Cairo waters down stock market tax after bourse drops sharply

CAIRO — Egypt has watered down a tax on stock market gains it announced last week as part of efforts to trim a high budget deficit, after the country's bourse recorded its biggest daily drop in almost a year on Sunday.

Beset by more than three years of economic and political turmoil since a popular uprising ousted Hosni Mubarak in 2011, Egyptian authorities are trying to steer a course between boosting state revenues while not discouraging investment.

Finance Minister Hany Dimian announced the new 10 per cent tax on dividends and on gains on share transactions on Thursday, drawing an uneasy initial response from the market.

The main share index closed down 3.5 per cent on that day and, after the two-day market break, it fell a further 4.2 per cent on Sunday.

"They are increasing budget revenues, [and the] initial reaction from investors is largely negative. [But] fiscal sustainability and government efforts to balance the budget... will be positive in the long term," said Moheb Malak, economist at Prime Securities.

The budget deficit hit 14 per cent of economic output in the last fiscal year, and it is set to stay high at around 12 per cent in the current and the coming fiscal year starting on July 1.

"They should be panicking about the deficit, it deserves panicking, but it's good that they're taking action. Nobody expected steps to lower the deficit to be popular," Malak added.

Authorities have now sugared the fiscal pill slightly, helping the market recoup some of its losses on Monday.

The finance ministry had initially set an annual tax-free limit of 10,000 Egyptian pounds ($1,400) on cash dividend payments for individuals resident in Egypt.

Financial Supervisory Authority head Sherif Samy told Reuters late on Sunday the tax threshold would be raised to 15,000 pounds. In another, earlier amendment, Finance Minister Dimian said dividends paid in shares would be tax-exempt.

'Bound to happen'

According to Ahmed Hafez, co-head of equity research at HC Brokerage in Cairo, the announcement of the new tax had lacked clarity. 

"What exactly the tax will look like has led to confusion among market participants in general," he said.

Dimian estimated late on Saturday that the tax would raise between 3.5 and 4.5 billion Egyptian pounds.

It is part of a broader package of fiscal reforms announced in conjunction with last week's presidential election.

Profits from stock market transactions in Egypt are currently tax-free, a situation Allen Sandeep, head of research at Naeem capital, said could not last forever.

"The timing might not have been ideal... but a capital gains tax was bound to happen like in any other market," he indicated.

"It might affect investments from [the Arab Gulf]. They might be a little bit disappointed with the capital gains tax," Sandeep added, noting that any negative impact would likely be temporary.

Gulf investors repatriating such profits generally do not have to pay tax at home. Several Gulf governments have helped prop up Egypt's finances during the political crisis with aid and soft loans.

After news of the amendments to the tax, Egyptian shares were up as much as 2.8 per cent on Monday. According to bourse data, local and retail investors were net sellers while institutions and foreigners were net buyers.

Investment and Industry Minister Mounir Fakhry Abdel Nour told reporters the draft tax bill had been sent to the presidency for approval and expected to be signed into law on Tuesday.

Separately, Egypt has launched a tender to import hundreds of thousands of tonnes of petroleum products in the third quarter of 2014, an energy official said, as the country tries to stave off a summer energy crisis.

Egypt's government wants to avoid major power blackouts during the months of increased consumption in the summer, when outages are worsened by a dilapidated grid and a wasteful subsidies system.

The tender comes in addition to supplies from Saudi Arabia, which will deliver energy products to Egypt in July and August as part of an aid package announced after the Egyptian army overthrew president Mohammed Mursi.

An official from the Egyptian General Petroleum Corp (EGPC) told Reuters that Egypt launched a tender on Thursday to import 90,000 tonnes of diesel each in July and August, and 120,000 tonnes of gasoline and 500,000 tonnes of diesel in September.

The tender would remain open until the first week of June, the official said, declining to be named.

Saudi Arabia would give Egypt about 240,000 tonnes of gasoline, and 850,000 tonnes of diesel in July and August "as a gift", he indicated

The country has enjoyed strong support from Gulf Arab states since Mursi was ousted last year amid widespread discontent over power cuts and long queues at petrol stations.

Saudi Arabia, Kuwait and the United Arab Emirates (UAE) pledged more than $12 billion in loans and donations.

The head of the EGPC told Reuters in May that Egypt would receive about $650 million to $700 million worth of petroleum aid per month in August, totalling to more than $3 billion from April to August.

Raising energy prices could cause more unrest, but analysts say failing to reform the system will inhibit economic growth.

In the agricultural sector, Egypt aims to buy about half of its domestic wheat harvest this year at 4.4 million tonnes and is unlikely ever to get much more from farmers, who need to reserve the rest for seed and to feed their families.

Egypt, the world's largest wheat importer, is striving to boost self-sufficiency and reduce its 32 billion Egyptian pound ($4.6 billion) food import bill.

But at most, the government will be able to increase domestic supply by around 1 million tonnes a year through improving storage and transportation.

Supplies Minister Khaled Hanafi, whose ministry is in charge of local wheat procurement, said last week the government had purchased 2.75 million tonnes in the harvest season that began in mid-April, on track to meet its target.

The harvest is now in full swing in northern parts of the breadbasket region of the Nile Delta and nearly finished in fields further south.

Hanafi said his ministry was pushing ahead with the plan to buy 4.4 million tonnes of domestic wheat this year. The target is consistent with the target set, but not met, last year by the government of Mursi.

The government says that improvements to the outdated storage system, and the addition of new silos could cut down on the more than 1 million tonnes lost yearly due to storage and transportation problems.

Yields for the Egyptian wheat crop are already among the highest in the world. Unlike fellow wheat producers such as Australia with inconsistent production, the Egyptian crop is reliable.

Many farmers in rural agricultural areas in the verdant Nile Delta region are willing to sell only about half of their harvest to the government.

Men who eke out a subsistence living on their land, using mostly the technology that their fathers and grandfathers did, say they are already selling the maximum amount they can.

Farmers such as Ahmed Sagheer say, given the needs of his own family, he cannot sell more wheat unless their small plots produce much more.

Sagheer, from a small village in Sharqiya province in the heart of the Egypt's breadbasket north of Cairo, complains of water shortages and expensive fertiliser, and says he does not expect the yield on his roughly one acre of land to increase dramatically soon.

"We don't have a good supply of water, fertiliser is too expensive and sometimes insects attack our crops," he said.

Traders surveyed in a Reuters poll ahead of the harvest put the year's crop at around 7 million tonnes, in line with last year's total.

Private traders' estimates for the local crop are consistently below government estimates, which also do not vary significantly from year to year.

The US Department of Agriculture expects Egypt's production to reach 8.95 million tonnes this year, up only 300,000 tonnes from last year.

Any efforts to expand wheat production onto uncultivated land are hampered by soaring population growth and illegal building on farmland, which officials say has increased since the 2011 uprising that ousted Hosni Mubarak.

‘Living day to day’

The government has steadily increased the fixed price it pays for local wheat in recent years. This year it raised the fixed price from 420 Egyptian pounds ($58.88) per 150 kilogrammes from 400 pounds, hoping to encourage farmers to sell to the government.

The local price exceeds the price Egypt pays in the international market by more than $100 per tonne.

But 59-year-old farmer Hussein Sobhi Hussein, standing by his water buffalo near his already harvested field, said the Egyptian pound "buys less than it used to", suggesting that it was a safer bet to keep a large part of his crop for his family rather than taking cash for it.

Another farmer from Al Baheira province, in the northernmost part of the Delta, where the harvest is currently in full swing, explained why he cannot afford to give up more of his crop.

"I have only one feddan [1.038 acres]. I have to plant it half with wheat because the other half is alfalfa for my livestock to eat," said Mohamed Seshar, a father of three who farms part of his late father's land, having split it with his brothers.

"Then I need to keep half of my wheat harvest for my family to eat," he said. "I'm living day to day," he added.

"I'll store half at home and sell the rest because of my family's needs," said Walid Ali, 25, a father of three who stood sweating in the midday heat. He and his young wife worked with other family members to put stalks of wheat that they had cut by hand into a threshing machine, which would have been replaced by a combine machine in a more mechanised farm.

"I'd like to sell more but for now it is not possible," Ali said as he turned to get back to work.