Dec. 29 (Bloomberg) -- When Hakem Rustom arrived at Cairo?s airport on Dec. 19 he was told he could only buy one bottle of wine at the duty-free shop instead of the usual four. He had Egypt?s growing budget deficit to blame.
?I tried to negotiate, but they said it was strictly one per passenger,? the 34 year-old PhD student said by phone. Reducing tax-free quotas on alcohol and tobacco at airports was part of an attempt to boost revenue as Egypt seeks to cut its budget deficit. The government reversed the decision on Dec. 25. Duty-free-shop owner Egypt Free Shops Co. said the restrictions would have led to a ?severe fall? in sales.
The U-turn is the latest example of how the three prime ministers since President Hosni Mubarak?s ouster in February are struggling to stick to policy, making it harder to attract donors and investors. Borrowing costs have climbed to records and foreign currency reserves have tumbled 44 percent in the first 11 months of the year. The yield on one-year treasury bills jumped 463 basis points this year to 15.292 percent.
?There is no time for this indecisiveness,? Alia Mamdouh, an economist at investment bank CI Capital, said by phone from Cairo on Dec. 27. ?To impose a decision and then reverse it like that would give an image to the IMF and the World Bank, and others who may want to help, that they wouldn?t know what to do with the money and have no vision.?
More Backtracking
It?s not the first time the government backs down. Former Finance Minister Samir Radwan said in June he requested a $3.2 billion loan from the International Monetary Fund, announced the agreement with the fund at a news conference in Cairo, before turning it down after the military, which took interim power from Mubarak, vetoed foreign borrowing.
Radwan also backtracked on a decision to impose a capital- gains tax after businessmen, including billionaire Naguib Sawiris, opposed it. The former finance minister and the current government of Prime Minister Kamal el-Ganzouri also delayed a real-estate tax.
The decision to phase out custom exemptions on alcohol sent prices for imported liquor in the black market soaring, the state-owned Ahramonline reported on Dec. 27. Finance Minister Momtaz El-Saeed faced discontent from workers in the tourism industry, the news website said.
El-Saeed didn?t return calls seeking comment yesterday. A finance ministry official, who declined to be identified because of department regulations, said the minister?s decision was aimed at plugging holes in the budget deficit by boosting revenue.
?They?re in urgent need of cash,? CI Capital?s Mamdouh said.
Economic Growth Slumps
Ganzouri has lamented donors? failure to make good on aid pledges to help the country in its transition toward democracy.
?Nothing has arrived? from the $35 billion pledged for Egypt and Tunisia by the Group of Eight major economies, el- Ganzouri said in a televised news conference on Dec. 22. Egypt?s ?Arab brothers? delivered only $1 billion out of $10.5 billion promised in soft loans and aid, he said.
Violence and the transition from military rule to democracy dragged Egypt?s economic growth down to 0.2 percent in the first quarter of the fiscal year which started in July, from 0.4 percent in the previous three months, the Ministry of Planning said this month. Growth was 5.1 percent in the fiscal year that ended June 2010. The government raised its budget deficit target this month for the fiscal year through June to 10 percent of economic output from 8.6 percent.
Tourism Revenue
Some relief could come from the IMF as the government plans to resume talks with the fund on the $3.2 billion loan in the first week of January, International Cooperation Minister Fayza Aboulnaga said in an interview in Cairo on Dec. 27.
The Arab Monetary Fund also agreed to lend Egypt $470 million, part of which was dedicated to help bring down the $12.7 billion balance of payments deficit registered in the first nine months of this year. Egypt posted a surplus of $719 million in the same period in 2010, according to central bank data.
Tourism revenue tumbled 32 percent to $6.3 billion in the first nine months, while foreign investors sold $7.5 billion in treasury bills and bonds.
The yield on Egypt?s 5.75 percent dollar bond due April 2020 soared 280 basis points, or 2.8 percentage point, this year to 8 percent at 11:00 a.m. in Cairo today, seven basis points shy of the record on Dec. 23. The average yield on Middle East sovereign bonds declined 27 basis points in the period to 4.92 percent on Dec. 28, according to the HSBC/Nasdaq Dubai Middle East Conventional Sovereign US Dollar Bond Index.
?Bottomless Pit?
Mounting debt and plunging foreign-currency reserves may prompt donors to ask Egypt to adopt a ?more flexible policy? on the exchange rate and seek ?some clarity? on the government?s plan to cut energy subsidies, said Simon Kitchen, a strategist at EFG-Hermes Holding SAE, the biggest publicly traded Arab investment bank.
?Official lenders and donors don?t want to pour funds into a bottomless pit,? he said Dec. 27 in response to e-mailed questions. ?Unfortunately, it is difficult for Egypt to give commitments on these issues during a political transition.?
Egypt?s pound has lost 3.8 percent against the dollar this year after a drop of 5.5 percent in 2010. Its decline has been capped as the central bank upholds a policy, reiterated in Dec. 6 statement, to ?safeguard an orderly foreign exchange market.?
That has helped the pound outperform currencies in countries that didn?t experience Egypt?s turmoil. Brazil?s real tumbled 11 percent, India?s rupee lost 16 percent and Turkey?s lira retreated 19 percent.
The government?s U-turn on the alcohol limit didn?t come in time for Rustom, the PhD student, to get the three extra bottles of imported wine that he wanted for a Christmas party.
?I had to buy local wine,? he said. ?It wasn?t the same, but it was fine.?
--Editors: Daliah Merzaban, Riad Hamade
Source: http://c.moreover.com/click/here.pl?r5675710276
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