Making Ends Meet

24 November 2017: Since 2014, the Egyptian state has taken several necessary measures within the economic reform framework that have caused a hike in prices and taxation. Among these measures are currency flotation, progressive income tax and a rise in the value added tax (VAT). But while the state dedicated programs to ease off the effects of these measures on lower-income segments of the society, the middle class is left to struggle on its own, without the safety net provided by the state to the lower-income segments,or the financial security enjoyed by the upper class.

Economic reform’s impact in numbers Food prices, which represent 40% of the CPI (Consumer Price Index) basket, climbed 40.5% in February, compared to 37.2% in January, according to the Central Agency for Public Mobilization and Statistics (CAPMAS). Meanwhile, the monthly rate of overall price inflation eased to 2.6% in February from 4.1% in January. As is, half of Egypt’s population is living near or below the poverty line, but inflation has risen to the highest level in decades since November’s currency float, VAT introduction and subsidy cuts.

The Central Bank of Egypt (CBE) indicated in a statement that July’s annual inflation increased to 33% from 29.8% in June “as expected,” after fuel and energy subsidies were slashed in June; their prices increasing by 30% and 50% respectively. The measures taken to boost the social safety network included a 140% increase in monthly
food subsidies; more than doubling to LE 50 from LE 21 per person, as authorities are determined to make timely progress in the reform agenda. Furthermore, pensions increased by 15% with a minimum of LE 150 for 10 million pensioners, and the value of the cash subsidy for the Takaful and Karama programs are now at LE 100 monthly for 1.7 million beneficiaries.

The president has also announced periodic bonuses and exceptional premiums for state employees and non-respondents to the Civil Service Law. However, many middle-class citizens are not beneficiaries of the social security network, as their income is mostly directed to fulfilling basic needs; thus incurring less spending on other consumer goods and services. In its August bulletin, CAPMAS noted that taxes on goods and services are of the highest types that contribute to high revenues, amassing LE 170 billion, followed by income taxes, which contribute LE 122.5 billion. Citizens whose annual income is below LE 7,200 are exempted from the tax.

Income tax brackets of 10%, 15%, 20%, and 22.5% are for the following income brackets respectively: LE 7,200-30,000;LE 30,000-45,000; LE 45,000-200,000; and above LE 200,000. However, the Egyptian Tax Authority announced in July breaks on income taxation for each bracket. The second, third and fourth brackets will receive 80%, 40%, and 5% off respectively, while the fifth bracket would pay the full value of
the tax. “The government did very well with the income brackets it set to conduct taxation,” Adel Beshai, professor of economics and former department chair at the American University in Cairo, says.

Since the last two brackets either pay the full value of taxation or receive little discount, slashing around 20% of their income can be considered a huge portion from the finances they need; especially since they pay tens of thousands of pounds for basic education annually. The middle-class adjusting to austerity measures We surveyed 10 middle-class professionals, eight females and two males, from different ages asking how they adjusted their lifestyle following the recent economic measures.

The respondents all said they replaced imported goods with local alternatives; primarily food, followed by clothing and home accessories, personal care products, cosmetics, furniture and, lastly, maintenance products. In terms of the goods and services they had cut spending on, jewelry came first on the list, followed by holidays, then outings and fast food. Furthermore, their purchases of electronic devices, furnishings and home accessories decreased; when on the other hand, expenditure on clothing and gym memberships has not significantly diminished.

All respondents said that they haven’t had to switch to cheaper schools following the increase in tuition fees, which jumped up to 68% at some international institutions. Four of the respondents said that they took an extra job, while three other started a business. Marwa, a market researcher at a bank, said that all she had to do is spend more responsibly. But it is worth noting that Marwa is 22 and unmarried, and so has less financial obligations.

Similarly, three of the respondents did not attempt to increase their incomes. On the other hand, there were alarming responses by youth who had to find alternative streams to increase their income; reflecting their concerns over their current and future financial statuses. For instance, Assem, a 23-year-old computer engineer, had to both take an extra job and start a business.

Dina, 23, who works in the corporate communications and public affairs field, had to take an extra job to cover her living expenses and generate savings. Sara, another 23-year-old, is working in project management at a multinational company and had to start a business to increase her income. A 24-year-old engineer, Rami was forced to let go of his dream job. “I had to go for boring, irrelevant jobs with high pay over my dream job,” he explained. Beshai’s analysis of how the middle class copes resonates with the interviewees’ responses.

“Anyone who knows the anatomy of Egypt’s economy would know that it has a huge informal sector that keeps the pot boiling; that keeps life going so people manage. They buy what they want to buy,” he says. The lower middle class now works several jobs, Beshai adds, and they are used to fulfilling whatever financial duties they had to go through revolving funds in a cooperation (game’ya), which works better than bank loans that are characterized by high interest rates.

Beshai adds, however, that the current middle class is difficult to define because sources of income are unpredictable lately, unlike two generations ago when people were employed in one place long enough to be able to predict the future value of their income.Consequences of the reform measures Beshai explains that certain industries in Egypt will witness a boost after the flotation and that the country is moving forward amid the recent reforms.

Samer Atallah, assistant professor of economics at the American University in Cairo, explains that the goods that will be manufactured locally will correspond to the necessity chain where a high demand exists, such as the demand for food and clothing, for instance, which local production will attempt to meet. “The current inflation will result in a decrease in imports. Some consumer goods will be manufactured locally, and others will be consumed less. Luxury items will be eliminated on the short term.

There will be a liquidation of assets,” Atallah elaborates. As inflation has been taking place for years, many citizens have been purchasing real estate and gold in order to preserve the value of their wealth with the aim that they would sell them when cash-strapped amid rising inflation. However, Beshai thinks that those who bought real estate in installments directly from construction companies would not be able to sell it as most potential buyers would not be able to pay such huge amounts of money at once.

Explaining why many goods have not been manufactured locally before, including simple ones such as erasers and pencils, Beshai says that the Egyptian culture cannot be separated from economic studies. He gave examples of the Palestinians, Lebanese, Syrians, and Greeks who all established historical shops and companies in Egypt before nationalization describing them as “moneymakers and service-oriented.” “Our culture is not that of building factories. Entrepreneurs in Egypt had started to rise in merchant activities enabling quick gains. Factories require a long-term mentality.

Also, the economic policy did not help those who built factories,” Beshai explains. On the other hand, the professor praised the new investment law; stressing nevertheless the importance of hiring professional employees to help investors through the process of founding a business. “What should be done is a reform in the administration like what some Asian countries did.

They can create free zones where only the qualified personnel operate, while the rest (extra state employees) get paid but remain outside of those areas,” Beshai says. Beshai adds that “20% is not very high by international standards, but they should find other sources for taxes such as capital gains tax...The reforms taking place now should have taken place 55 years ago when it was still possible to conduct it gradually.