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Cablegate: Impact of New Revenue Measures

VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #1132/01 1570516
ZNR UUUUU ZZH
R 050516Z JUN 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 9444
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0411

UNCLAS CAIRO 001132

SENSITIVE
SIPDIS

STATE FOR NEA/ELA, NEA/RA, NEA/EX FOR HAUGH AND EEB
USAID FOR ANE/MEA MCCLOUD AND RILEY
TREASURY FOR MATHIASON AND DENNIS
COMMERCE FOR 4520/ITA/ANESA/OBERG

E.O. 12958: N/A
TAGS: ECON EAID EFIN EINV EG
SUBJECT: IMPACT OF NEW REVENUE MEASURES

REF: Cairo 000959

Sensitive but Unclassified. Not for Internet distribution.

-------
Summary
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1. (U) The revenue generating measures announced by the GOE on May
5 (reftel) continue to attract attention in the local media. Press
reports indicate that the measures are designed to raise about LE 14
billion ($2.6 billion) annually, or about 5% of annual revenues.
The Ministry of Finance (MOF) has provided informal confirmation of
revenue figures cited in press reports. The revenue measures have
been widely criticized as nullifying the "gain" that public servants
hoped to achieve from the 30% salary increase package announced by
Mubarak in his Labor Day speech. Investors have also characterized
some of the measures as anti-business. From a fiscal perspective,
these measures will help plug the deficit which the large salary
increase and rising subsidy bill are creating, but the rising
expenditures expose the many problems in the government's budget.
The lack of public awareness and debate about the measures, and the
speed with which they were approved is symptomatic of the weaknesses
in the public expenditure process. The suddenness of the
announcement caught the public and investors off guard and alienated
many who might otherwise have been supportive of the measures. The
stock had been on a tear before the announcements, coincidentally
reaching its historic high on May 5. It lost 15% in 8 sessions in
the days after May 5. It has now recovered somewhat, but is still
9% below its May 5 peak.

-----------------------------------
Gasoline Sales Tax Increased
-----------------------------------

2. (U) The sales tax on 90, 92 and 95-octane gasoline, diesel (gas
oil), and kerosene was raised by 35%, 32%, 57%, 47%, and 47%
respectively. 80 octane was left unchanged. This measure will
generate the bulk of the new revenue, estimated at LE 6 billion ($ 1
billion) or 2% of the total annual revenue. Raising the cost of
gasoline is one of the most pro-poor revenue generating measures
that the government can take, given that the top quintile of the
population realizes 93% of the benefit from Egypt's artificially low
price gas prices. Noteworthy is the fact that the subsidy level
itself was not reduced, but rather the tax on the products was
increased. Hence, the resulting revenue will go directly to the
MOF, rather than to the Ministry of Petroleum (which would benefit
if subsidy levels were decreased), a sign that the MOF is seeking to
increase control over government revenues.

3. (SBU) Discussion of the price increases in the press is focused
on how the tax increase affects the middle class and poor. Taxis
and microbuses (privately owned) are now charging higher rates in
order to pass the cost on to the customer, prompting widespread
complaints from those who use this form of transport. The publicly
owned buses and subway have not raised prices. As a means of
measuring impact, we have not seen a noticeable fall in traffic
levels, nor heard reports of falling car sales, although we will
continue to monitor this. When gasoline prices were increased by
30% in 2006, passenger car sales grew 40% in 2006 and 35% in 2007.
In general, growth in Egypt remains strong enough that the economy
will weather this gasoline price shock. To put the price increase
into context, it is important to note that Egypt still has some of
the least expensive gasoline in the world, and even after this
increase, the 95 octane gas costs LE 2.75 ($.51) per liter

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