption 283.6 339.7 360.3 566.8 699.7 812.6 1217.0- Other indirect 1/ 85.6 97.2 141.2 199.7 325.8 354.4 419.0Direct taxes 415.6 551.3 725.8 870.1 1824.0 1944.7 2429.0- Personal income 47.7 54.9 51.9 55.1 73.2 85.4 110.0- Business profit 277.6 387.2 538.4 655.7 1506.3 1577.7 1900.0- Other 2/ 90.3 109.2 135.5 159.3 244.5 281.6 419.0
Total Tax revenue 1322.6 1967.3 2147.1 2541.6 4178.9 4684.9 5716.0Non-tax government revenue 3/ 118.8 135.7 147.2 267.2 494.0 587.0 623.0
Total government revenue 1441.4 2103.0 2294.0 2808.8 4672.9 5271.9 6339.0Public economic sector surplus 573.9 652.4 1012.3 875.0 2699.9 2958.7 3052.0- Transferred profits 242.9 384.4 539.3 501.0 1735.5 1714.7 1852.0- Investment self-financing 331.0 268.0 473.0 374.0 964.4 1244.0 1200.0
Total Public Revenue 2015.3 2755.4 3306.3 3683.8 7372.8 8230.6 9391.0_=, ~~~~... ---- =_.=. .=_= _=... =,= .==
Central, local and service agenciescurrent expentditure 1670.0 1701.0 2037.0 2494.7 3691.0 4893.5 6466.0
Public economic authorities currentdeficit 42.0 55.0 58.0 60.0 67.3 100.4 128.0
Subsidies 434.0 650.0 710.0 1352.0 6/ 2166.4 7/ 2192.1 2000.0Net capital expenditure 4/ 154.0 214.0 443.0 643.0 864.9 1030.0 1100.0Investment expenditure 980.0 1549.0 2311.0 2547.0 3765.6 8/ 4671.0 4800.0
Total public expenditure 3280.0 4169.0 5559.0 7096.7 10555.2 12887.0 14494.0
Gross public sector deficit 1264.7 1413.6 2252.7 3412.9 3182.4 4656.5 9/ 5103.0External financing of deficits 5/ 488.0 608.0 882.0 1135.3 1101.9 1212.4 1538.0Domestic financing of deficit 776.7 805.6 1370.7 2277.6 2080.5 3444.1 3565.0
Non-bank domestic financing 339.7 334.6 543.7 695.0 1206.4 8/ 1261.4 1876.0Bank financing 437.0 471.0 827.0 1582.6 6/ 874.1 7/ 2182.7 9/ 1689.0
Memo Items
Total expenditure as Z of GDP 55 50 57 56 61 63 60Total revenue as X of GDP 34 33 34 29 43 40 39Total deficit as X of GDP 21 17 23 27 18 23 21
l/ Includes: Stamp taxes and miscellaneous other taxes.2/ Includes: Taxes on property, estate duties, taxes on immovable property and local government
tax revenue.3/ Incluaes: Fees, miscellaneous non-tax revenue and local government non-tax revenue.4/ Includes: Government debt installments on domestic and foreign debt, net capital transfer
to public economic authorities and public sector companies and miscellaneous capitalexpenditure by the government.
5/ Gross foreign financing of the budget deficit.b/ Adjusted to include LE 122 million received by General Authority for Supply Commodities (GASC) to cover price adjustments snd
financed through banking system in 1981/82. A similar amount has been excluded from 1981/82 account.7/ Adjusted to include LE 595 million GASC expenditure incurred in 1980/81 but financed in 1981/82
through tne banking system. A similar amount has been excluded from 1981/82 account.8/ Includes LE 304 construction payment arrears incurred by public authorities and companies.9/ Reflects deficit on an accruals basis. Cash deficit amounts to LE 5,381.0 million. The excess
amount of LE 717.0 reflects arrears as far back as 1979 which were financed in 1981/82
through money creation. The arrears have been reallocated to periods in which expenditure was actually incurred.
Source: Ministry of Finance and IBRD estimates.(0726J-2)
- 13 -
Egypt stood at US$33.29 a barrel. Economic depression in the Western world
which set in around the end of 1981, coupled with a basic disequilibrium in
the world oil market caLused by significant 'chiseling' activities within the
OPEC oil cartel, generated an excess supply situation in the international
oil market which forced the oil price down. The Egyptian average crude oil
price fell to US$29.80 a barrel in 1981/82 and is estimated to be only
US$27.50 a barrel in 1982/83. Economic depression slowed the flow of Suez
Canal traffic as well causing a reduction in the Suez earnings during
1981/82. Suez Canal traffic has, however, picked up recently in response to
improved world economic situation and earnings are somewhat higher this year
compared with last year.
10. There are some influences of exogenous factors on the expenditure
side as well, but the relative impact is much less. The main exogenous
influence on expenditure is through the consumer subsidy bill. The size of
this subsidy, which accounts for about 17% of total government expenditure,
depends mainly on movements in the international food prices (mainly
wheat). This is becaus-e imported food items constitute the large bulk of
subsidized commodities and because the domestic selling price of subsidized
commodities has been much more stable than procurement prices. In principle
investment expenditure also should be affected by exogenous factors
Table 7: Exogenous Revenue in Relationship to Total Revenue(in mll.ions of Egyptian Pounds
1976 1977 1978 1979 1980/81 19811821/ 1982/83j/
Total Revenue 2015 2755 3306 3684 7373 8231 9391
Exogenous Revenue 217 398 497 690 2588 2250 2335
Ratio of Exogenousto Total Revenue 0.11 0.14 0.15 0.19 0.35 0.27 0.25
1/ Preliminary actuals1/ Estimated
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(availability of foreign financing, prices of imported capital goods); but
in practice the investment expenditure has been used as a discretionary
instrument including recently short term economic management. The most
influential factor governing public expenditure is the domestic rate of
inflation. Under the present budgetary framework, more than 50% of total
government expenditures (all current expenditure except food subsidy and all
capital transfers) are largely autonomous and are highly sensitive to
domestic inflation which has accelerated in recent years.
IV. Scope of Fiscal Policy
11. The combination of susceptibility to exogenous factors on the
revenue side and strong domestic inflationary influence on the expenditure
side has posed a serious problem for short term economic management. A
simplified sequence illustrating the destabilizing influence of the budget
is as follows. An initial exogenous deterioration in the terms of trade
causes a reduction in revenue receipts which then raises the level of the
budget deficit. Given the exogeneity of the level of foreign financing, the
bulk of the deficit is financed through domestic sources - mainly bank
financing. A part of the increase in money supply due to Treasury deficit
financing is offset by a reduction in money supply due to Central Bank
operations in financing the current account deficit, but most of the effect
translates into an increase in the money supply. The growth of money supply
at a rate faster than that at which people are willing to accumulate money
holdings, causes an increase in the rate of inflation which then feeds back
into a higher budget deficit in the next fiscal period. Although this is an
over simplified sequence, it does illustrate the destabilizing effect of
- 15 -
fiscal policy on macro balances. An active use of fiscal policy would
require a change in thie budget structure. Dependence on exogenous revenues
should be reduced whilie the discretionary influence on expenditures should
be increased.
- 16 -
Chapter 3
The Structure and Development of Tax Revenues
I. Tax Trends
1. Tax revenues constitute about 92% of total government revenue and 60%
of total public sector revenue. Table 7 gives total government revenues in
the period 1976 to 1981/82. Nominal tax revenues grew at an annual average
rate of 26% since 1976. Since the domestic inflation rate is estimated to be
around 17%, tax revenues grew in real terms as well.l/ During the same
period, average nominal growth rates for business profit, personal income,
property, consumption, customs and stamp taxes are 37%, 11%, 18%, 21%, 22% and
28% respectively. The very rapid growth in business profit tax is partly due
to the tax contribution of petroleum and Suez, but also due to the growth in
taxes from private commercial and industrial activities. The relatively slow
growth in property, personal income and consumption taxes reflect the passive
nature of these tax instruments. Until very recently, the Government did not
attempt to increase the effectiveness of personal income and consumption
taxes. The scope of property taxes has been further narrowed with abolition
of this tax at the Central Government level.
1/ The rate of inflation is only 12.4% based on the official consumer priceindex (CPI). The official CPI gross underestimates the rate of inflationsince it is heavily weighted with commodities under price control. Theestimated rate is based on growth rates of money supply and availabilityof real goods and services.
- 17 -
Table 7: Government Tax Revenue
(In millions of Egyptian Pounds)
1976 1977 1978 1979 1980/81 1981/82
Total Governmenttax revenue 1322.6 1967.3 2147.1 2541.6 4178.9 4684.9
- Direct taxes 415.6 551.3 725.8 870.1 1824.0 1944.7
Personal income 47.7 54.9 51.9 55.1 73.2 85.4
Business profit 277.6 387.2 538.4 655.7 1506.3 1577.7
Property 19.0 18.0 23.0 29.0 43.0 38.2
Local government 71.3 91.2 112.5 130.3 201.5 243.4
- Indirect taxes 907.0 1416.3 1421.3 1671.5 2354.9 2740.2
Consumption 283.6 339.7 360.3 566.8 699.7 812.6
Customs duties 537.8 979.4 919.8 905.0 1329.4 1573.2
Stamps 61.2 89.8 126.2 154.8 167.9 239.3
Others 24.4 7.4 15.0 44.9 157.9 115.1
Non-tax governmentrevenue 118.8 135.7 147.2 267.2 494.0 587.0
Fees 38.2 46.8 53.8 81.3 123.9 127.2
Local government 17.5 23.0 28.2 32.5 50.4 60.9
Miscellaneous 63.1 65.9 65.2 153.4 319.7 398.9
Total governmentrevenue 1441.4 2103.0 2294.0 2808.8 4672.9 5271.9
Source; Ministry of Finance
(0726J-6)
- 18 -
2. Tables 8 and 9 show main taxes as percentage of GDP and the structure
of taxes respectively. The tax ratio shows an increasing trend but also shows
significant fluctuations due to the behavior of revenue contributions from
customs duties and business profit taxes. The instability in customs revenue
reflects basically the increase in the exchange rate in domestic currency
units for evaluation of duty liability, following the progressive devaluation
of the Egyptian pound. The fluctuations in business profit taxes are caused
by the tax contribution of Suez and petroleum, reflecting instability in
earnings from these sources.
Table 8: Main Taxes in Relation to GDP(expressed as ratio)
1976 1977 1978 1979 1980/81 1981/82
Total Taxes 0.20 0.24 0.22 0.20 0.24 0.23Total taxes excludingpetroleum & Suez 1/ 0.20 0.24 0.22 0.22 0.24 0.24
Business profit 0.04 0.05 0.05 0.05 0.09 0.08Business profit excludingpetroleum & Suez 1/ 0.03 0.03 0.04 0.04 0.05 0.05Property tax 0.003 0.002 0.002 0.002 0.002 0.002Consumption Tax 0.04 0.04 0.04 0.04 0.04 0.04Custom duties 0.08 0.12 0.09 0.07 0.08 0.08Personal income 0.008 0.008 0.007 0.007 0.004 0.004Stamp taxes 0.009 0.010 0.013 0.012 0.010 0.012
Source. Table 7
3. In terms of relative importance, business profit taxes constitute
the largest source of government tax revenue followed by customs duties,
1/ Tax contributions and value added contributions are excluded from thenumerator and denominator respectively.
- 19 -
consumption tax and stamp taxes. Personal income and property taxes are
relatively unimportant as sources of Government revenue. The rapid increase
in business profit tax has lowered the share of all other taxes, except stamp
duties. In particular, the contribution of personal income and property
taxes, which were alreasdy quite low before the Open Door Economic Policy,
declined very significantly. The augmented role of business profit tax
indicates an apparent improvement in the tax structure. But, if profit taxes
from petroleum and Suez are excluded, the tax structure is typical of many
developing countries with reliance mainly on commodity taxes.l/
Table 9: Structure of Taxes(as a proportion of total tax revenue)
1976 1977 1978 1979 1980/81 1981/82
Business profit 0.210 0.197 0.250 0.258 0.360 0.337Business profit excludingpetroleum and Suez 0.153 0.125 0.133 0.159 0.151 0.162
Personal income 0.036 0.028 0.024 0.022 0.018 0.018Property tax 0.014 0.009 0.011 0.011 0.010 0.008Consumption tax 0.214 0.173 0.168 0.223 0.167 0.173Custom duties 0.407 0.497 0.428 0.356 0.317 0.336Stamp taxes 0.046 0.046 0.059 0.061 0.040 0.051
Source: Table 8
1/ See: Hazley H. Hinrichs, A General Theory of Tax Structure Change DuringEconomic Development, Harvard Law School, 1966.
- 20 -
II. Development of Main Taxes
Income Taxes
4. The legal basis for taxation of income follows a two-tier system.
There is a schedular income tax and a global income tax. The schedular income
tax was established by Law No. 14 of 1939, while the global income tax was
established in 1949. The schedular taxes are levied on four types of income:
dividends and interest, profits, professional income and wages and salaries.
The global income tax is levied on income of individual persons. The tax laws
have undergone frequent changes. The latest modification was made effective
July 1981. The objective of the last modification is to move gradually from
the two-tiered system to a unified system of general income tax.
Tax on interest and dividends
5. This tax is levied on income from movable property comprising
interest, dividends and royalties earned in Egypt by individuals and
companies, or earned abroad by Egyptian residents. Interest on capital
invested by non-residents in Egypt are also taxable. The tax rate was 26% in
1961 but increased to 40% in 1967. The new tax Law No. 157 of 1981 included
two modifications. Domestic dividends from joint stock companies are now
classified under corporate profit and the tax rate has been reduced from 40%
to 32%. Also, interest income from bonds issued by joint stock companies
(public or private) which are offered for public subscription are tax exempt.
Profit Tax
6. The profit tax is levied on commercial and industrial profits of all
establishments operating in Egypt. This tax is levied every year on net
profits made during the previous year, or during the period of 12 months
- 21 -
covered by the last balance sheet. Before Law 157/1981, the tax rate was 40%
of net profit and the tax base excluded dividends paid out to individuals to
avoid double taxation since dividends were taxed under the interest income
category. The new tax law distinguishes between pure public sector companies,
joint stock companies and partnerships and individuals. Public sector
companies, except EGPC, are now required to pay 32% of their net profit as
tax. EGPC is required to pay 40%. Dividends of joint stock companies have
been merged with their profit and they are now required to pay a new tax
called 'companies tax' at the rate of 32% of net profit. Also, capital gains
and sale of real estate are tax exempt if such proceeds are used for
participation in joint stock companies. Finally, the tax on profits of
partnerships and individual enterprises has been reduced from a 40% flat rate
to a progressive rate structure as follows;
20% on first L.E. 1,00023% on the next L.E. 1,50027% on the next L.E. 2,00032% on the remaining.
Tax on Professional Income
7. This tax is levied on the net profits of self-employment in free and
other non-commercial professions. Before Law 157/1981, deductions for
dependents were the same as those allowed on income from wages and salaries.
The tax rate was a flat 11% until 1959. The rate structure was made
progressive in 1960 as follows:
11% first L.E. 1,50013% on the next L.E. 50015% on the next L.E. 1,00018% on the next L.E. 2,00022% on the remaining.
- 22 -
The rate structure was increased substantially in 1978. Tax rates were set to
progress from 29.5% to 43%. Law 157/1981 increased the number of allowances
and deductions and also lowered the average tax rate. The new rate structure
is:
18% on first L.E. 1,00020% on the next L.E. 1,50025% on the next L.E. 2,00030% on the remaining.
Tax on Wages and Salaries
8. This tax is levied on income derived from employment, comprising
wages, salaries and other emoluments including payment in kind. The rate
structure has been progressive since it was first levied, but the level of
exempted labor income and the degree of progression as well as the average
rate have undergone frequent modifications. The latest change was implemented
under Law 157/1981. The evolution of the tax since 1952 is shown in Table
10. The main changes under the new Law are: first, personal allowances are
now deductible irrespective of family wage income. Under the old system
allowances were permitted only if the family income from labor is less than
double the size of the exemption. Second, in addition to family allowances,
wage earners are allowed to deduct contributions to social insurance and
pensions, premium paid on life insurance and health schemes, and 10% allowance
for earning income (transportation) from the tax base. Third, the level of
exemption has been increased. Finally, both-average and marginal rates are
now lower.
General Income Tax
9. The general income tax was introduced to improve the progressiveness
of the income tax. It is paid on the sum of all incomes, including the annual
rental value of agricultural land. Deductions are allowed for all taxes paid
- 23 -
Table 10: Evolution of Tax on Wages and Salaries
Tax Law Exemption and Rates
Law 147/1952 Income up to LE 150 is exempted2% for the first LE 1203% for the next LE 1804% for the next LE 2005% for the next LE 3007% for the next LE 4009% for amounts in excess thereof
Law 199/1960 Income up to LE 250 is exempted2% for the first LE 1003% for the next LE 1504% for the next LE 1505% for the next LE 1507% for the next LE 2009% for the next LE 300
11% for the next LE 30013% for the next LE 50015% for the next LE 1,00018% for the next LE 2,00022% for amounts in excess thereof
Law 53/1974 Income up to LE 260 is exemptedNo change in rate structure.
Law 46/1978 Income up to LE 600 is exemptedNo change in rate structure.
Law 157/1981 Income up to LE 960 exempted2% on the first LE 4805% on the next LE 480
10% on the next LE 96015% on the next LE 96018% on the next LE 96022% on any amounts in excess thereof
Source: Tax Department, Ministry of Finance
For Law 147/195i2: M. Reda A. El-Edel, "Impact of Taxation on IncomeDistribution: An Exploratory Attempt to Estimate Tax Incidence inEgypt", in The Political Economy of Income Distribution in Egypt, editedby Gouda Abdel--Khalik and Robert Tiguor, Holmes and Meier PublishersIncorporated, blew York, 1982.
- 24 -
under schedular taxes. The progressivity of the tax rate ranged from 8% for
income over L.E. 1,000 to 95% for LE 10,000 in 1960. The highest rate was
reduced to 80% in 1978 and subsequently to 50% in 1981. The new rate
structure is shown below:
Taxable Income Marginal Tax(L.E.) Rate (
Up to 2000 02000 - 3000 83000 - 4000 94000 - 5000 105000 - 6000 116000 - 7000 127000 - 8000 138000 - 9000 149000 - 10,000 1510,000 - 20,000 1820,000 - 25,000 2025,000 - 30,000 2230,000 - 35,000 2435,000 - 40,000 2640,000 - 45,000 2845,000 - 50,000 3050,000 - 60,000 3260,000 - 65,000 3765,000 - 70,000 4270,000 - 75,000 47Over 75,000 50
Taxes on Property
Agricultural land tax:
10. This tax is levied on all arable land on the basis of its rental
value, which is assessed every two years. The tax is paid by all landowners
with holdings exceeding 3 feddans. The tax rate (including defense and
national security taxes) was 23.8% of annual rental value in 1960/61. It was
raised to 30.1% in 1973. The tax was abolished in 1981 at the Central
government level, but the proportion under the jurisdiction of the
governorates remains and is earmarked for local administration. The basic
rate is 14% of annual rental value.
- 25 -
Tax on buildings:
11. Taxes on buildings are assessed either on the basis of actual rents
or on imputed rental value (for owner occupied buildings). This is an annual
tax payable by owners of buildings with annual rental value exceeding L.E.
18.0. A deduction of 20% of the annual rental value is allowed for expenses.
Before 1981, the rate structure progressed from 20.5% to 68.2% for residential
buildings and there was a flat rate of 23.2% for non-residential buildings.
This tax was also abolished at the Central government level in 1981. The
governorates, however, collect their share of this tax and the proceeds are
earmarked for this use. The basic rate now is 10% for non-residential
building and progresses from 10 to 40% for residential building.
Estate and inheritance taxes
12. The estate tax was established by Law 159/1952 which, amended by Law
202/1960, provided that a tax be levied on the total value of estates of
deceased persons, including the real and personal property of Egyptian
nationals and resident foreigners, and rural property in Egypt owned by
deceased non-resident foreign nationals. The value of the estate is
calculated net of debts and obligations and the rate ranges from 5% to 40%.
There is also an inheritance tax which is payable by all persons to whom a
succession accrues. The value of the estate is calculated net of debts.
Items exempt from duty include the family house, up to LE 2000 of personal
life insurance policies, all employer provided life insurance and certain
miscellaneous things. Since 1960 the basic rate has progressed from 5% to 22%.
Taxes on Goods and Services
Taxes on Imports
13. Customs Duties: The customs tariff consists of a single column based
on Brussels Tariff Nomenclature (BTN). Most duties are ad valorem and are
applied to a fair market CIF import price. For most imports, customs duties
- 26 -
are assessed on the basis of the Central Bank exchange rate, except that goods
entering through non-resident accounts are evaluated on the basis of the
commercial bank pool exchange rate. Goods in transit and goods which enter
specified free zones are duty exempt. Customs duties may be refunded on
imports which are embodied in exports if the re-exportation takes place within
one year after the duties were paid. There are wide variations in the rate
structure ranging from 0 to 3000 percent. Capital goods in general have very
low import tariffs and many types of capital goods are duty exempt. Consumer
goods have relatively high import tariffs, going up to 3000% for certain types
of alcohol and its products.
14. Development Tax
Most imported goods are subject to an economic development tax.
Initially this was set at 10% of c.i.f. value. The rate was reduced to 5% by
Presidential Decision No. 202/1980.
Pavement Duty: This is imposed on all imported goods. The rate is
3% and the base is the sum of import duty, development tax and consumption
duty payable on a particular imported good.
Statistic Duty: This is imposed on all imported goods except wheat,
at the rate of 1% of the c.i.f. value.
Marine Duty: This is levied on all imported goods transported by
ship and which are liable to pay import duty. The rate is 0.5% of c.i.f.
value.
Taxes on Exports
15. Export Customs Duties
Explicit customs duties are also levied on the exports of a small
number of commodities. These include, raw hides and skins, metal scraps and
- 27 -
wastes and antiques. Hides and skins exportation are subject to an export
duty of LE 1.2 per thousand kilogram, metal wastes and scraps pay export duty
of LE 11 per thousand kilograms and antiques of an age exceeding 100 years are
subject to an export duty of 5%. Dutiable exported goods are also liable to
pay a pavement tax of 3% of assessed export duty and all exported goods are
required to pay 0.5% marine duty. An implicit export tax is realized by the
Government on cotton through pricing policy. This shows up in the budget as
profits from cotton trade.
16. Consumption Tax
A number of commodities, imported or of domestic origin, are subject
to a consumption tax. The current list includes 53 commodities. Tax drawback
on exported goods is allowed. The main commodities are coffee, tea, sugar,
cigarettes, tobacco and products, beverages and a range of consumer goods
considered of 'luxurious' nature. The duty is either ad valorem or specific
and there is a fairly large variation in the tax rate. In general, luxurious
consumer goods, imported cigarettes and imported alcoholic beverages pay
higher consumption duty.
17. Stamp Tax
Stamp duties are levied on a wide range of documents including deeds,
applications, contracts, insurance premiums, checks, invoices, lotteries,
posters and other advertisements, air tickets, supply of electricity, water
and gas. Stamp duties may be dimensional, specific, graduated or proportional.
III. Agricultural Taxation
18. Taxation of agricultural income is a classic problem in developing
countries - in the aggregate agriculture typically constitutes the largest
economic base but it is too thinly spread to enable cost effective direct
taxation. The main form of direct taxation of agricultural income is through
- 28 -
a tax on land holdings. The scope of this tax is very limited due to problems
of measurement and implementation. Various methods of indirect taxation of
agriculture are possible. These include: compulsory procurement at
controlled prices, cropping area restrictions and taxation of agricultural
inputs. These schemes have been used in varying forms by developing
countries. A key issue is the effect on farmer incentives. Excessive
indirect taxation of agriculture may result in severe disincentive effects on
production and consequently have an adverse impact on economic growth.
19. In Egypt agriculture accounts for 20% of GDP, 37% of total employment
and more than 50% of total non-oil exports. The relative importance of
agriculture has declined over the years, but in terms of structure of
commodity production, it still ranks as number one. Direct taxation of
agricultural income through land taxes is very limited. Prior to 1981, this
tax was collected at both central and local government levels. Since July
1981 this tax is collected only by the governorates. The tax revenue in
1981/82 amounted to only LE 57.0 million, which is less than 1% of
agricultural value added.
20. Indirect taxation of agriculture in Egypt is based on two major
schemes:
- compulsory procurement at controlled prices,
- determining cropping pattern through area restrictions.
The different combination of these schemes for the major crops are summarized
in Table 11. The procurement prices are substantially below world prices.
The resultant taxation of agriculture (as illustrated by the account ratios)
is only partially channelled to the Treasury as cash revenue (through cotton
- 29 -
Table 11: Indirect Taxation of Agriculture
AccountingArea Restriction Ratios
Crop Legal Effective Compulsory Procurement (1981 prices)
Cotton Yes Yes 100% of total output 2.13Sugarcane Yes Yes 100% of total output 1.41Soyabeans Yes Yes 100% of total output N.A.Groundnuts Yes - Yes Fixed quantity varied
periodically 2.15Onions Yes Yes " " " 4.81Garlic Yes Yes if " " N.A.Potatoes Yes No 100% of exportable surplus 1.30Oranges Yes No 100% of exportable surplus N.A.Wheat Yes Yes Fixed quantity varied
periodically 2.05Beans Yes Yes " " " 1.25Lentils Yes Yes " " " 1.15Sesame Yes Yes " " 1.06Rice Yes Yes 1.91Maize Yes No No 1.10
Source: Arab Republic of Egypt: Issues of Trade Strategy and InvestmentPlanning, World Bank Report No. 4136-EGT, page 105-106 and 189.
export profits), but mostly spills over as subsidies on industrial inputs and
final consumption goods. A part of the disincentive effects of indirect
taxation is neutralized by subsidies on agricultural inputs - chiefly
irrigation, water, fertilizer, pesticides, seeds and diesel. But, on the
whole, there is substantial net taxation of agriculture. The net tax rate for
the sector as a whole is estimated to have increased from about 12% in 1975 to
about 14% in 1981.2/
IV. Evaluation of the Tax Structure
21. Taxes perform three types of functions: mobilize resources for
financing government expenditure, provide incentives to individuals and
1/ Trade Strategy Report, op. cit., page 144
- 30 -
enterprises to improve resource allocation, and change the pattern of income
distribution. Taxes vary in terms of the differential effects on the three
objectives and the challenge for policy makers is to select the particular mix
which provides the 'best' combination. Apart from the controversy as to what
constitutes an optimal tax structure, even if an optimal tax structure could
be devised, its implementation would be constrained by institutional
bottlenecks. Nevertheless, numerous criteria have been proposed for
evaluating the ex-post tax performance of countries. These evaluations
provide useful guidelines for making changes in the tax structure.
22. In this section the revenue performance of the Egyptian tax structure
will be assessed in terms of two main criteria.: tax effort and tax
buoyancy. The incentive and income distribution effects of taxes will be
discussed in the next section.
V. Tax Effort Analysis
23. Tax effort analysis has drawn a fair amount of attention in recent
times.- . The basic idea is that different countries have different types
of tax base or 'tax handles'. These tax handles depend mainly on the
structure of the economy. Hence, the amount of tax revenue that can be
mobilized depends quite significantly on the structure of the economy. Once
the tax handles are identified the question may be raised; is the country
making adequate effort to realize its tax potential? One methodology
developed in the literature is to express the ratio of tax revenue to GDP as
1/ See in particular: Alan A. Tait et al "International Comparisons of
Taxation for Selected Developing Countries, 1972-76", IMF Staff Papers,
Vol. 26, March 1979 and Raja J. Cheliah "Trends in Taxation in Developing
Countries", IMF Staff Pepers, Vol. 15, July 1971.
- 31 -
a function of certain key factors which affect tax handles. Then, using
cross-country data and regression techniques predict the potential ratio for
each country. An international tax comparison (ITC) index is obtained finally
by dividing the actual ratio to the potential ratio. Countries with an index
exceeding unity are considered as making satisfactory tax effort and their
fiscal problems are caused by other factors. The problem with this approach,
as numerous critics have pointed out, is that tastes relevant to the public -
private goods mix would -differ across countries which would have a significant
influence on the tax ratio. Therefore, two countries seeking to equate the
marginal social benefits of private and public goods may end up having quite
different tax ratios and yet one may be considered as making unsatisfactory
tax effort based on ITC index. Nevertheless, ITC indices provide a useful
summary measure for evaluating the tax structure, provided it is not used
mechanically. It is not a normative measure of 'tax effort', but gives some
indication as to whether the tax handles have significantly additional
potential for generating more revenue.
24. The capacity to tax depends on a number of factors. Some of the
important ones are:
(1) the level of economic activity
(2) the sectoral composition of the economy
(3) the openness of the economy
(4) share of mining in exports
The level of economic activity, as measured by per capita GNP, is expected to
have a positive effect on the tax ratio. Two important considerations
relating to the sectoral composition of the economy are the share of
agriculture in GDP and the share of mining (including petroleum) in GDP.
- 32 -
Since the practical problems of taxing agriculture directly are quite serious,
the tax ratio and share of agriculture in GDP are expected to be negatively
related. The openness of the economy, measured either in terms of total
exports as a ratio of GNP, or total value of trade (exports plus imports) as a
proportion of GNP is expected to have a positive effect on the tax ratio.
Finally, the share of mining (including petrolem) and tax ratio are expected
to be positively associated. The potential tax ratios are computed for 45
developing countries by regressing tax ratio on different combinations of the
above determinants. ITC indices and regression results corresponding to each
specification and data sources, are contained in Annex I. For the text, a
particular specification is chosen. This specification computes the tax ratio
as a function of per capita non-export income, share of mining in GDP and
share of non-mineral exports in GNP. The reason for choosing this
specification is that it makes it possible to compare the updated results of
the present exercise with results of previous periods obtained by other
reseachers. The comparison is made in Table 12.
25. There has been considerable shift in the ranking of countries by ITC
indices over time. One important reason for these shifts is the emergence of
the oil sector as an important source of tax revenue. For this paper the main
interest is Egypt's relative position. Both 1969-71 and 1978-80 ITC indices
rank Egypt quite high relative to other developing countries. It, however,
receives a low ranking in terms of 1972-76 ITC index. The 1978-80 result is
not very sensitive to specification. Regardless of the specification used,
Egypt shows an ITC index exceeding unity and there are marginal changes only
in relative ranking in response to changes in specification (Annex 1). Thus,
based on the most recent result, it may be concluded that Egypt's tax
performance compares favorably with other developing countries.
- 33 -
Table 3.5: Forty-four Developing Countries: ITC Indices1969-71, 1972-76, 1978-80
Country(By 1978-80 ITC Index ITC Index ITC IndexRanking) 1978-80 (Ranking) 1972-76 (Ranking) 1969-71 (Ranking)
Togo 1.593 (1) 0.703 (40) 0.739 (36)Trinidad andTobago 1.507 (2) 0.723 (38) 0.834 (32)
Zambia 1.384 (3) 1.368 (4) 1.111 (16)Guyana 1.312 (4) 1.350 (5) 1.059 (19)Sri Lanka 1.309 (5) 0.983 (19) 1.374 (6)Senegal 1.294 (6) 1.021 (17) 1.342 (7)Kenya 1.285 (7) 1.219 (10) 1.090 (18)Chile 1.282 (8) 1.265 (8) 1.159 (14)Malaysia 1.268 (9) 1.193 (12) 1.191 (12)Ivory Coast 1.264 (10) 1.115 (14) 1.471 (4)Egypt 1.260 (11) 0.853 (30) 1.487 (3)Tunisia 1.252 (12) 1.184 (13) 1.639 (2)Tanzania 1.242 (13) 1.336 (6) 1.034 (21)Peru 0.224 (14) 0.986 (18) 0.874 (30)Zaire 1.222 (15) 1.295 (7) 1.276 (9)Turkey 1.210 (16) 1.484 (2) 1.197 (11)Morocco 1.209 (17) 1.214 (11) 1.224 (10)Indonesia 1.132 (18) 0.797 (32) 0.658 (40)Brazil 1.109 (19) 1.607 (1) 1.806 (1)India 1.067 (20) 1.252 (9) 1.093 (17)Ghana 1.059 (21) 0.976 (20) 1.154 (15)Argentina 1.042 (22) 1.099 (15) 0.973 (24)Korea 0.979 (23) 0.858 (28) 1.181 (13)Pakistan 0.974 (24) 0.915 (26) 0.728 (37)Mali 0.972 (25) 0.968 (21) 1.055 (20)Venezuela 0.963 (26) 0.958 (25) 0.920 (26)Jamaica 0.959 (27) 1.064 (16) 0.993 (23)Ethiopia 0.887 (28) 0.803 (31) 0.705 (38)Honduras 0.871 (29) 0.669 (42) 0.800 (34)Singapore 0.852 (30) 0.796 (33) 0.785 (35)Sudan 0.851 (31) 1.465 (3) 1.440 (5)Upper Volta 0.843 (32) 0.955 (23) 0.817 (33)Thailand 0.799 (33) 0.968 (22) 0.925 (28)Phillippines 0.784 (34) 0.718 (39) 0.683 (39)Burundi 0.758 (35) 0.780 (34) 0.946 (27)Mexico 0.747 (36) 0.733 (37) 0.490 (43)Rwanda 0.744 (37) 0.773 (35) 0.602 (42)Costa Rica 0.743 (38) 0.858 (29) 0.970 (25)Colombia 0.689 (39) 0.899 (27) 0.901 (29)Paraguay 0.647 (40) 0.665 (43) 0.867 (31)Bolovia 0.567 (41) 0.742 (36) 0.459 (44)Guatemala 0.566 (42) 0.558 (44) 0.618 (41)Ecuador 0.559 (43) 0.680 (41) 1.002 (22)Nepal 0.438 (44) 0.489 (45) 0.374 (45)
Source: IBRD staff estimates and Alan A. Tait et al, op. cit.
- 34 -
26. Tax Revenue Buoyancy: Tax revenue buoyancy measures the
proportionate response of tax revenue received by the Government to variations
in some measure of economic activity, usually GDP. This is closely related to
the concept of tax revenue elasticity. A change in tax revenue between two
periods might occur due to two reasons: first, due to a change in the
economic activity to which tax collections are related and second, due to a
change in the tax rate. The first source of the change is called 'automatic'
or 'built-in' change and the second source is known as 'discretionary'
change. Tax buoyancy measures the total response of tax revenue whereas tax
elasticity measures only the automatic or built-in response.
27. Point estimates of tax revenue buoyancy with respect to GDP at
different levels of disaggregation are presented in Table 13 /. Total tax
revenue, with or without the tax contribution of petroleum and Suez Canal,
shows a buoyancy value exceeding one. The buoyancy estimate improves if
petroleum and Suez based tax revenues are excluded.
Table 13: Revenue Buoyancy Estimates
Tax Measure Magnitude
Total tax revenue 1.129Total tax revenue excludingpetroleum and Suez 1.180
Consumption taxes 1.086Business profit tax 1.212Business profit tax excluding
petroleum and Suez 1.492Personal income tax 0.894Property tax 0.831Customs duties 2/ 0.977
1/ Point estimates are derived by regressing the natural log of taxes on thenatural log of GDP over the period 1976 to 1981/82.
2/ Buoyancy estimated with respect to value of imports.
- 35 -
The disaggregated picture indicates that business profit tax is the most
buoyant tax instrument. Consumption tax has a buoyuancy value exceeding
unity, but property and personal income taxes have buoyancy values which are
less than one. The buoyancy of customs duties with respect to value of total
imports is close to unity. Thus, while on the aggregate tax revenue is quite
responsive to GDP, at the disaggregated level the responsiveness of personal
income and property taxes is not satisfactory.
28. The favorable revenue performance of the tax structure in terms of
tax effort and overall buoyancy indicates that Egypt's fiscal problems are
caused by excessive growth in government expenditure. Taxes on an average
finance about 40% of total expenditure. The major non-tax sources of revenue
include surplus from petroluem, Suez Canal and public sector companies.
Public economic sector savings which finance about 20% of total expenditure
have shown significant instability. The challenge for Egypt lies in reducing
the reliance on unstable sources of revenue by increasing the fiscal
contribution of public sector companies and monitoring expenditure growth in
line with resource availability, but without adversely affecting economic
growth.
VI. Economic Effects of the Tax System
29. Taxation and Income Distribution. Taxes are important instruments
of income distribution. Unfortunately, very little is known about the
distributive effects of the Egyptian tax system. A recent study made an
exploratory attempt to obtain some evidence on this.-/ The main finding of
1/ M. Reda El Adel, op. cit
- 36 -
the study is that the tax system, including consumer subsidies, which is
defined as a negative tax, had a favorable effect on income distribution. The
gini coefficient of income for 1974/75 is 0.4043 before taxes and 0.3792 after
taxes. The evidence, however, is not conclusive and also the data used in the
study are not current. In view of the lack of direct evidence, only
qualitative judgements can be made regarding the income distribution
implications of the tax system in Egypt.
30. There are two aspects of equity; "horizontal equity" and "vertical
equity". Horizontal equity requires 'equal treatment of equals', meaning that
people at the same level of income should bear the same tax burden. Vertical
equity requires 'taxation according to ability to pay', implying that people
with higher income should bear a higher tax burden. Satisfaction of both
aspects of equity requires that the tax base should include all sources of
income, earned or unearned, and that the tax rate should vary according to
income levels rather than income sources. There are problems with the
Egyptian tax structure regarding both equity aspects. The principle of
horizontal equity has suffered because of the following factors. First,
taxation of income is largely based on a schedular system with the tax rate
varying according to the source of income. Second, earned income is taxed at
a higher rate than unearned income. For example, capital gains are taxed only
if it is 'realized'. Similarly, taxes on property are almost negligible.
Third, large tax exemptions have been granted to foster private investment and
moreover there is substantial tax evasion. Both have tended to erode the tax
base for a selective income group.
31. From the point of view of vertical equity or taxation 'according to
ability to pay', the tax progression is of special interest. In the
- 37 -
discussion of the legal tax structure, it was shown that taxation of all
sources of personal income, except dividends and interests, follow a
progressive rate structure. The supplementary global income tax schedule also
incorporates significant progression. If assessment and collections were
effective, the income tax system would accomplish a substantial equalization
of incomes. But the low effectiveness of implementation reflected by
insignificant revenue contribution of personal income taxation indicates the
weakness of the tax structure in terms of vertical equity as well.
32. The large share of indirect taxes in total taxes is also a matter of
concern in terms of tihe equity content of the tax structure. The regressive
impact of indirect taxes might be expected to be offset to a large extent by
consumption subsidies. But in view of the open-ended nature of subsidies, it
is difficult to present a definite view on the overall impact of indirect
taxes and subsidies on tax progression.
Taxation and Incentives
33. The incentive effects of taxes depend on the incidence of the taxes.
In practice all taxes have disincentive effects and the real issue is the
trade-off between incentives, revenue and income distribution. As in the case
of the distributive implication of the Egyptian tax system, very little
attention has been paid to this issue.Given the lack of quantitative evidence,
only qualitative judgements can be made.
34. The most important source of revenue is the business profit tax.
This is also the tax instrument actively used by the government to encourage
private investment in the economy. Incentives have been provided in two
forms. First, under 'Law No. 43/1974 (amended in 1977) foreign private
investments have been exempted from all taxes for a period of 5 years from the
- 38 -
first fiscal year following commencement of production. Such exemptions apply
for the same period to the proceeds of the profits which are reinvested in the
enterprise. Second, the new tax Law 157/1981 made special provisions for
encouragement of the establishment of joint stock companies, public and
private. The special provisions include:
(1) tax exemption on interest income from bonds issued by joint stock
companies provided these bonds are offered for public subscription;
(2) tax exemption of interest in bonds issued by public sector banks as
well as the interest on bonds issued by these banks in which public
sector capital accounts for more than 5% and which are registered
with the Central Bank, if these bonds are issued with the aim of
financing projects within Egypt;
(3) tax exemption on profits resulting from the revaluation of assets of
an establishment owned by an individual or partnership when these
assets are used for participation in joint stock companies;
(4) tax exemption on real estate transaction if used for a joint stock
company.
What is not clear, however, is the relative cost and benefit of these
incentives. The issue as to whether the benefits of these incentives exceed
the revenue loss is quite important and merits a careful analysis.
35. The bulk of commodity production subject to profit taxation is under
price control while services are relatively free. To some extent the impact
of price control on output is offset by subsidy input, but on the whole the
present incentive structure favors services production and is biased against
commodity production. Given that a major objective of the Government is to
divert resources from services into commodity production and full price
- 39 -
flexibility is not likely to be achieved in the near future, with a higher
rate of taxation of services profit would tend to lower the overall
disincentive effect on commodity production. But at present profits from
services and commodity are taxed at the same rate. The disincentive effects
are therefore similar.
36. Although infant industry development has played an important role in
the design of import tariff structure, the main objective was revenue
generation. This can be seen from Table 14. Except for basic metals and
transport equipment, effective protection due to tariffs is negative for
public sector industries. Basic metals and transport equipment activities
show negative value added at world prices partly due to large effective
protection accorded by the import tariff structure. In the case of the
private sector, customs duties have provided significant effective protection
to activities classified under other textiles, metals and engineering products
and building materials, but food processing and textile related spinning
activities experienced negative effective protection.
Table 14: Sumary Measure. of Effective Protection
Public Sector Private SectorDue to Due to Due to Due to
Industry Overall Tariffs Subsidies Industry Overall Tariffs Subsidies
Textile TextileCotton textile -28 -2 -22 Spinning -42 -90 -42Other textile 35 -3 46 Others 64 58 4
FoodEdible oil -94 -6 -82 Food -39 -73 55Processed food -70 -3 -64
Chemicals Buildingmaterials 95 97 0.3Paper 89 -14 116
Basic 45 -8 80
MetalsElectric machinery 9 -3 20Basic *etals (Negative value added at world prices)Transport equipment (Negative value added at world prices)
Source: Trade Strategy Report, op. cit., pages 294 and 296
(0726J-15)
- 40 -
37. Although public sector industries are subject to price controls on
output, they have also received significant subsidy through access to
controlled price inputs. The overall impact of price control, input subsidy
and tariff protection has been quite dispersed. In the case of other textile
and food processing, the two largest industrial activities in Egypt, negative
effective protection due to tariff and price control on output have reinforced
each other to offset the positive incentive effect of access to subsidized
inputs, thereby resulting in a large negative overall effective protection for
these two activities. But input subsidies offset the negative protection
accorded by tariffs on other textiles, paper, basic chemicals and electric
machinery, and reinforced the tariff based effective protection on basic
metals and transport. The private sector is not subject to output price
control, and they have largely benefitted from the system of tariff protection.
38. While the overall disincentive effect of tariffs and price controls
is mixed for the aggregate industrial sector, the impact is clearly adverse
for agricultural production. Except for meat and milk, all major agricultural
activities experienced negative effective protection, basically due to price
controls on output.-Y
VI. Strengthening the Tax System
39. As discussed above, although the level of taxation in Egypt is not a
major issue, there are problems regarding equity and incentive aspects of
taxation. These include: relatively strong reliance on indirect taxes,
insignificant role of personal income and property taxes, large dependence on
schedular tax system with tax rates varying according to source of income,
large tax exemptions which are subject to abuse and low tax compliance. A
1/ See World Bank, Trade Strategy Report, op. cit, page 180
- 41 -
number of possibilities exist to improve the tax system in Egypt. These are
discussed briefly below.
40. Business Profit Tax: Revenue from business profit tax can be
increased by taking a imore careful look at the cost aspect of the various
exemptions provided to attract foreign and domestic private investments. It
is very important to undertake a detailed study of the impact of these
incentives and compare the benefits with the costs. Also, it would be useful
to assess whether non-tax incentives may be substituted for tax incentives to
minimize loss of revenue. At present profits from commercial activities are
taxed at the same rate as production activities. It may be desirable to
discriminate in favor of the production sectors and, therefore, have a higher
tax rate for commercial activities.
41. A major problem with the business profit tax is the low level of
compliance. Under Law 157/1981 the Government has implemented a number of
changes to improve voluntary compliance. These include a reduction in the
average rate of tax, an increase in the level of tax exempt profit and a
reduction in the marginal tax rate for partnership and individual
enterprises. At the same time, several steps have been taken to improve the
tax assessment and collection procedures of the tax administration. These
include an increase in the number of tax collection offices at the governorate
level, better tax records and imposition of strict penalties for tax evasion
and delays. Although the full impact of these measures will not be realized
for some time, 1982/83 profit tax collections are estimated to have increased
by about LE 200 to 250 million.
42. Personal Incoime Tax: The main problem with personal income tax is
the low level of compliance. This is due to weaknesses in the tax assessment
- 42 -
and collection machinery. At present most of personal income tax is collected
through schedular taxes on wages and salary and self-employment. The role of
the global income tax is very limited. Additional revenues can be raised and
a more equitable tax structure introduced by moving from the present system of
schedular and global income taxes to a unified global personal income tax and
combining this shift with a stronger tax administration machinery. The
Government has recently taken some steps in this respect. A team of U.S.
Internal Revenue Service experts are looking at the issues of income tax
unification as well as improved assessment procedure on the basis of computer
records. Some administrative changes in tax collection procedures have been
introduced as well. The seriousness with which the required changes are
implemented will determine the impact of these measures on revenue collection.
43. Consumption Tax: The present selective excise tax on consumption is
too narrowly based. A broad based general sales tax would constitute a
significant improvement in the tax structure. The tax should be ad valorem
rather than the present mix of a combination of specific and ad valorem
rates. Like the present excise tax, the tax should not also discriminate
amongst imports and domestic production and the tax rebate may be extended to
exports. At present there is no indication that a broadly based sales tax be
introduced. The Government response has been to continue with the system of
selective excise tax, but increase the number of commodities under the scope
of this tax (Law 133/1981). The revenue effect of this measure is estimated
to be around L.E. 250 million in 1982/83.
44. Customs Duty: A very easy way for augmenting revenue collection from
customs duties is to switch from the present procedure of assessing duty on
- 43 -
the bulk of imports baEsed on the Central Bank pool exchange rate (LE 0.7 =
1.00 US$) to the commercial exchange rate (LE 0.84 = 1.00 US$). It is
estimated that the change would generate additional revenue of about L.E. 400
million. Another problem with customs duties is that the variation in the
rates of duties within broad commodity groups is too wide. A more unified
system would help reduce the distortionary effects of the import tariff. As
in the case of business profit taxes, it is important to look more carefully
at the costs and benefits of customs duties exemptions. Also, customs duty
collection procedure need to be strengthened. In particular, the continued
leakages of duty free imports from free zones to the rest of the economy need
special attention. The Government has made some effort recently to correct
the existing loopholes and revenue from customs duties are expected to
increase by 24% in 1982/83, despite a reduction in the value of imports (due
to import controls as well as reduction in import prices). The issue of the
use of commercial bank pool exchange rate for assessment of customs duty
liability, however, remains unresolved.
- 44 -
Chapter 4
Analysis of Public Sector Expenditure
I. Composition and Structure
1. The composition and structure of public sector expenditures by main
categories are shown in Table 15. The three main characteristics underlying
the recent trends in public sector expenditures arez
a) the large role of autonomous expenditure (defined as the sum of
current expenditures, economic authority deficit and net capital
transfers;l/
b) the growing importance of subsidies as a major budgetary expenditure;
and
c) the slowdown in the growth of investment expenditure.
2. Between 1976 and 1980/81, autonomous expenditures declined relative
to subsidy and investment expenditures due to very rapid growth rates in the
latter two categories following the very favorable resource situation which
emerged in Egypt'during 1974-1980/81 period. The increase in budgetary
subsidies is a reflection of the Government's policy of protecting the living
standards of the poorer people in the face of the growing concentration of
incomes and rapid inflation. The growth in investment expenditures, on the
other hand, indicates both the response of the Government to ease up the
physical infrastructure bottlenecks which had gained prominence with the surge
in the level of economic activity in this period, and the attempt to
reorganize the
1/ These are autonomous in the sense that the degree of discretionaryinfluence is very small.
- 45 -
Table 15: Composition and Structure of Public Expenditure
l976 1977 1978 1979 1980/81 1981/82 1982/83 a/
A. As a proportion ofGDP
- Current expenditure 0.248 0.204 0.208 0.196 0.213 0.239 0.269- Consumer subsidies 0.064 0.078 0.072 0.106 0.125 0.107 0.083- Economic authority
current deficit 0.006 0.006 0.006 0.005 0.004 0.005 0.005- Net capital
expenditure 0.023 0.026 0.045 0.051 0.050 0.050 0.046- Investment
expenditure 0.146 0.186 0.236 0.200 0.217 0.228 0.200
B. As a proportion of totalexpenditure
- Current expenditure 0.509 0.418 0.366 0.351 0.349 0.379 0.446- Subsidies 0.132 0.156 0.128 0.191 0.210 0.171 0.138- Economic authority
deficit 0.013 0.013 0.010 0.008 0.006 0.008 0.009- Net capital
expenditure 0.047 0.051 0.080 0.091 0.082 0.080 0.076- Investment
expenditure 0.299 0.372 0.426 0.359 0.357 0.362 0.331
a/ Estimated
Source: Table 6(0726J-16)
- 46 -
industrial base into a more modern and capital intensive structure.
3. With the emergence of resource tightness since 1981/82, the relative
importance of autonomous expenditures has increased, following rapid growth in
this component due to high rates of inflation and the Government policy to
absorb a part of the impact of decline in resource availability by limiting
growth in investment and subsidy expenditures. The 1982/83 experience
illustrates this quite dramatically. There is a big jump in the share of
autonomous expenditure and significant decline in the shares of subsidy and
investment expenditures.
4. A similar picture is indicated by the responsiveness of expenditure
and its main component to GDP (Table 16). Total expenditure, investment
expenditure and subsidies all show buoyancy values exceeding one. But the
responsiveness of autonomous expenditure with respect to the general price
level is much larger than the responsiveness with respect to GDP.
II. Growth and Structure of Autonomous Expenditure
5. The largest component of autonomous expenditure is current
expenditure. Despite the decline in relative share, current expenditures in
the period 1976-1981/82 grew at an annual average rate of 22%, which implies a
real growth rate of 5%. The estimated increase in nominal current expenditure
for 1982/83 is much larger - 32% over 1981/82. The main reason for the rapid
growth in current expenditure is increases in defense appropriations and the
wage bill. The growth in the wage bill has been more due to increase in the
level of employment in government services than due to wage adjustments. The
relative unattractiveness of government jobs in terms of wages and salaries is
fairly well known. The large increase in government employment reflects
basically the policy of providing guaranteed employment to graduates.
- 47 -
Table 16: Expenditure Buoyancy Estimates
(Point estimate 1976-1981/82)
Total expenditure withrespect to GDP 1.23
Autonomous expenditure withrespect to GDP 0.91
Subsidies with respect toGDP 1.61
Investment expenditurewith respect to GDP 1.28
Autonomous expenditure with respectto general price level 1.75
6. Since 1979 the expenditure on interest payments (domestic and
foreign) has assumed significant proportions (Table 17). Interest payment on
domestic public debt in particular has increased quite rapidly. This is the
consequence of growth in Treasury borrowings to finance the budget deficit.
The more than doubling of domestic interest payments in 1982/83 is, however,
more apparent than real. This includes interest payments of about LE 200
million by the Treasury ito the Central Bank which reverts back to the Treasury
in the form of Central Bank profit transfer.
- 48 -
Table 17: Treasury Expenditure on Interest
(In millions of Egyptian Pounds)
1979 1980/81 1981/82 1982/83 1/
Interest on DomesticPublic Debt 208.2 340.3 360.7 747.4
Interest on ForeignPublic Debt 147.7 116.8 148.4 204.5
Total Interest Payment 355.9 457.1 509.1 951.9
As Percentage ofTotal Expenditure 5.0 4.3 3.9 6.6
As Percentage of GDP 2.8 2.6 2.5 4.0
1/ Estimated
Source: Ministry of Finance
7. The growing burden of the public debt since 1979 has also resulted in
increased budgetary expenditure on amortization payments (Table 18). Outlays
on the amortization of foreign debt are expected to grow even faster in the
future given the repayment profile on increasingly large amounts of loans.
The other component of capital transfers expenditure - loans to public
economic authorities and public sector companies to cover their capital
commitment deficits, reflect two important aspects of the state budget which
is often overlooked: (a) the complexities of financial transactions between
the Treasury and public economic enterprises and (b) the fact that there are
large dispersions in the earnings of various public economic enterprises. The
flow of funds between the Treasury and public economic enterprises and the
issue of financial contribution of these enterprises will be discussed in some
detail in Chapter 6.
- 49 -
Table 18: Amortization of Public Debt and Transfersto Finance Capital Deficits of Public Sector Companies
and Public Economic Authorities(in millions of Egyptian Pounds)
1979 1980/81 1981/82 1982/831/
Amortization ofdomestic debt 179.2 206.1 281.3 401.4
Amortization offoreign debt 2/ 383.9 261.9 96.0 3/ 346.8
Total amortizationpayments by Treasury 554.1 468.0 377.3 748.2
Transfers to financecapital deficits ofpublic sector companies 64.9 158.8 213.9 159.1
Transfers to financecapital deficits ofpublic economicauthorities 196.4 221.8 389.6 492.8
17 Estimated2/ From Treasury fund only3/ Low amortization patyments in 1981/82 reflect some debt scheduling which
occurred in that yearSource: Ministry of Finance
8. Apart from financing capital deficits of public economic authorities,
the Treasury is also responsible for financing their current deficits. Such
deficits reflect the inability of some of these authorities to cover their
current costs of production. The railway authority accounts for the bulk of
the current deficit financed by the Treasury. This inability is induced by
the lack of autonomy, in particular regarding price setting, for these
organizations. Since current deficits arise because the organizations cannot
charge consumers their cost of production, they constitute a kind of subsidy
for the users.
III. Growth and Structure of Budgetary Subsidies
9. Subsidies first entered as a budgetary item in 1950, but it was not
until 1973 that it gained prominence. Since then, subsidy expenditure, has
- 50 -
Table 19: Direct Subsidies Paid from the Special Fundfor Subsidies and the Treasury Fund 1/
(In millions of Egyptian pounds)
1976 1977 1978 1979 1980/81 1981/82 1982/83 2/
General Authority forSupply Commodities 321.5 313.4 449.6 6/ 1001.9 7/ 1703.1 7/ 1473.1 1336.5
Cairo & AlexandriaPublic TransportAuthorities 10.2 11.5 17.6 27.4 26.9 49.4 33.3
Agricultural CreditCorporation 8.7 0.1 0.1 0.1 5.3 4.0 7.6
AgriculturalStabilizationFund 3/ 34.2 34.7 38.3 101.9 119.1 227.9 160.0
Textile Corporation 39.9 16.3 44.3 50.6 92.0 126.9 127.3Petroleum
Corporation 4/ 10.2 12.0 15.9 40.0 51.9 56.2 41.8Cooperative BuildingAuthority 0.2 0.4 1.2 2.3 6.9 15.4 30.7
Government Credit Banks 9.9 29.3 19.7 31.2 40.0 51.6Press Paper Subsidies 2.5 6.6 4.1 3.8 6.7 6.5 -Industrial Output
Subsidies - - 72.6 41.3 58.3 114.2 117.3Price Adjustment
Fund 5/ - 228.0 - - - - -of which: GASC - 124.0 - - - - -
Other 6.1 16.7 37.0 63.0 65.2 78.5 94.3
TOTAL 433.5 649.6 710.0 1352.0 2166.4 2192.1 2000.0
Memo Item:
Share ofFood Subsidy 0.74 0.67 0.63 0.74 0.79 0.67 0.67
Source: Ministry of Finance
1/ The Special Fund for Subsidies was established in 1975, prior to which directsubsidies were included in various sections of the budget.
2/ Estimated3/ For fertilizers and pesticides; includes Treasury Fund payments.4/ For bottled gas and kerosene.5/ The Price Adjustment Fund was established in 1977 to finance the cost of
phasing in the domestic price impact of commodities imported at the parallelrather than the official exchange rate.
6/ Includes LE 122.1 million arrears financed in 1981/82. In 1978 and 1979, 190million LE were allocated to 1979 and 140 million LE to 1978.
7/ Includes LE 595 million expenditure incurred by GASC in 1980/81 but financed in1981/82.
(0726J-8)
- 51 -
increased at a very rapid rate. For example, between 1976 and 1981/82,
nominal subsidy expenditure grew at an annual average rate of 36 percent. The
structure of direct subsidy for the period 1976 to 1982/83 is given in Table
19. The most important category of direct subsidy is food which alone
accounts for about 70% of total subsidy expenditure. Other items include
transport, agriculture input subsidies on fertilizer and pesticides, interest
subsidy on agriculture and housing credits, consumer subsidies on textiles,
kerosene, bottled gas, newspaper and various types of industrial goods
produced by nationalized industries. In view of its dominant role, the growth
and structure of food subsidies are analyzed below in greater detail.
IV. An Analysis of Food Subsidies
10. The growth in budgetary expenditure on food subsidies may be
explained by two factors:
(a) increase in the composition and volume of subsidized goods;
(b) increase in the rate of subsidy.
11. The amounts of major subsidized food commodities for the period 1976
- 1981/82 are shown in Table 20. It is clear that the quantities of goods
subsidized for each category increased quite significantly during this
period. For example, subsidized quantities of wheat, flour and maize grew at
annual average rates of 6.5, 13.6 and 19.1 percent respectively compared with
a population growth rate of about 2.8% per annum. Similarly, the quantities
of lentils, oils and food and animal fats grew at annual average rates of 4.4,
4.9 and 3.8 percent respectively. The fastest growing items in recent years
have been: sugar, meat and fish (all with relatively high income
elasticities). But despite this, wheat, flour and maize remain as the first,
second and third most important commodity and together account for about 80
-52 -
percent of the total food subsidy bill. The bulk of the subsidized goods
continue to be procured through imports. The only exception is sugar for
which domestic procurement is relatively more important.
Table 20: Amounts of Major Subsidized Commodities
(in thousands of tons)
Item 1976 1977 1978 1979 1980/81 1981/82
Wheat 3027 3384 3710 3725 4000 4300Imported 2758 3297 3560 3561 3910 4200Domestic 269 87 150 164 90 100
Imported Flour 541 655 837 1028 1022 1100Imported Maize 435 676 690 632 1172 1150Beans 132 75 85 91 100 140
Imported 83 25 35 43 74 100Domestic 49 50 50 48 26 40
Lentils 29 55 60 64 68 107Imported 17 44 50 56 66 105Domestic 12 11 10 8 2 2
Oil 222 225 375 289 284 375Imported 222 225 250 259 284 275Domestic - - 125 - - 110
Food & Animal Fats 163 127 179 190 204 201Eggs (millions) - - - - 109 160Tea - 48 37 41 29 26Frozen beef - 65 70 68 124 95Chickens - - - 13 64 85Fish 43 31 67 29 104 150Sugar - - - 345 1068 1130
Imported - - - 345 518 550Domestic - - - - 550 615
Live cattle - - - 50 70 150
Source: General Authority for Supply Commodities (GASC)
- 53 -
V. The Rate of Subsidy
12. The rate of subsidy expressed as a share of the cost price for each
commodity for the period 1979 to 1981/82 is presented in Table 21. The
subsidy rate for most commodities is fairly high. In general, the rate of
subsidy is higher for foodgrains. There has been some change in the rate of
subsidy between 1979 and 1981/82. The subsidy rates for wheat, oil, edible
fat, beef and chicken show some decline, while those for flour, beans,
lentils, eggs, fish anid sugar show an increase.
Table 21: Subsidy per unit for Major Subsidized Commodity(As a percentage of procurement price)
1979 1980/81 1981/82
Wheat (wt. av.) 80 71 72Imported 81 71 72Domestic 65 54 54
Imported Flour 65 70 63Imported Maize 51 61 58Beans (wt. av.) 52 60 64
Imported 66 66 67Domestic 41 41 57
Lentils (wt. av.) 64 75 70Imported 65 76 70
Domestic 60 57 71Oil (wt. av.) 82 53 45
Imported 82 53 51Domestic - - (-)14
Edible fat 60 50 51Animal fat - 68 66Eggs - - 59 61Tea 18 (-)37 (-)53Frozen beef 56 51 48Chickens 12 03 06Fish 24 22 35Sugar (wt. av.) 09 15 24
Imported 09 15 24Domestic - (-)03 17
Source: Annex 2
- 54 -
13. The selling prices of subsidized commodities are relatively more
stable than the procurement prices, particularly imported ones. This is an
important reason for the fluctuations in the rate of subsidy. For example
the changes in the rate of subsidy between 1980/81 and 1981/82 are entirely
due to fluctuations in the imported prices of subsidized goods since selling
prices remained unchanged (Annex 2).
14. As indicated by the large variations in the rate of subsidy, the
absolute difference between procurement price and sales price decreased for
some commodities and increased for others. The quantities of subsidized
goods, however, increased for all categories. The increase in the nominal
subsidy bill is, therefore, an outcome more of the increase in the volume of
subsidized goods than the widening of the absolute price gap. The relative
role of the two factors for the period 1979 - 1981/82 for each commodity is
indicated in Table 22. There are significant differences in the contribution
of the two factors. The increase in wheat subsidy is entirely due to the
increase in quantity. For flour the increase in the price gap is more
important. Maize, beans, lentils, fish and sugar show large increases for
both quantity and price gap. The increase in the price gap, however, is
relatively more important for beans, lentils and sugar while increase in
quantity is more important for maize and fish. Quantities of chicken, oil and
beef increased fairly rapidly, but the price gap narrowed for these
commodities. The decline in the price gap for edible oil more than offset the
increase in the quantity. Similarly, the decline in the price gap for animal
and edible fat offset the increase in quantity of this commodity.
- 55 -
Table 22: Relative Importance of Quantityan(d Price Gap Changes for Subsidized Goods
(1979 - 1980/81)
% Change in Quantity % Change in Absolute Price Gap
Wheat 15.40 0.00Flour 7.00 23.63Maize 82.00 38.79Beans 54.00 75.74Lentils 67.00 131.48Oil 32.00 (-)47.20Animal & edible fat 5.80 (-)31.60Frozen beef 39.70 (-) 7.78Chickens 553.80 (-)89.68Fish 417.20 92.36Sugar 227.50 322.00
Source: Calculated from Table 17 and Annex 2
VI. Hidden or Implicit Subsidies
15. Budgetary suLbsidies reflect only explicit subsidy expenditure
incurred by the government. Even such subsidy is underestimated because all
imported subsidized goods channeled through GASC are evaluated at the Central
Bank pool exchange rate. The food subsidy bill would be much larger if a more
realistic exchange rate were applied to calculate the c.i.f., price of
imported subsidized goods in domestic currency units. Quite apart from this,
a major source of implicit or hidden subsidy is supply of energy products to
domestic consumers at a price which is far below the opportunity cost (the
f.o.b. price or the c.i.f. price). The value of the subsidy is estimated at
more than L.E. 2.0 billion per year.
- 56 -
VII. Investment Expenditure
16. The final component of government expenditures is investment outlays
of the combined public sector. Between 1976 and 1981/82 nominal investment
expenditure grew at an annual average rate of 29%. The growth in investment
expenditure was quite uneven. The 1976-1978 period saw a big surge in
investment expenditure, particularly in 1978 when the share of investment
expenditure reached a high of 43% of total expenditure and 24% of the GDP.
Since 1979, the share of investment expenditure has been declining. The
slowdown is noticeable particularly in 1982/83.
17. The decline in the rate of growth of public investment is partly due
to the government policy of reducing investment expenditure in response to
resource tightness in the economy and partly due to physical absorptive
capacity constraints. The physical constraints have shown up in terms of
inadequate availability of overhead, such as transport, construction materials
and skilled workers, as well as institutional bottlenecks.
18. The structure of investment shows that public sector investment has
concentrated on three major sectors: industry, energy (mainly electricity)
and transport and communication (Table 23). These three together account for
about 70% of total public sector investment. In view of significant excess
capacity in public industries, a large part of industrial investment has been
for replacement and modernization. This has meant an increase in the capital
intensity of these enterprises. Further, capacity expansion has concentrated
on energy intensive (such as fertilizer) and capital intensive (engineering
and metallurgical products) activities. In general, therefore, new
investments have augmented the capital intensity of industrial production.
The large increase in electricity and transport investments reflect the
- 57 -
Government's efforts to relieve the physical absorptive capacity constraints
in the economy. Power availability does not appear to be a major bottleneck
at present, but transportation problems remain quite serious.
Table 23: The Structure of Public Investment
1976 1977 1978 1979 1980/81 1981/82 1982/83
Non-financial publicenterprises 0.38 0.42 0.38 0.35 0.41 0.37 0.35
Electricity andPetroleum 0.15 0.11 0.13 0.12 0.14 0.10 0.11
Transport andCommunication 0.14 0.21 0.23 0.13 0.14 0.14 0.14
Agriculture 0.05 0.05 0.05 0.07 0.05 0.05 0.08Others 0.28 0.21 0.21 0.23 0.26 0.34 0.32
Source: Ministry of Finance
VIII. Economic Effects of Government Expenditure
19. Like taxes, government expenditures are important fiscal instruments
for affecting the distribution of income and resource allocation in the
economy. Given the very large role of the public sector in Egypt, an analysis
of the economic effect's of government expenditure is extremely important.
Unfortunately, except for some partial attempts to determine the income
distribution effects of food subsidies, no systematic effort has been made to
determine the incidence of government expenditure. The efficiency aspect of
public investments in agriculture and industry have been studied in some
detail in a recent World Bank report.
Food subsidies and income distribution
20. One attempt to determine the cost effectiveness of the food-subsidy
- 58 -
program in Egypt is included in a World Bank study country economic report on
Egypt.-/ The main conclusion of the study is that the food subsidy program
is fairly cost effective mainly because of the dominance of the food grains in
the subsidy program. A similar result on the cost effectiveness of foodgrain
subsidy was obtained in a recent report on shadow prices for Egypt.2/ Both
studies, however, questioned the justification of subsidies on meat, fish and
sugar on income distribution grounds.
Income distribution effects of other public expenditures
21. Apart from direct food subsidies, the Government has attempted to
improve the income distribution through two other channels. These are (a)
expenditure on health and education and (b) subsidies through price controls
on transport and on industrial goods, interest subsidy for housing finance and
guaranteed employment program for graduates. These expenditures are not
targetted towards any specific income group, but in practice it is likely that
higher income groups have benefitted relatively more due to their stronger
socio-politic influence.
Resource allocations effects of government expenditure
22. Resource allocation and growth in the economy are affected directly
by the size and structure of public investment expenditure. Also, very
important indirect effects are transmitted through price controls and
subsidies. The resource allocation implications of pricing policy has already
been discussed in Chapter 3. A brief economic analysis of public investment
is presented below.
1/ Khalid Ikram: Egypt - Economic Management in a Period of Transition, AWorld Bank Country Economic Report, Johns Hopkins Press, Baltimore (1980)
2/ John Page: Shadow Prices for Trade Strategy and Investment Planning inEgypt, World Bank Staff Working Paper No. 521.
- 59 -
23. Public sector investment accounts for about 70% of total investment
in the economy. Apart from the provision of infrastructure facilities, the
main direction of such investment has been towards the provision of industrial
goods in the economy. The efficiency of the public sector industrial
investment has been studied in some depth in a recent World Bank report./
The findings of the study indicate very low levels of efficiency for most
investments. There are large discrepancies for almost all sectors between
financial and economic profitability. Sectors with good financial
profitability generally show low economic profitability and vice versa (Table
24). This result is not surprising given the pervasiveness of controls
(prices, wages, financial and management) in the economy.
24. The bulk of public sector industrial investments has concentrated on
the production of goods for the domestic market - basically wage goods. As a
result, the export performance of public enterprises has been very weak.
Industries oriented towards exports suffer from inadequate incentives,
including overvaluation of the exchange rate and ineffective tax rebate
system. A further problem is that the growing capital and energy
intensiveness of public investment has limited the ability of public
enterprises to create productive employment.
25. Public investments in electricity and transport played a large
development role by easing up physical bottlenecks constraining Egypt's
economic progress in the early 70s. Nevertheless, there are significant
issues of efficiency for these investments as well. In particular, available
evidence tend to indicate that investments in electricity and transport were
1/ Arab Republic of Egypt - Issues of Trade Strategy and Investment Planning,World Bank Economic Report No. 4136-EGT, World Bank (1982)OChis is a restricted-circulation document for official use only.)
- 60 -
Table 24: The Divergence between Economic and Financial ProfitabilitySingle Year Estimates FY80/81
Average Economic Average FinancialRate of Return Rate of Return
Cotton textiles 13.6 5.9Wool textiles 4.1 15.5Jute products -5.1 17.5Carpets 4.2 18.3
Oil, soaps & detergents 14.4 -6.6Sugar 34.2 7.1Processed vegetables 12.3 2.2Oils & essences 78.1 17.6Starch & yeast 45.0 6.2
Artificial fibres -9.5 1.9Non-edible oils -11.1 3.8Coke -17.4 -20.7Leather & tanning 8.3 4.1
Iron & steel -2.7 10.9Aluminum -21.0 12.5
Non-ferrous metals -3.1 15.5Steel pipes -2.0 18.9Formed & shaped steel 6.4 11.7Ferrous castings -46.2 -6.7
Road motor vehicles -32.7 -13.4Railway carriages 17.3 12.1Bicycles & motorcycles -3.2 1.5Industrial electrical products 52.6 24.4Electric consumer durables 20.0 15.8Consumer electronics -3.6 20.5
Ceramics -12.8 2.4China & glass -16.4 20.6
Source: Trade Strategy Report, op. cit., page 361
- 61 -
not based on least cost solutions. Moreover, the returns from these
investments have been lowered significantly due to inadequate attention to
maintenance and repairs of facilities.
26. Finally, the main thrust of agricultural investment has been towards
provision of irrigation and drainage facilities and land reclamation. These
investments were aimed at easing up two major bottlenecks: the growing
problem of rising water tables and soil salinity and the acute shortage of
arable land further exacerbated by the mounting population pressure. Both
investments achieved only limited success in realizing the objectives. The
amount of investment in, drainage and irrigation infrastructure proved
inadequate relative to the magnitude of the need. Moreover, there is some
evidence that the returns from implemented projects are low relative to
potential. There are important issues of design and construction standards of
completed projects. Further, maintenance of old network is a perennial
problem. The track record on land reclamation efforts is not very encouraging
either. After a large impetus in 1960s, land reclamation was deemphasized in
1970s due to very low returns from such efforts. The reasons include
insufficient drainage and irrigation facilities, inadequate soil studies,
institutional constraints, and insufficient financial resources. Since the
beginning of 1980 land reclamation efforts have gained prominence once again.
Given long gestation periods and high capital intensity, progress towards
completion of projects have been slow. Consequently, short term output
effects are negligible.
IX. Policy Measurets for Rationalizing Public Sector Expenditure
27. The review of public sector expenditures indicates quite clearly the
fact that there is considerable room for improvement in managing public sector
- 62 -
expenditure. Some of the important expenditure measures are discussed below.
(a) As a general policy, the discretionary component of budgetary expenditures
has to be increased in order to make it possible to use fiscal policy as
an active tool of stabilisation. This would require a reduction in the
rate of growth of current expenditures and transfers, and making
expenditures more responsive to non-exogenous resources in the economy.
(b) While it is true that food subsidies have a favourable effect on income
distribution, a number of improvements in the administration of subsidy is
possible. First, the open-ended system of subsidy should be replaced with
a more target group olriented system. The Government has recently reduced
the number of ration card holders by restricting eligibility. While this
is an encouraging first step, additional measures have to be taken to
ensure only target groups benefit from subsidies. Second, to keep the
budgetary cost of the subsidy scheme in reasonable proportion it is
necessary that the rate of subsidy be gradually adjusted downwards. This
would require frequent adjustments in the selling price of subsidized
goods to reflect movements in procurement prices. The present policy of
the Government is to restrict total outlay on subsidies at the level of
L.E. 2.0 billion in 1981/82 prices. Apart from the fact that this
represents a large sum of money, there is no definite program as to how
this would be achieved. One scheme under active consideration is to
introduce different grades for each commodity. The quality differential
would then serve as a basis both for some increase in effective price and
channeling the subsidy to the poorer group. There is very little action
even on this as yet. Third, the subsidy on non-essential items such as
meat, fish, eggs and poultry should be phased out gradually.
- 63 -
(c) Interest subsidy for housing and subsidy through price controls on
industry and energy products do not necessarily improve income
distribution since tlnese are not target group specific. For example, the
present policy of charging 4% interest on housing loans has caused an
excess demand for such loans. It is generally believed that the bulk of
these loans has concentrated in the hands of the more well-to-do group in
the economy. Also, it has adversely affected the growth of housing
finance institutions and availability of loanable funds. Similarly, price
controls on industry and energy products have resulted in wastage and
misallocation of resources which are far in excess of whatever beneficial
effects they are expected to have in terms of income distribution. The
need for phasing out such controls is fairly well established by now and
recognized by the Government. A comprehensive program, however, has yet
to be formulated.
(d) The policy of guaranteed employment for graduates constitutes a drain on
resources and should be phased out. One step undertaken by the Government
to reduce the fiscal burden of this policy is to increase the job search
period for graduates before they can apply for entitlement under this
scheme, thus making the scheme less attractive. This, however, does not
solve the basic problem that the very existence of the scheme provides
wrong signals, i.e. distorts choice in favour of general graduate studies
at the expense of technical studies. The economic cost of this distortion
in the long run may be even more important than the budgetary cost of
providing the jobs.
(e) Investment expenditure is the most important fiscal tool for affecting
resource allocation and growth in the economy directly. Given growing
resource constraints, it is extremely important that new investment
- 64 -
decisions be based on a careful evaluation of each project's economic
viability. The growth and sectoral composition of investment should be
based on the future economic needs of the country. For example, the World
Bank report on issues of trade strategy and investment planning-/ has
demonstrated the need both to augment the rate of investment as well as
increase the share of investment in commodity production, mainly export
based and import substitutes.
1 op. cit.
- 65 -
Chapter 5
The Fiscal Role of Non-Government
Public Economic Sector
I. Fiscal Linkages Between the Treasury and the Public Economic Sector
1. The public economic sector comprises two major institutions: public
economic authorities and public sector companies. The budgetary procedures
allow both institutions to have separate budgets, but these are linked to the
State general budget through a number of transactions. Table 25 shows the
various flow of funds between public economic sector and the Treasury.
Table 25 : Flow of Funds Between Treasury and
Public Economic Sector
Treasury Inflow Treasury Outflow
Business profit tax Investment loans
Transfer of profit Capital transfer loans
Self-financing of investment Direct subsidies from the specialfund
Installments and interest Transfer to cover current(including NIB) deficit 1/
1/ This applies only for public economic authorities
2. Treasury Inflow Itera
Business Profil: Tax: Public sector companies and public economic
authorities are required to pay a tax on their operating profit. At present
the tax rate is 40% for the Petroleum Authority and 32% for all others.
- 66 -
Transfer of Profit: Public sector companies are required to
transfer 65% of their surplus available for distribution to the
Treasury..Y/ Petroleum and Suez Canal Authorities transfer about 85% of
their post tax surplus to the Treasury.
Self-financing of Investment: A part of the surplus remaining
after profit transfer is retained by enterprises as undistributed profits.
These resources are used for financing investment of enterprises which
generate them. Retained earnings are not physically transferred to the
Treasury (or the NIB) but total investment expenditures include investments
financed through retained earnings.
Installments and Interests: All investment loans extended to
public enterprise before 1981 are required to be paid back to the Treasury
with interest in accordance with an agreed schedule. Installments and
interests on new investment loans are required to be paid directly to NIB.
3. Treasury Outflow
Investment Loansz Until June 1981, all approved investments
concerning public sector companies and public economic authorities were
financed by the Treasury. Since 1981/82 these investments are financed by
the NIB.
Capital Transfer Loans: The Treasury makes transfer payments to
finance the deficit of the capital budgets of public sector companies and
public economic authorities.
1/ In practice transferred profits have constituted a much lower percentageof post tax profit. Public sector companies have tended to keep a muchlarger proportion as retained earnings which shows up as self-financingof investment.
- 67 -
Transfers to Lower Current Deficit of Public Economic Authorities:
The Treasury is also responsible for financing the current budget deficits
of public economic authorities.
Direct Subsidies from the Special Fund: One form of consumer
subsidy is through control over prices of public sector company products
(industrial goods and petroleum products). The Treasury makes direct
payment from the special subsidy fund to the affected public enterprises to
compensate for their 'Loss.
4. Tables 26 anl 27 give the magnitudes of the various transactions
between the Treasury and the public economic authorities and public sector
companies for the period 1979 - 1982/83. On the aggregate public sector
companies receive much more financial resources from the Treasury than they
give back. But public economic authorities taken together provide more
funds to the Treasury than they receive from it.
II. Savings-Investment: Gap
5. A more interesting way of analyzing the flow of funds is to look at
the savings-investment gap of public economic authorities and public sector
companies (Table 27). The three striking features which emerge are:
(i) The savings-investment gap for public sector companies has
increased over time.
(ii) Despite significant growth in surplus generated by petroleum and
Suez Canal authorities, particularly since 1980/81, in the
aggregate public economic authorities are also characterized by
negative savings-investment gap.
(iii) There are significant fluctuations in the savings generated by
public economic authorities.
- 68 -
Table 26: Flow of funds between Public EconomicAuthorities and the Treasury
(In millions of Egyptian Pounds)
1979 1980/81 1981/82 1982/831/
Treasury Inflo
1. Business profit tax 270.0 920.0 836.0 953.5
2. Transfer of surplus 420.8 1603.6 1396.0 1637.4
3. Self-financing ofinvestment 110.0 170.0 180.0 190.0
4. Installments andinterests (including NIB) 197.1 279.4 393.7 402.5
5. Special bonds 2/ - 310.0 - -
Total inflow 997.8 3283.0 2805.7 3182.9
Treasury Outflow
1. Investment loans(including NIB) 975.0 1126.0 1190.0 1198.0
2. Capital transfer loans 196.4 221.8 389.6 492.8
3. Transfer to covercurrent deficit 60.0 67.3 100.0 127.9
4. Direct subsidies fromthe special fund 182.4 248.0 398.9 325.0
Total Outflow 1413.8 1663.1 2078.5 2143.7
Net Treasury Inflow (-)416.0 1619.9 727.2 1039.2
1/ Estimated2/ Energy bonds held by EGPC
Source: Ministry of Finance and staff estimates.
(0726J-10)
- 69 -
Table 27: Flow of funds between Public Sector Companiesand the Treasury
(In millions of Egyptian Pounds)
1979 1980/81 1981/82 1982/831/
Treasury Inflow
1. Business profit tax 136.0 162.9 190.8 376.5
2. Profit transfer 69.4 73.7 164.3 265.0
3. Self-financing ofinvestment 264.0 797.3 1064.0 1010.0
4. Installments andinterest (including NIB) 6.7 7.6 14.4 88.2
5. Government bonds 31.0 18.6 35.7 40.5
Total Inflow 507.1 1060.1 1469.2 1780.2
Treasury Outlow
1. Investment loans(including NIB) 911.2 1570.5 1857.0 2016.0
2. Capital transfer {Loans 64.9 158.8 213.9 159.1
3. Direct subsidies f1romthe Special Fund 154.9 209.4 327.6 378.9
Total Outflow 1131.0 1938.7 2398.5 2554.0
Net Inflow (-)623.9 (-)878.6 (-)929.3 (-)773.8
1/ Estimated
Source: Ministry of F'inance and staff estimates
(0726J-11)
- 70 -
Table 28 : Savings-Investment Gap for PublicEconomic Sector (1979-1982/83)(In millions of Egyptian Pounds)
1979 1980/81 1981/82 1982/831/
Public Sector Companies
Gross savings 364.4 889.6 1264.0 1315.5(profit transfer) (69.4) (73.7) (164.3) (265.0)(investment self-finance) (264.0) (797.3) (1064.0) (1010.0)(government bonds) (31.0) (18.6) (35.7) (40.5)
Capital deficits financedby the Treasury 64.9 158.8 213.9 159.1
Investment expenditure 911.2 1570.5 1857.0 2016.0Savings-investment gap (-)611.7 (-)839.7 (-)806.9 (-)859.6
Public Economic Authorities
Gross savings 530.8 2083.6 1576.0 1827.4(profit transfers) (420.8) (1603.6) (1396.0) (1637.4)(investment self-finance) (110.0) (170.0) (180.0) (190.0)(government bonds) (-) (310.0) (-) (-)
Current and capital deficitsfinanced by Treasury 438.8 537.1 888.5 945.7
Investment expenditure 975.0 1126.0 1190.0 1198.0Savings-investment gap (-)883.0 409.8 (-)502.5 (-)316.3
1/ Estimated
Source: Tables 26 and 27
The first factor is an indication of the poor financial performance of
public sector companies in the aggregate. The second and third factors
reflect both the budgetary dependence on exogenous resources (petroleum and
Suez Canal revenue) - a characteristic which was highlighted in Chapter 2
and the pricing policy of the Egyptian government with respect to public
services.
6. The main reason for the poor financial performance of public sector
companies is lack of autonomy including lack of effective control over price
- 71 -
and wage setting and employment decisions. Although the financial
performance of public sector companies taken together is not satisfactory,
some companies have done fairly well. The dispersion in the earnings of the
public enterprises are yet another indication of the ad-hoc nature of price
controls and subsidy schemes. While many enterprises have experienced
financial constraints due to price controls, some enterprises have
benefitted significantly from the explicit and implicit subsidies. But as
stated above, most firms showing high financial profitability have low
economic profitability. Given the fact that a high proportion of profits
have been retained by companies for reinvestment, new investments have
tended to perpetuate the inefficiency problem.
7. The GovernmLent has recognized the problem of lack of autonomy and
made some attempts in the past to correct this distortion. For example, in
1976 all general organizations were abolished and public sector companies
were allowed in principle to exercise greater discretion in all matters
pertaining to price formation, wage payment and employment. But in practice
very little was achieved and the Government has retained effective control
over all three kinds of key decisions. The Government policy towards
state-owned enterprises is presently under review. A public sector company
Reform Bill has been drafted and is being discussed. This draft reform bill
contains provisions allowing public sector companies greater effective
flexibility with respect to management of financial resources, wage setting
and employment decisions. Also, public sector companies would be given the
same tax incentives as accorded to private industries. The Government would
retain control over the price formation, but prices would be made more
responsive to cost of production and any State subsidy intended for final
- 72 -
consumers would be provided through the distribution, not production,
channels. Apart from the issue of adequacy of the proposals in the Bill,
the more worrisome factor is the slowness with which it is being processed.
There are no clear indications at present as to how soon this would be
enacted and with what final provisions.
- 73 -
Chapter 6
Financing Public Sector Fiscal Deficit
I. The Sources of Financing Budget Deficit
1. In recent periods Egypt has experienced very large fiscal
deficits. This has emerged as a major problem for economic management for
the present. The problem arises due to two reasons. First, large fiscal
deficits are often a reflection of the growing indebtedness of the country
to the rest of the world (i.e., a large deficit in the current account of
the balance of payments). Second, if the fiscal deficit is financed largely
by Treasury borrowings from the Central Bank and the increased liquidity is
not offset by either Central Bank operations in financing the balance of
payments current deficit or reduced liquidity to other domestic
institutions, significant inflationary pressures may be generated in the
economy. Both concerns have emerged in Egypt.
2. The various sources of financing the budget deficit in Egypt are
given in Table 29. The structure of financing of the budget deficit shows
an increase in the share of domestic financing relative to foreign financing
(Table 30). The reduct:ion in the reliance on foreign financing is basically
due to the problem of mobilizing foreign resources rather than due to a
change in the strategy of the Government to move towards increasing
self-reliance. This is quite clearly indicated by the growth in the
reliance on bank financing. Except in 1980/81, bank financing was the
largest source of domestic financing for the budget deficit. Amongst
non-bank domestic sources, the surplus from the social security fund is the
most important source.
Table 29 Financing of Public Sector Budget Deficit(In millions of Egyptian Pounds)
1976 1977 1978 1979 1980/81 1981/82 1982/83 1/
overall fiscal deficit 1264.7 1413.6 2252.7 3412.9 3182.4 4656.5 5103.0
Gross foreign financing 488.0 608.2 882.0 1135.3 1101.9 1212.4 1538.0
- Credit facilities for thedevelopment plan 2/ N.A. 368.6 697.2 854.5 829.3 843.8 1240.8
- Cash and commodity loans N.A. 239.6 184.3 280.8 272.6 368.6 297.2
of which: P.L. 480 N.A. (70.5) (68.6) (138.6) (127.7) (195.5) (165.6)
Other U.S. commodity N.A. (69.8) (98.2) (75.4) (112.8) (29.3) (84.6)
GODE N.A. (97.8) (-) (-) (-) (-) (-)
EEC N.A. (-) (-) (7.8) (9.0) (-) (-)
IBRD N.A. (-) (6.5) (7.0) (7.3) (5.3) (-)
Other N.A. (1.5) (11.0) (51.7) (15.8) (138.5) (47.0)
Domestic financing 776.7 805.6 1370.7 2277.6 2080.5 3444.1 3565.0
- Bank financing 437.0 471.0 827.0 1582.6 3/ 874.1 4/ 2182.7 5/ 1689.0
- Non-bank financing 339.7 334.6 543.7 695.0 1206.4 1261.4 1876.1
of which: Social security surplus (268.7) (225.0) (357.0) (491.0) (632.3) (898.2) (1148.5)
Savings certificate (54.0) (76.6) (135.7) (157.0) (228.7) (256.1) (236.0)
Postal savings (19.0) (16.0) (25.0) (16.0) (21.6) (33.9) (36.0)
Government bonds topublic sector companies (-) (16.0) (26.0) (31.0) (18.6) (35.9) (40.5)
Development bonds (-) (-) (-) (-) (-) (35.9) (400.0)
Others (1.0) (-) (-) (-) (305.2) (1.6) (15.1)
Memo Items
Foreign financing as X of total financing 38.5 43.0 39.2 33.3 34.6 26.0 30.1
Bank financing as X of total financing 34.5 33.3 36.7 46.4 27.5 47.0 33.1
1/ Estimated2/ Mainly project loans3/ Adjusted to reflect LE 122.1 million received by GASC to cover price adjustments and
financed through banking system in 1981/824/ Adjusted to reflect LE 595 million expenditure incurred in 1980/81 but financed
in 1981/82 through banking system5/ Excludes arrears financing
Source: Ministry of Finance
(0726J-3)
- 75 -
Foreign financing
3. Foreign financing of the budget deficit is in the form of two types
of loans: credit facilities for the development plan which are project
specific loans for investment and cash and commodity loan which are
non-project type loans. The bulk of foreign financing is through project
specific loans. Although share of foreign financing has declined, there has
been significant growth in total foreign financing (16% between 1976 and
1982/83).
Table 30: The Structure of Financing of Public Sector Deficit
(as a proportion of total deficit)
1976 1977 1978 1979 1980/81 1981/82 1982/83
Foreign Financing 0.385 0.430 0.392 0.333 0.346 0.260 0.301Domestic Financingof which:Non-Bank financing 0.270 0.237 0.241 0.204 0.379 0.270 0.368(Social Security
Surplus) 0.212 0.159 0.158 0.144 0.199 0.193 0.225(Others) 0.058 0.078 0.083 0.060 0.180 0.077 0.143
Bank Financing 0.345 0.333 0.367 0.406 0.275 0.470 0.331
Memo Item:Bank financing as
% of GDP 6.5 5.6 8.4 12.4 5.1 10.7 7.0
Source: Table 29
Domestic financing
4. Non-bank domesl:ic financing: The main source of non-bank domestic
financing is the social security surplus. The growing reliance on this source
of funds is indicated by the rapid increase in the growth rate of the surplus
- 76 -
(annual average rate of 25% between 1976 and 1981/82). The other important
domestic non-bank source is public borrowings through the savings certificate
scheme. Availability of funds through this channel has increased at an annual
average rate of 36 percent. Mobilization of resources through postal savings
and Government bonds do not appear to have worked well. Recently the
Government introduced special development bonds. There are some indications
that this may emerge as an important source of deficit financing in the future.
5. Bank financing: The most important feature underlying the structure
of financing of the budget deficit is the increasing role of bank financing.
The large reliance on bank financing has caused an expansion in the supply of
money in the economy at a rate faster than the rate of expansion of the demand
for money. The imbalance has generated significant inflationary pressures in
the economy causing problems for resource allocation as well as income
distribution.
II. Public Sector Savings - Investment Gap
6. It is useful to view the problem of financing public sector deficit
in terms of the public sector savings-investment gap. A given public sector
investment program can be financed through three sources:
(a) public sector savings
(b) foreign savings
(c) private savings
If it is assumed that foreign savings are exogenous, the basic fiscal problem
for policymakers is to mobilize sufficient resources from public and private
sectors to finance the public investment program. The effort should also take
into consideration the potential trade-off between financing of public
- 77 -
investment and private investment. Excessive public borrowings could have
real crowding out effects on the financing of private investment.
7. The pattern of public sector savings and the public sector
savings-investment gap are contained in Table 31. The widening of the public
sector savings investment gap is mainly due to large government dissavings.
The table illustrates quite dramatically the fact that the rapid increase in
gross non-government public sector financial savings, mainly due to increase
in petroleum and Suez Canal earnings, have been largely dissipated in
financing government consumption and transfers rather than financing the
investment program.
III. Public Finance in Egypt: Summary and Conclusions
8. Egypt's public finances are unusual in several respects compared to
those of other countries at similar income levels. The public sectors
dominance in its economy requires the mobilization and expenditure of a vast
amount of resources. Total public expenditures are 60% of GDP, total revenues
are 40% of GDP and the public sector deficit is 20% of GDP. There are very
few, if any, developing countries in the world with such high proportions.
These heighten the normal fiscal issues of the efficiency, equity and
development impact of public sector economic operations.
9. Since the mid-1'970s, both public consumption and investment have
grown rapdily, financed by the rapid rise in public resources. The outlook
for the continuation of ithe rapid rise in these easily co-opted resources is
dim and consequently there is need to review the structure of public
expenditure to ensure that available resources are being used in the best way
possible. While the economy would benefit from a curtailment of government
consumption expenditures and consumer subsidies, there is a need to maintain
and even increase government investment expenditure.
- 78 -
Table 31: Public Sector Savings at Current Prices(in millions of Egyptian Pound)
1976 1977 1978 1979 1980/81 1981/82 1982/83
Total grossgovernment revenue 1322.6 1967.3 2147.1 2541.6 4178.9 4684.9 5716.0
Total governmentconsumption 1/ 1670.0 1701.0 2037.0 2494.7 3691.0 4893.5 6466.0
Subsidies 434.0 650.0 710.0 1352.0 2166.4 2192.1 2000.0
Net government savings (-)781.4 (-)383.7 (-)599.9 (-)1305.1 (-)1678.5 (-)2400.7 (-)2750.0
Public sector financialsavings 2/ 573.9 668.4 1038.3 906.0 2718.5 2994.6 3092.5
Other public sectorrevenues 3/ 118.8 135.7 147.2 267.2 494.0 587.0 623.0
Other public sectorexpenditures 4/ 196.0 269.0 501.0 703.0 932.2 1130.4 1228.0
Social securitysurplus 268.7 225.0 357.0 491.0 632.3 898.2 1148.5
Total public sectorsavings 5/ (-)16.0 376.4 441.6 (-)343.9 1234.1 948.7 886.0
Total public sectorinvestment 980.0 1549.0 2311.0 2547.0 3765.6 4671.0 4800.0
Public sector savings -
investment gap 5/ (-)996.0 (-)1172.6 (-)1869.4 (-)2890.9 (-)2531.5 (-)3722.3 (-)3914,.0
Source: Table 6
1/ Includes expenditure on interest2/ Includes: transferred profits, investment self-financing and development bonds held by
by public economic authorities and public sector companies3/ Includes non-tax revenue4/ Includes economic authorities current deficits and net capital expenditures5/ Excludes stock accumulation
(0726J-9)
-79 -
10. Perhaps the greatest scope for reducing the public sector budget
deficit is to raise public sector savings by increasing prices of goods and
services which are linked to the budget. This constitutes a very large group
which include food items, electricity, petroleum products, natural gas, rail
transport and many manufactured products. Many of these prices have been kept
at unrealistically low levels despite accelerating inflation and an
increasingly overvalued exchange rate with the result that the government
controlled prices are far apart from economic prices. There are compelling
efficiency reasons for raising these prices as their low levels have
encouraged patterns of consumption and production that are quite wasteful of
Egypt's resources. Equally compelling is the need to raise prices to augment
the savings of the public economic sector and thus reduce the growing
investment-savings gap.
11. The level and method of taxation is another important issue. At
about 25% of GDP, taxation in Egypt is high compared to other countries but
low compared to public expenditure. As already discussed, there is scope to
increase taxes through avoidance of erosion of the bases; both in the case of
business taxes and in the case of custom duties, tax exemptions devised to
improve economic incentives are subject to misuse. In the case of custom
duties, tax yields can be increased by the expedient of valuing imports at the
commercial bank exchange rate rather than the present practice of using the
official exchange rate. Regarding consumption taxes, the present selective
excise taxes can be replaced by a broad based sales tax.
12. Some amount of deficit financing will be inevitable. Although both
foreign financing and the social security surplus can be expected to continue
growing in nominal terms, they are unlikely to grow rapidly enough to obviate
- 80 -
the need to borrow from the private sector. Mobilization of private savings
through government borrowing is currently restricted by the underdeveloped
nature of the capital market in the economy. Major efforts will be required
to develop a well functioning capital market. Even if such efforts are
forthcoming, it would take quite a while for the market to operate
effectively. For the short run an important policy measure would be to
improve the attractiveness of public debt instruments. Raising of funds
through domestic borrowing may, however, increase the level of deficit in the
future due to the increasing burden of debt servicing. A more desirable
change in policy would be to allow private participation in the ownership of
public enterprises. This change, however, can only be very gradual since it
presupposes the existence of an effective capital market.
13. Finally, there is a need to monitor foreign borrowings more
carefully. Large accumulation of foreign debt could endanger the
creditworthiness status of a country. Although the foreign debt situation in
Egypt has not reached alarming proportions, the growing debt service burden is
a matter of concern. Moreover, the large inflow of foreign resources into the
public sector, excluding petroleum, do not appear to have sufficiently
augmented the capacity to earn foreign exchange. The use of foreign resources
in the future need to be planned in such a way that the economy is able to
earn or save adequate foreign exchange in order to service its debt liability
as well as to lower future borrowings requirement. Effective use of foreign
borrowings requires both proper choice of projects and major structural
changes in the economy, including reform of the public economic sector and
rationalization of prices.
- 81 -
IV. Implications for Further Research
14. The objective of this paper was to present an overview of Egypt's
public finances, focussing on major issues relating to mobilization of fiscal
resources and identifying certain key areas of policy reform. A major
conclusion of this stucly is that the greatest potential for mobilizing
resources lies in improving the financial performance of the decentralized
public sector. Given the present inadequacy of knowledge, a study of the
decentralized public setctor finances would be crucial in designing an
appropriate financial reform package. The paper pointed out that there are
significant tax exemptions are offered as fiscal incentives for augmenting
private investment, some of which are also subject to abuse. It would be
useful to take a careful look at the budgetary cost of various fiscal
incentives and compare it with the benefits. The implications of fiscal
policy for resource allocation and income distribution were touched upon very
briefly and in qualitative terms only. Quantitative studies of the impact of
budget on income distribution, particularly consumer subsidies and implicit
energy subsidies, would yield useful insights on the appropriateness of such
subsidies in relation to the stated objectives and also provide a basis for
policy reform. Finally, the paper argued for a gradual reduction in the
reliance on international trade taxes and increase in the reliance on domestic
sales taxes. A quantitative study of the appropriate restructuring of tariffs
and sales taxes in the Light of the twin objectives of revenue and efficiency
would be of significant interest to policy makers who are often reluctant to
modify the tariff structure on grounds of losing revenue.
- 82 -ANNEX IPage 1 of 5
ITC Analysis
Data Sources and Estimation Technique
1. Data used in deriving ITC indices are contained in Table 1. The data
are drawn from three main sources:
- International Financial Statistics (IFS) published by the
International Monetary Fund (IMF).
- Government Finance Statistics Yearbook (GFS), published by the IMF.
- World Development Report (WDR), published by the World Bank.
As in previous studies, non-tax revenue and social security contributions are
excluded. Local government revenue is included for only those countries where
it exceeds 10% of total tax revenue. All data are converted into US dollar
units using official exchange rates reported in IFS.-/
2. All equations are estimated using ordinary least square (OLSQ)
methodology. There may be simultaneity bias in the coefficient estimates but
a consistent estimation technique such as two-stage least squares (2SLS) was
not considered in order to retain maximum comparability with earlier
estimates. The bias is, however, not likely to be significant. Alan Tait et
al reported in their work that they did not detect serious simultaneity bias
when they compared OLSQ estimates with 2SLS estimates. Table 2 contains ITC
indices based on five alternative specifications, while Table 3 gives
correlation coefficients for the alternative estimates. Finally, Table 4
shows the regression results for the alternative specifications.
1/ GNP is defined in market price terms. The appropriate measure should beGDP at factor cost plus net factor income. Due to lack of data thisadjustment was not done.
Table 1: Tex Effort Analysis ANNEX I
Pate 2 of 5
Data GNP per Exports per TaxesPeriod Population capita in capita in as S In Million $ X Share in CDP of
(Average) in Kill. * sill. $ of CNP Exports Iports GNP Mineral Exports Mining Agric.(P) (Y/P) (X/P) (T/Y) (X) (M) (Y) (XN) (N/Y) (A/Y)
Togo 1978-80 2.4 419 120 0.249 287 563 1012 178 13 26Trinidad & Tobago 1979 1.1 3611 1837 0.330 2021 1434 4069 1839 43 3Zambia 1978-80 5.6 561 226 0.232 1265 1254 3166 1227 22 15Guyana 1977-79 0.9 558 334 0.240 301 342 483 90 25 12Sri Lanka 1978-80 14.5 224 76 0.219 1101 1579 3239 154 12 28Senegal 1978-80 5.5 470 181 0.197 995 1322 2594 288 5 29Kenya 1978-80 15.6 387 111 0.199 1729 2314 6025 363 8 34Cbile 1978-80 109.2 1773 40 0.207 4358 4898 193569 2571 16 7Malaysia 1977-79 11.5 1247 693 0.229 7973 6816 14340 2312 14 24Ivory Coast 1980 8.0 1118 340 0.212 2734 3059 8980 137 11 34Egypt 1978-80 42.1 527 148 0.209 6248 9247 22201 2937 16 2GTunisia 1978-80 6.2 1123 442 0.228 2756 3165 7000 1433 22 17Tanzania 1977-79 17.5 217 37 0.176 648 1111 3797 26 4 54Peru 1978-80 17.3 690 147 0.181 2548 3337 11932 1172 8 18Zaire 1978-80 27.7 192 60 0.183 1660 1511 5322 930 9 32Turkey 1978-80 44.2 1192 53 0.178 2339 5864 52727 140 9 23Morocco 1978-80 19.5 823 144 0.195 2800 4576 16043 1232 15 18Indonesia 1978-80 152.8 323 96 0.221 14690 11508 49354 10136 33 26Braxil 1977-79 11.5 1329 931 0.163 10742 13062 153404 1182 8 10India 1978-80 652.5 210 14 0.152 9323 11207 137016 746 8 37Ghana 1978-80 11.3 405 92 0.170 1039 926 4563 166 12 66Argentina 1978-80 26.7 2279 277 0.161 7410 7025 60901 148 8 13Korea 1978-80 37.6 1412 482 0.165 18103 21187 53024 5612 13 16Pakistan 1978-80 79.7 273 14 0.140 1127 4366 21747 79 9 31Mali 1977-79 6.6 149 21 0.136 137 203 978 0 4 42Venezuela 1978-80 13.5 3672 1099 0.188 14869 14861 49657 14572 31 6Jmica 1977-79 2.1 914 401 0.182 854 866 1947 265 22 8EthLopia 1977-70 29.8 119 14 0.124 424 591 3542 21 5 51Konduras 19784-0 3.6 569 228 0.145 812 949 2026 41 8 31Singapore 1978-80 2.4 3831 6245 0.184 14863 18588 9117 4013 9 1Sudan 1978-80 17.5 404 34 0.123 589 1015 7052 24 8 38Upper Volta 1978-80 6.7 175 23 0.119 154 479 1179 2 5 40Thailand 1978-80 46.3 592 141 0.125 6519 7980 27401 782 9 25Phillipines 1978-80 46.9 632 121 0.123 5676 7309 29625 1022 11 23Burundi 1978-80 4.3 157 22 0.110 93 137 669 7 7 55Mexico 1978-80 69.4 1976 236 0.121 16358 17702 137156 6380 14 10Rvanda 1977-79 4.5 204 20 0.105 92 165 920 1 6 48Costa Rica 1978-80 2.2 1823 512 0.123 1116 1506 3975 0 9 17Colombia 1978-80 26.5 1016 168 0.105 4463 4068 26937 178 8 28Paraguay 1978-80 2.8 946 122 0.097 343 537 2651 3 8 30Bolivia 1977-79 5.3 580 119 0.088 633 801 3076 544 15 18Guatemala 1978-80 7.1 980 214 0.093 1512 1803 6910 30 12 30Ecuador 1978-80 8.1 1106 276 0.109 2228 2416 8938 1025 30 13Nepel 1977-79 13.4 126 7 0.063 95 218 1694 0 9 57
Source. D1Y, lnternational Financial StatisticsIMF, Governent Financial StatisticsIBDD, World Development Report
0742(54)
ANNEX I
-84- Page 3 of 5
Table 2: Forty-Five Developing Countries: ITC Indices Based onFive Regression Equations, 1978-80
Per Capita Non-export Non-ExportGNP and Income, Income Per Mining,Foreign Mining and Capita and Agriculture Mining andTrade Non-minerals Exports and Exports Agriculture
Country (Equation 1) (Equation 2) (Equation 3) (Equation 4) (Equation 5)
1. Togo 1.489 1.593 1.569 1.517 1.5252. Trinidad and Tobago 1.736 1.507 1.490 1.474 1.5123. Zambia 1.390 1.384 1.336 1.240 1.2674. Guyana 1.316 1.312 1.213 1.230 1.2685. Sri Lanka 1.324 1.309 1.354 1.323 1.3666. Senegal 1.165 1.294 1.555 1.236 1.3037. Kenya 1.228 1.285 1.256 1.286 1.3228. Chile 1.345 1.282 1.279 1.298 1.1329. Malaysia 1.282 1.268 1.157 1.249 1.37910. Ivory Coast 1.273 1.264 1.227 1.329 1.37611. Egypt 1.276 1.260 1.304 1.228 1.21612. Tunisia 1.323 1.252 1.258 1.227 1.25613. Tanzania 1.136 1.242 1.239 1.314 1.36714. Peru 1.138 1.224 1.160 1.152 1.10315. Zaire 1.150 1.222 1.158 1.155 1.19316. Turkey 1.164 1.210 1.187 1.224 1.10617. Morocco 1.225 1.209 1.261 1.196 1.13118. Indonesia 1.403 1.132 1.394 1.168 1.18319. Brazil 1.059 1.109 1.048 1.076 0.95420. India 1.043 1.067 1.170 1.088 1.02821. Ghana 1.094 1.059 1.117 1.196 1.32722. Argentina 0.988 1.042 0.892 1.049 0.95723. Korea 0.963 0.979 0.912 0.959 0.96124. Pakistan 0.938 0.974 1.081 0.982 0.90825. Mali 0.900 0.972 0.992 0.991 0.97926. Venezuela 1.025 0.963 0.871 0.961 0.93327. Jamaica 1.058 0.959 0.996 0.945 0.96228. Ethiopia 0.832 0.887 0.925 0.930 0.93629. Honduras 0.857 0.871 0.834 0.888 0.94730. Singapore 0.674 0.852 0.718 0.722 1.02431. Sudan 0.823 0.851 0.904 0.877 0.83632. Upper Volta 0.759 0.843 0.872 0.858 0.83933. Thailand 0.784 0.799 0.797 0.797 0.78534. Phillipines 0.783 0.784 0.806 0.783 0.75335. Burundi 0.729 0.758 0.802 0.814 0.83736. Mexico 0.751 0.747 0.696 0.748 0.68037. Rwanda 0.702 0.744 0.786 0.780 0.77138. Costa Rica 0.715 0.743 0.672 0.754 0.74139. Combia 0.672 0.689 0.666 0.701 0.67540. Paraguay 0.621 0.647 0.635 0.662 0.63041. Bolivia 0.559 0.567 0.575 0.533 0.51142. Guatemala 0.578 0.566 0.574 0.592 0.58643. Ecuador 0.669 0.559 0.651 0.579 0.56144. Nepal 0.431 0.438 0.498 0.479 0.477
(0726J-17)
- 85 -ANNEX IPage 4 of 5
Table 3: Forty-Four Developing Countries: Correlation Matrix
for ITC Indices
ITC1 ITC2 ITC3 ITC4 ITC5
ITCI 1.00
ITC2 0.96 1.00
ITC3 0.97 0.97 1.00
ITC4 0.96 0.99 0.98 1.00
ITC5 0.93 0.96 0.93 0.97 1.00
- 86 -ANNEX IPage 4 of 5
Table 3: Forty-Four Developing Countries: Correlation Matrix
for ITC Indices
ITCI ITC2 ITC3 ITC4 ITC5
ITCI 1.00
ITC2 0.96 1.00
ITC3 0.97 0.97 1.00
ITC4 0.96 0.99 0.98 1.00
ITC5 0.93 0.96 0.93 0.97 1.00
- 87 -ANNEX IPage 5 of 5
Table 4: Forty-Four Developing Countries: Taxable Capacity Equations
(1) T/Y = 0.14 + 0.000007 Yp + 0.0289 (X + M/Y)(11.1) (0.76) (1.80)
R2 = 0.086 F(2,41) = 3.062
(2) T/Y = 0.12 + 0.00004 (Yp - x ) + 0.002 N(6.3) (0.29) p (2.305+ 0.074 (X - Xn)/Y(1.34)
R2 = 0.105 F(3,40) = 2.715
(3) T/Y = 0.12 + 0.00002 (Yp - Xp) + 0.12 X/Y(7.29) (2.09) (3.49)
R2 = 0.19 F(2,41) = 6.16
(4) T/Y = 0.14 + 0.0012 Ny - 0.0004 A(4.82) (1.32) (0.69)+ 0.063 X/Y(1.93)
R = 0.172 F(3,40) = 4.05
(5) T/Y = 0.17 + 0.0012 N - 0.0008 Ay(6.46) (1.25) (1.42)
R2 = 0.118 F(2,41) = 3.95
T/Y = Ratio of tax revenue to GNPY = GNP in US$Yp = Per capita GNPX = ExportsM = ImportsXp = Per capita exportsN = Share of mining (including petroleum) in GDPy -
= Share of agriculture in GDP= Mineral (including petroleum) exports
't' values shown in brackets
- 88 -
ANNEX IIPage 1 of 3
Table 1: Estimation of Subsidy Per Unit (1979)(In Egyptian Pounds)
Purchase Distribution Procurement Sales Subsidy perItem (per ton) Price Cost Price Price Unit-
Wheat (wt. av.) 128.64 0.90 129.54 24.7 104.84Imported 131.25 0.79 132.04 24.7 107.34Domestic 65.92 4.62 70.54 24.7 45.84
Imported flour 188.48 2.60 191.08 67.8 123.28
Imported maize 111.72 6.00 117.72 57.9 59.82
Beans (wt. av.) 190.40 6.56 197.01 85.33 102.44Imported 246.53 6.54 253.07 85.33 167.74Domestic 140.70 6.57 147.27 85.33 61.94
Lentils 110.48Imported 276.90 3.48 280.38 97.51 182.87Domestic 33.27 1.04 34.31 13.76 20.55
OilImported 426.60 2.28 428.88 76.12 352.76Domestic - - - -
Edible fats 628.00 2.28 630.28 250.00 380.28
Animal fats - -
Eggs - - - -
Tea 1418.90 40.20 1459.10 1191.31 267.79
Frozen beef 1115.90 76.30 1192.20 521.58 670.72
Chickens 1074.60 59.75 1134.35 1000.11 134.24
Fish 219.90 80.02 299.92 228.84 71.08
Sugar (wt. av.)Imported 192.96 8.26 201.22 182.37 18.85Domestic - - - -
Source: GASC(0768J-6)
- 89 -ANNEX IIPage 2 of 3
Table 1: Estimation of Subsidy Per Unit (1980/81)(In Egyptian Pounds)
Purchase Distribution Procurement Sales Subsidy perItem-(per ton) Price Cost Price Price Unit
Wheat (wt. av)Imported 141.10 0.85 141.95 41.30 100.65Domestic 83.30 5.84 89.14 41.30 47.84
Imported flour 241.80 3.33 245.13 73.03 171.83
Imported maize 144.50 7.78 152.28 60.00 92.28
Beans (wt. av.)Imported 285.50 7.57 293.07 100.00 193.07Domestic 161.30 7.53 168.83 100.00 68.83
OilImported 492.20 2.63 494.63 234.00 260.63Domestic - - - -
Edible fats 498.90 2.63 501.53 250.00 251.53
Animal fats 376.20 2.63 378.83 120.00 158.83
Eggs (px 100) 11.76 0.24 12.00 4.96 7.04
Tea 1414.00 42.20 1456.20 2000.00 (-)543.80
Frozen beef 1314.80 82.90 1397.70 680.00 717.70
Chickens 1020.00 65.00 1085.60 1050.00 35.60
Fish 317.00 90.02 407.02 317.00 90.02
Sugar (wt. av.)Imported 515.00 10.00 525.00 234.00 169.00Domestic 214.00 12.00 226.00 234.00 (-)8.00
Lentils (wt. av.)
Imported 416.20 5.23 421.43 110.00 321.53Domestic 250.00 7.81 257.81 110.00 147.81
Source: GASC(0768J-7)
- 90 -ANNEX IIPage 3 of 3
Table 1: Estimation of Subsidy Per Unit (1981/82)
(In Egyptian Pounds)
Purchase Distribution Procurement Sales Subsidy perItem (per ton) Price Cost Price Price Unit
Wheat (wt. av.) 145.04 1.03 146.07 41.26 104.81Imported 147.00 0.90 147.90 41.26 106.64Domestic 83.30 6.00 89.30 41.26 48.04
Imported flour 197.00 3.45 200.45 73.30 127.15
Imported maize 135.00 8.00 143.00 60.00 83.00
Beans (wt. av.) 180.03
Imported 294.00 7.80 301.80 100.00 201.80Domestic 225.80 7.90 233.70 100.00 133.70
Oil (wt. av.) 186.40Imported 476.00 2.89 478.90 234.00 244.90Domestic 200.00 6.00 206.00 234.00 (-)28.00
Edible fats 507.00 2.89 509.90 250.00 259.90
Animal fats 350.00 2.89 352.90 120.00 232.90
Eggs (100) 12.50 0.30 12.80 5.00 7.80
Tea 1260.00 46.20 1306.20 2000.00 (-)693.80
Frozen beef 1213.00 85.60 1298.60 680.00 618.60
Chickens 1050.00 69.20 1119.20 1050.00 69.20
Fish 294.00 92.02 386.02 250.00 136.02
Sugar (wt. av.) 79.55Imported 337.00 11.00 348.00 234.00 114.00Domestic 270.00 13.00 283.00 234.00 49.00
Lentils (wt. av.) 255.90Imported 360.00 5.75 365.75 110.00 255.75Domestic 375.00 8.00 383.00 110.00 273.00
Source: GASC(0768J-8)
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