## cr1815

## Source details

**Canonical URL:** [cr1815](https://www.imf.org/-/media/files/publications/cr/2018/cr1815.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2018/cr1815.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2018/cr1815.pdf.json)

---

### Energy Sector Reform
- Reforms aimed to improve production, rationalize consumption, improve governance and financial sustainability of sector SOEs, and promote private sector participation.
- Authorities increased fuel and electricity prices several times as part of a multi-year plan to gradually eliminate subsidies and bring retail prices to cost recovery levels.
- Enacted a new Renewable Energy Law in 2014 establishing a guaranteed feed-in tariff program; this enabled financial closure with international firms to invest around USD 2.5 billion to generate 1.8 GW of solar energy over the next two years.
- Electricity Law of 2015 separated regulation and operational functions, and generation and transmission activities.
- Gas Law approved in August 2017 includes setup of an independent regulator and allows private sector to import, distribute and export gas and operate pipelines.
- Authorities developing plans to restructure EEHC and to improve EGPC’s financial position and gradually clear all arears to international oil companies by end-June 2019.

### Growth performance, labor market outcomes, and demographic context
- About 3.5 million Egyptians are projected to join the labor market over the next five years.
- Working-age population increased by almost 40 percent since 2000 and now accounts for about 60 percent of the population.
- 34 percent of Egypt’s 95 million people are under the age of 15 and around 700,000 people will join the labor market every year in the foreseeable future.
- Unemployment:
  - Unemployment rate averaged 10 percent over 2000–10, peaked at 13.4 percent in 2013/14, and “remains high at around 12 percent.”
  - Youth unemployment is at 31 percent.
  - 1 in 4 young people is unoccupied (not in education, training or the labor force) based on the 2014 ILO SWTS.
  - Among unemployed youth: about 30 percent of young men and 50 percent of young women have tertiary education.
  - Women’s labor force participation rate is 23 percent versus 76 percent for men; based on SWTS 1 in 2 young women is unoccupied; inoccupation rate reaches 80 percent for married young women.
- Growth and productivity:
  - Real GDP per capita growth averaged 2.4 percent annually over 1990–2010.
  - Investment-to-GDP ratio stable around 15 percent over the last 15 years, below EM MENAP at 26 percent and other EMs at 33 percent.
  - TFP contribution became negative during the 2000s.
  - Labor utilization contribution to per capita growth was close to 0 during the 1990s and 2000s and contributed negatively over 2011–14 (-2.5 percent).
  - Per capita growth decomposition: capital deepening “explained about 80 percent of total real per capita GDP growth during the 1990s and 2000s.”
  - National poverty rate estimated at 27.8 percent in 2015/16, up from 25.2 percent in 2010/11.
- Employment elasticity and job structure:
  - Historical employment-growth elasticity reported as 0.58.
  - 70 percent of private non-agricultural employment is concentrated in micro, small and medium enterprises.
  - Job creation concentrated in capital-intensive and informal sectors (retail trade, construction, transportation).
  - Only about 5 percent of Egyptian firms are exporters (EBRD, 2017).

### Medium-term labor market scenarios (2017–2022) and GDP requirements
- 2017 labor force: 28.8 million.
- 2017 Unemployment Rate: 12.2 percent.
- 2017 Unemployed: 3.5 million.
- 2017 Employed: 25.3 million.
- 2022 labor force: 32.3 million.
- 2017–2022 New entrants to the labor force: 3.5 million.
- Total currently unemployed and new entrants: 7.0 million.
- Employment elasticity: 0.58.
- Scenario 1 — Absorbing new entrants:
  - Unemployment Rate outcome: 13.7 percent;
  - Annual percentage growth in employment required: 2.6;
  - Annual real GDP growth rate required: 4.5.
- Scenario 2 — Reducing the unemployment rate by 30 percent:
  - Unemployment Rate outcome: 0.2 percent;
  - Annual percentage growth in employment required: 3.2;
  - Annual real GDP growth rate required: 5.4.
- Scenario 3 — Increasing labor force participation to 55 percent with an employment-output elasticity of 0.80:
  - Unemployment Rate outcome: 0.2 percent;
  - Annual percentage growth in employment required: 4.3;
  - Annual real GDP growth rate required: 5.4.
- Average real GDP growth rate, 2007–2017: 4.3 percent.
- Conclusion: projected GDP growth rates of around 5–6 percent over the next 5 years would be consistent with absorbing new entrants and reducing unemployment by about 30 percent; further reforms removing bias toward capital-intensive industries could improve labor market outcomes.

### Constraints to private sector-led growth (findings)
- Entry and entrepreneurship:
  - Firms’ entry density: about 1 newly registered limited liability firm per 10,000 working-age people in Egypt versus 24 on average across other countries (World Bank, 2015).
  - Time to obtain an operating license: about 32 days (down from 70 days in 2013 WBES).
  - Time to obtain a construction-related permit: 56 days (down from 90 days in 2013).
  - Bureaucratic barriers and insolvency regime deter entrepreneurship; cost of resolving insolvency is high compared to other EMs.
- Public sector dominance and connected firms:
  - Public sector accounts for 30 percent of total GDP (official national accounts).
  - 75 percent of FDI concentrated in real estate and extractive industries.
  - Only 8 percent of all firms but 45 percent of connected ones operate in energy intensive sectors (Schiffbauer and others, 2015).
- Corruption and perceptions:
  - About 70 percent of firms surveyed identify corruption as a major constraint in 2016 WBES, up from about 50 percent in 2013.
- Access to finance and land:
  - Only about 12 percent of surveyed Egyptian firms have a bank loan or a line of credit and use banks to finance working capital (2016 WBES).
  - About 25 percent of firms report access to finance as a major obstacle (2016 WBES), compared to about 30 percent in 2013.
  - Credit to the private sector is 34 percent of GDP.
  - Between 2007 and 2015, only 9.5 million square meters of industrial land allocated by government; since 2016 government able to allocate 16.9 million square meters.
- Infrastructure and connectivity:
  - Global Infrastructure Outlook estimates Egypt’s cumulated investment gap in transport infrastructure over the next 10 years at USD 70 billion, about 27 percent of current GDP.
- Trade and competitiveness:
  - Total exports of goods and services to GDP averaged 15 percent since 2000 versus 42 percent in MENAP EMs and 27 percent in other EMs.
  - Egypt scores 42 over 100 on the distance to frontier indicator for trading across borders (World Bank Doing Business).
  - Based on 2016 WBES, it takes 14 days to obtain an import license (down from 20 days in 2013).
  - WTO data: Egypt has 274 non-tariff measures, primarily technical barriers to trade and sanitary and phytosanitary measures.
- Skills mismatch:
  - ICA 2008: 50 percent of firms identified worker skills mismatches among top five constraints.
  - Only 21 percent of firms offer on-the-job training (2016 WBES), up from 11 percent in 2013.
  - Based on SWTS: 36 percent of unemployed young men and 51 percent of unemployed young women have been looking for a job for more than two years.

### Policies to foster a dynamic and productive private sector (recommendations)
- Implement insolvency and procurement laws in line with international best practices.
- Improve institutions and governance, especially in SOEs; set up independent regulators across economic sectors.
- Continue to improve land allocation processes; clarify land ownership between state entities.
- Strengthen credit bureaus and collateral registry systems to include small firms.
- Reduce non-tariff trade barriers and streamline customs procedures.
- Revise tertiary education curricula and improve vocational studies in partnership with the private sector.
- Promote women’s participation via better childcare services, safe public transportation, part-time and telework arrangements, maternity leave and parental services.
- Use fiscal consolidation to reduce crowding out and create space for higher private sector credit.
- Make land allocation more open and competitive (competitive bidding and publication of land sales).
- Develop an integral long term public investment strategy and supervisory framework to boost connectivity and attract private investment in infrastructure.

### Authorities’ reform program and outcomes
- Macroeconomic and structural actions implemented:
  - Fiscal consolidation: rationalizing and re-prioritizing expenditures and raising revenues.
  - Civil service law to contain the public sector wage bill.
  - Energy price hikes to gradually eliminate the energy subsidy bill.
  - Implementation of the VAT with broader coverage and a higher rate than the previous sales tax.
  - Central Bank liberalized the exchange rate, eliminating FX shortages and overvaluation, and rebuilt foreign exchange reserves.
- Outcomes observed:
  - GDP growth rebounded to 5 percent in Q4 of 2016/17.
  - Signs of rebalancing of growth from consumption to net exports.
  - Fiscal deficit has started to narrow and public debt is expected to start declining in the coming years.
  - Inflation has started to slowdown thanks to adequate monetary tightening.
- State role and SOE governance:
  - Creation of independent regulators and publication of a report on state-owned enterprises covering financial performance, activities, ownership, organizational structure and audited reports.
  - Authorities plan to divest stakes in 5 to 6 public entities over the next two years.

### Tax revenue mobilization — key findings and potential
- Recent patterns:
  - In the last decade, tax revenues remained broadly stable around 13 ½ percent of GDP.
  - Total tax revenues hovered around 13½ percent of GDP in the period 2004/05 between 2016/17.
  - Introduction of the VAT and increase of excises on domestic goods—mainly petroleum products—have increased tax revenues to slightly above 13 percent of GDP.
- Benchmarking and capacity:
  - Peer analysis estimate of tax capacity = 16.80 percent of GDP; Tax Policy and Administration Gap = 3.10 percent of GDP.
  - Stochastic frontier analysis estimate of tax potential = 18.20 percent of GDP; Tax Policy and Administration Gap = 4.50 percent of GDP.
  - Interpretation: Egypt can raise revenues by 3 to 4½ percent of GDP if strong tax policy and tax administration reforms are implemented.
- Options to increase revenues:
  - Broaden the VAT base by including exempted goods into the tax base; mitigation by using portion of additional VAT revenues for targeted social assistance.
  - Increase coverage of the personal income tax and improve progressivity and compliance for professional income.
  - Address corporate tax base erosion: review tax incentives (including Free Zones), transfer pricing regulations, rules against debt shifting, measures against treaty shopping.
  - Simplify tariff structure, eliminate discretionary customs exemptions, and review use of customs duties.
  - Develop property tax administration: property tax doubled in last year but remains 0.1 percent of GDP; property tax has large potential to raise revenues and increase progressivity.

### Changes in tax composition (findings)
- Corporate income taxes decreased from a peak of 6 percent of GDP to around 3½ percent of GDP in 2016/17.
- Around 60 percent of corporate income tax stems from state-owned enterprises such as EGPC, the Suez Canal Authority and the Central Bank of Egypt.
- Personal income tax in 2016: around 1.6 percent of GDP.
- Trade revenues (mainly customs duties): 0.9 percent of GDP in 2015.
- Property tax revenues doubled in the last year but remain 0.1 percent of GDP.
- Sales tax (GST) revenues were around 2.6 percent of GDP prior to VAT replacement.

### SME regime and tax administration reform (recommendations)
- Simplify the SME/small and micro enterprise regime primarily to prevent larger firms masquerading as small firms and to encourage SME engagement with the tax system.
- Recommended design features:
  - Use a single indicator such as turnover for the tax base.
  - Provide simple rules for taxpayers and tax administration.
- Tax administration structure and reform:
  - ETA currently structured by tax type with separate field office networks and separate IT systems causing duplication.
  - Medium-term vision: fully implement an integrated and segment-based structure supported by reformed IT systems and processes.
  - Short-term priorities: strengthen IT systems, build risk assessment programs by segment, combine databases for cross-checking, and clarify laws and regulations to reduce disputes.
  - LTO, MTO, STO roles recommended: specialized units with function-based approaches and rationalized staffing.

### Monetary policy operations, money markets, and CBE modernization
- Current operational framework:
  - CBE operates a hybrid system with an interest rate operational target and a reserve money indicative target.
  - Since floating the currency in November 2016, CBE uses a monetary targeting framework including an NDA cap and an NFA floor and an indicative reserve money target.
- Recommendations:
  - Redefine operational target: position the policy rate in the middle of the interest rate corridor and maintain the overnight rate close to the policy rate.
  - Develop money markets: consolidate Central Depository of Securities, develop primary market auctioning system, collateral management system, and an electronic trading platform for government securities.
  - Enhance forecasting and policy analysis: reporting, database, near-term forecasting, model-based macroeconomic forecasts and measures of uncertainty.
  - Communications: maintain strategic communications, calendar of public appearances, and strengthen institutional capacity for communications.
- Conclusion:
  - CBE has made notable progress toward an inflation targeting regime; continued efforts needed to achieve low and stable inflation and support high and inclusive growth.

### Controlled Foreign Corporation (CFC) rules and capital gains issues
- Need for CFC rules:
  - Egyptian-owned companies could accumulate passive income in low-tax offshore subsidiaries to avoid Egyptian tax; CFC rules would allow immediate inclusion of that income in Egypt’s tax base.
- Treaty-shopping safeguards:
  - Recent DTTs include a beneficial ownership test; practical effectiveness may be limited.
  - Consider adopting specific domestic law tests linking treaty benefits to concrete criteria (active trade or business, listed shares, substantial number of resident shareholders).
- Capital gains challenges and policy responses:
  - Offshore relocation: consider an ‘exit tax’ on unrealized capital gains with mitigation options (deferred collection or installment payments).
  - Offshore indirect sales: include specific source rule in domestic law and secure taxing rights in DTTs to tax sales of Egyptian immovable property effected via corporate shells.
  - Domestic sales: law amendment of 2014 repealed exemption of gains on listed securities and introduced a 10 percent final WHT, but amendment suspended until 2020; stamp duty applied on share transactions.
  - Recommendation: develop a neutral system with uniform treatment of different types of capital gains and regulations for effective enforcement, targeting high-value transactions.

*International Monetary Fund staff analysis as presented in the source chapter.*

### 1. Energy Sector Reform _________________________________________________________________ 15

### 1. Energy Sector Reform

### Introduction and context
- About 3.5 million Egyptians are projected to join the labor market over the next five years.  
- The working-age population has increased by almost 40 percent since 2000 and now accounts for about 60 percent of the population.  
- 34 percent of Egypt’s 95 million people are under the age of 15 and around 700,000 people will join the labor market every year in the foreseeable future.  
- The unemployment rate averaged 10 percent over 2000–10, peaked at 13.4 percent in 2013/14, and “remains high at around 12 percent.”  
- Labor force participation is around 50 percent, versus 62 percent for other emerging economies.

### Growth performance and structural diagnosis
- Real GDP per capita growth averaged 2.4 percent annually over 1990–2010, against 3.9 percent in emerging markets (EMs) peers outside the Middle East and North Africa.  
- In the global financial crisis and Arab Spring period, GDP per capita stagnated versus a 4.8 percent annual expansion on average for other EMs.  
- The national poverty rate is estimated at 27.8 percent in 2015/16, up from 25.2 percent in 2010/11.  
- Per capita growth decomposition shows capital deepening (capital-labor ratio) was the main driver of GDP growth over the last two decades and “explained about 80 percent of total real per capita GDP growth during the 1990s and 2000s.”  
- Investment-to-GDP ratio has been stable around 15 percent over the last 15 years, below EM MENAP at 26 percent and other EMs at 33 percent for the same period.  
- Total factor productivity (TFP) contribution became negative during the 2000s, contrasting with EM peers where TFP gains were a major source of growth.  
- Labor utilization (change in employment-to-population ratio) contribution to per capita growth was close to 0 during the 1990s and 2000s and contributed negatively over 2011–14 (-2.5 percent), indicating failure to absorb a growing population into employment.  
- The external sector contributed negatively to growth in recent years.

### Private sector dynamism, investment, and trade
- Firms’ entry density (newly registered limited liability firms per 10,000 working-age people) was about 1 in Egypt versus 24 on average across other countries (World Bank, 2015).  
- Private investment to GDP ratio was 11.4 percent over 2000–16, about 7 percentage points below other EMs.  
- Net FDI averaged 4.3 percent of GDP annually over 2000–10 and declined to 2.3 percent on average over 2014–17.  
- 75 percent of FDI was concentrated in real estate and extractive industries, limiting positive spillovers to the overall economy.  
- Egypt scores below EM peers on the Global Competitiveness Index for business sophistication, innovation, and technological readiness.  
- Less than 15 percent of Egyptian firms engaged in product or process innovations in the three years preceding the 2016 WBES; only 6 percent engaged in formal Research & Development in the previous fiscal year.  
- Only about 5 percent of Egyptian firms are exporters (EBRD, 2017).  
- Total exports of goods and services to GDP averaged 15 percent since 2000 versus 42 percent in MENAP EMs and 27 percent in other EMs.  
- Manufacturing exports were 53 percent of total goods exports in 2015 versus 38 percent in 2000, but remain less sophisticated and concentrated in a few products. Services exports are dominated by tourism.

### Employment outcomes and distributional effects
- Employment elasticity of growth is relatively low (historical employment-growth elasticity reported as 0.58).  
- Seventy percent of private non-agricultural employment is concentrated in micro, small and medium enterprises.  
- Job creation has been concentrated in capital-intensive activities; sectors generating most jobs (retail trade, construction, transportation) are largely informal with low quality and low productivity.  
- Youth unemployment is at 31 percent. Based on the 2014 ILO School-to-Work Transition Survey (SWTS), 1 in 4 young people is unoccupied (not in education, training or the labor force).  
- Among unemployed youth: about 30 percent of young men and 50 percent of young women have tertiary education.  
- Women’s labor force participation rate is 23 percent versus 76 percent for men. Based on SWTS, 1 in 2 young women is unoccupied; the inoccupation rate reaches 80 percent for married young women.

### Quantified counterfactuals and potential gains from better factor allocation
- If TFP in Egypt had increased at the same rate as in other EMs over 1990–2014 (0.5 percent annually), real per capita growth over 2011–14 would have been 1.5 percent instead of a 0.4 percent contraction.  
- If labor utilization had been in line with other EMs, real per capita growth would have been around 2.6 percent over the same period.  
- If capital deepening, labor utilization and TFP had all been in line with other EMs, real per capita growth would have reached 3 percent.

### Medium-term labor market scenarios and requirements (2017–2022)
- 2017 labor force: 28.8 million.  
- 2017 Unemployment Rate: 12.2 percent.  
- 2017 Unemployed: 3.5 million.  
- 2017 Employed: 25.3 million.  
- 2022 labor force: 32.3 million.  
- 2017–2022 New entrants to the labor force: 3.5 million.  
- Total number of currently unemployed and new entrants: 7.0 million.  
- Employment elasticity: 0.58.  
- Scenario 1 — Absorbing new entrants: 13.7 percent; Annual percentage growth in employment required: 2.6; Annual real GDP growth rate required: 4.5.  
- Scenario 2 — Reducing the unemployment rate by 30 percent: 0.2 percent; Annual percentage growth in employment required: 3.2; Annual real GDP growth rate required: 5.4.  
- Scenario 3 — Increasing labor force participation to 55 percent with an employment-output elasticity of 0.80: 0.2 percent; Annual percentage growth in employment required: 4.3; Annual real GDP growth rate required: 5.4.  
- Average real GDP growth rate, 2007–2017: 4.3 percent.  
- Conclusion drawn: projected GDP growth rates of around 5–6 percent over the next 5 years would be consistent with absorbing new entrants and reducing unemployment by about 30 percent; further reforms that remove bias toward capital-intensive industries could improve labor market outcomes, notably labor force participation.

### Identified constraints to private sector-led growth
- Persistent structural constraints limiting private sector role include: difficulties to start and exit a business; lack of competition in several key sectors; perceptions of corruption; constrained access to finance and land; lengthy customs procedures and non-tariff barriers; skill mismatches and labor market segmentation; and macroeconomic instability.  
- The authorities’ reform program is addressing some of these constraints; continued reforms are needed to shift the economic model toward increased private sector participation and integration into global value chains, remove distortions in resource allocation, and equip the labor force with needed skills to improve inclusion of women and youth.

*International Monetary Fund staff analysis as presented in the source chapter.*

### 13.      In past decades, difficulties to start a business and a rigid exit framework have limited

### 13.      In past decades, difficulties to start a business and a rigid exit framework have limited 

### Constraints to entrepreneurship and business entry
- Time and cost of starting a business are cited regularly as a top constraint for investors.
- At the most recent Egypt Euromoney conference, 50 percent of polled participants identified bureaucratic barriers to starting a business as the main constraint to foster a start-up culture in Egypt.
- Based on the latest Doing Business survey, Egypt has shown progress and now performs better than other EMs.
- The insolvency regime in Egypt is constraining and might deter investment and entrepreneurship.
- According to the Doing Business indicator, the cost of resolving insolvency is high compared to other EMs.
- Based on the 2016 WBES:
  - It takes about 32 days to obtain an operating license, down from 70 days in the 2013 WBES.
  - It takes 56 days to obtain a construction-related permit, down from 90 days in 2013.

### Lack of competition and public sector dominance
- Several sectors remain protected and dominated by the public sector or a few politically connected private sector firms.
- The public sector is particularly involved in extractive industries, manufacturing and the financial sector.
- Based on official national account statistics, the public sector accounts for 30 percent of total GDP.
- Even during the period of liberalization in the 2000s, several sectors remained closed to foreign investment, including aviation, engineering services, certain activities in the energy sector, steel, aluminum production, construction, insurance and fertilizers.
- Concentration among a few players insulated from competition has reduced firms’ efficiency and limited the emergence of new more productive firms, reducing productivity, growth and job creation.
- Schiffbauer and others (2015) estimate that the entry of connected firms into previously unconnected sectors was associated with a significant decline in the aggregate employment generation of the sector over the period of study.

### Subsidies, resource allocation, and connected firms
- Some government entities enjoy benefits that put private sector competitors at disadvantage such as subsidized inputs (energy) or tax exemptions.
- Based on Schiffbauer and others (2015):
  - Only 8 percent of all firms but 45 percent of connected ones operate in energy intensive sectors.
- This has led to a suboptimal allocation of production factors and government resources to energy intensive sectors to the detriment of labor intensive activities.

### Corruption perceptions and firm constraints
- Perceptions-based corruption indices show high levels of perceived corruption in Egypt compared to most regional peers and other emerging market economies.
- The perception of corruption is likely to have discouraged domestic investment and constrained growth.
- Based on the 2016 WBES:
  - About 70 percent of firms surveyed identify corruption as a major constraint, up from about 50 percent in 2013.

### Access to finance
- Based on 2016 WBES:
  - Only about 12 percent of surveyed Egyptian firms have a bank loan or a line of credit and use banks to finance working capital.
  - About 25 percent of Egyptian firms surveyed report access to finance as a major obstacle, compared to about 30 percent in 2013.
- Credit to the private sector is low in Egypt, at 34 percent of GDP.
- Historically, the banking sector has concentrated its lending to the government, and private sector credit is mostly directed to a few large firms.

### Land, property registration, and infrastructure
- Most of the land in Egypt is owned by the government, and its control is fragmented across different government entities, making land acquisition complex.
- Between 2007 and 2015, only 9.5 million square meters of industrial land have been allocated by the government.
- Since 2016, legislative reforms have translated into improvement, with the government being able to allocate 16.9 million square meters of industrial land.
- Registering private property requires 8 procedures taking about 60 days, against 38 days in MENAP EM and 46 days in other EMs (Doing Business).
- Transport infrastructure compares well with peers on the Global Competitiveness Index, but connectivity could be improved.
- The Global Infrastructure Outlook (G20 Initiative) estimates Egypt’s cumulated investment gap in transport infrastructure over the next 10 years at USD 70 billion, about 27 percent of current GDP.
- Lack of an integrated strategy for multi-modal transport logistics has constrained investment and increased domestic transport costs.
- FDI in transport infrastructure and agribusiness logistics has been limited by the lack of an integrated strategic and regulatory framework.

### Trade and external competitiveness
- Prior to the float of the currency, appreciation of the Egyptian pound in real terms weighed on Egypt’s external competitiveness.
- Regulatory bottlenecks and barriers to trade have made private sector-led trade integration more difficult.
- Egypt scores 42 over 100 on the distance to frontier indicator for trading across borders in the World Bank Doing Business.
- Egypt scores 3.7 over 7 in the World Competitiveness sub-index on burden of custom procedures.
- Based on the 2016 WBES, it takes 14 days to obtain an import license, down from 20 days in the 2013 WBES.
- Based on WTO data, Egypt has 274 non-tariff measures, primarily technical barriers to trade and sanitary and phytosanitary measures.
- These factors have limited FDI and trade and the productivity gains from deeper integration.

### Skills mismatch and labor market segmentation
- Significant skills mismatches exist despite high unemployment; firms report difficulties filling positions.
- ICA 2008 showed 50 percent of firms identified worker skills mismatches among their top five constraints.
- Young Egyptians perform below many peers in international tests, especially in STEMS.
- Based on the 2016 WBES:
  - Only 21 percent of Egyptian firms offer on-the-job training to their employees, up from 11 percent in 2013.
- The labor market is segmented between the public and private sectors; the public sector has historically been perceived as the employer of first resort.
- World Bank (2014) estimates overall wage gap between women and men is about 12 percent and rises to 40 percent in the private sector.
- Based on SWTS:
  - 36 percent of unemployed young men and 51 percent of unemployed young women have been looking for a job for more than two years.

### Policies to foster a dynamic and productive private sector (findings and recommendations)
- The authorities have implemented reforms including restoring macroeconomic stability, energy-sector reforms, reducing costs of licensing, increasing allocation of industrial land, improving the investment framework, and measures to promote youth and women inclusion.
- Additional needed policies include:
  - Implementing the insolvency and procurement laws in line with international best practices.
  - Improving institutions and governance especially in state-owned enterprises.
  - Continuing to improve land allocation processes.
  - Strengthening credit bureaus and collateral registry systems.
  - Reducing non-tariff trade barriers.
  - Revising tertiary education curricula and improving vocational studies in partnership with the private sector to reduce skill mismatches.
  - Promoting women’s participation in the labor force through better childcare services and safe public transportation.

### Authorities’ reform program and recent progress
- Reform objectives:
  - Foster private sector-led growth and job creation.
  - Shift the economic model towards more private sector participation and integration into global value chains.
  - Promote emergence of young and dynamic firms that create jobs, invest, and raise productivity.
- Recent macroeconomic and structural actions:
  - Fiscal consolidation based on rationalizing and re-prioritizing expenditures and raising revenues.
  - Implementation of the civil service law to contain the public sector wage bill.
  - Energy price hikes to gradually eliminate the energy subsidy bill and improve targeting and quality of social spending.
  - Implementation of the value-added tax with broader coverage and a higher rate than the previous sales tax.
  - Central Bank liberalized the exchange rate, eliminating FX shortages and overvaluation, and rebuilt foreign exchange reserves.
- Outcomes:
  - GDP growth rebounded to 5 percent in Q4 of 2016/17.
  - Signs of rebalancing of growth from consumption to net exports.
  - Fiscal deficit has started to narrow and public debt is expected to start declining in the coming years.
  - Inflation has started to slowdown thanks to adequate monetary tightening.

### State role, governance, and energy sector reforms
- Authorities are taking steps to streamline the role of the state and improve governance, including creating independent regulators and publishing a report on state-owned enterprises covering financial performance, activities, ownership, organizational structure and audited reports.
- Authorities plan to divest stakes in 5 to 6 public entities over the next two years.
- Box 1 — Energy Sector Reform (summary of measures and outcomes):
  - Reforms aimed to improve production, rationalize consumption, improve governance and financial sustainability of sector SOEs, and promote private sector participation.
  - Authorities increased fuel and electricity prices several times as part of a multi-year plan to gradually eliminate subsidies and bring retail prices to cost recovery levels.
  - Enacted a new Renewable Energy Law in 2014 establishing a guaranteed feed-in tariff program; this enabled financial closure with international firms to invest around USD 2.5 billion to generate 1.8 GW of solar energy over the next two years.
  - Electricity Law of 2015 separated regulation and operational functions, and generation and transmission activities.
  - Gas Law approved in August 2017 includes setup of an independent regulator and allows private sector to import, distribute and export gas and operate pipelines.
  - Authorities are developing plans to restructure financially the Egyptian Electricity Holding Company (EEHC) and to improve financial position of the Egyptian General Petroleum Company (EGPC) and gradually clear all arears to international oil companies by end-June 2019.

### Recent regulatory and institutional reforms (business environment)
- Enacted a new industrial licensing law to ease time and cost of starting a business by reducing the number of entities involved and the number of procedures required to obtain licenses.
- Number of newly established companies increased by 36 percent year-on-year over January-August (year not specified in source excerpt).
- Measures to streamline import and export requirements are planned.
- Centralized allocation and management of land under one entity; government granted close to 70 percent more industrial land in 2016/17 than over the previous 8 years.
- Revised the Investment law to strengthen investor protection and streamline processes.
- Planning to revise the Insolvency and Procurement laws.
- Measures to support SMEs include revision of the Companies law (to include single person companies) and measures to foster financial inclusion.

*International Monetary Fund — Arab Republic of Egypt country report excerpt*

### 27.      However, more is needed to achieve higher sustainable growth rates and generate jobs

### 27.      However, more is needed to achieve higher sustainable growth rates and generate jobs

### Macroeconomic and structural objective
- Egypt aims to achieve higher sustainable growth rates and generate jobs in the private sector by:
  - Providing a stable, predictable and fairly implemented regulatory environment conducive to private sector activity.
  - Removing bottlenecks to higher private sector investment, notably in terms of access to finance and land.
  - Promoting domestic connectivity and integration into global value chains.
- With restored macroeconomic stability and adequate structural reforms, Egypt has the potential to attract much higher FDI and develop private sector activity in the tradable sector to achieve higher job creation and investment, improve productivity and raise potential growth.

### Regulatory regime and business environment (policy recommendations)
- Provide an adequate and stable regulatory regime that guarantees a level playing field for all business participants:
  - Build on reforms already in progress and ensure additional regulatory changes are in line with international best practices, notably the Insolvency and Procurement Laws which are in the process of being revised.
  - Ensure legislative reforms aimed at creating a level playing field are adequately implemented and do not suffer from capture by specific interest groups.
  - Executive regulations associated with legislative changes should be clear and transparent.
  - Better coordination among different state entities, headed by a dedicated unit, would improve consistency and efficiency of government policy implementation.
  - Additional reforms could aim at strengthening competition, notably by strengthening the role of the Egyptian Competition Authority (ECA).

### Institutions, governance, and SOE reform
- Improve institutions and governance to reduce corruption and build capacity and accountability in public administration:
  - Improve transparency and information to all citizens.
  - Set up independent regulators across economic sectors to reduce scope for corruption and unequal treatment between public and private operators.
  - Improve governance of SOEs and other public entities to reduce distortions between public and connected firms and other private firms.
  - Improve transparency vis-à-vis citizens and provide transparent information to private sector participants on market opportunities and SOEs’ activities.
  - Improve SOEs’ financial viability.

### Removing constraints to private investment
- Address access to finance:
  - Fiscal consolidation will generate space for higher private sector credit by reducing crowding out of bank financing by large public sector deficits.
  - Strengthen credit bureaus and collateral registry systems to include small firms that lack access to finance.
- Address access to land:
  - Clarify land ownership between different state entities to simplify access.
  - Make land allocation more open and competitive: use competitive bidding processes and publication of land sales and the use of the proceeds to improve transparency, reduce distortions and generate more revenues for the state.
  - Simplify property registration to stimulate investment and the use of property as collateral.

### Connectivity and public investment
- Develop better connectivity to improve products market efficiency:
  - Fiscal consolidation and reorientation of public spending away from generalized subsidy will free up space for higher public investment.
  - Establish a sound framework for prioritization, selection and appraisal of public investment projects.
  - Develop an integral long term public investment strategy to improve domestic and international connectivity and create a favorable environment for the private sector that reduces transaction costs and fosters access to new markets.
  - Develop a sound supervisory framework for overall connectivity infrastructure to promote private sector investment in infrastructures and logistics.

### Trade integration and exchange rate policy
- Promote trade integration:
  - Transition to a flexible exchange rate regime and a monetary framework focused on controlling inflation will help preserve external competitiveness and offer opportunities for higher trade integration.
  - Remove legal barriers to FDI and trade barriers (including non-tariff measures) to strengthen benefits from integration into global value chains.

### Labor market, youth and women (policy recommendations)
- Improve labor market functioning to ensure youth and women are not excluded from new employment opportunities:
  - Address skills mismatches and ensure young Egyptians are equipped with skills needed by employers:
    - Improve quality of education by better monitoring learning progress and teachers’ performance.
    - Adjust education curricula, notably tertiary education and vocational studies, in partnership with relevant stakeholders including the private sector.
    - Provide broader skill sets including soft skills and on-the-job training to improve labor productivity and adaptability.
    - In some cases, implement targeted Active Labor Market Policies (ALMPs) such as training, temporary wage subsidies, apprenticeships or job intermediation services, ensuring careful design, monitoring, integration with social policies and ex-post evaluation.
- Enhance reforms to foster women’s labor force participation and employment:
  - Increase budget resources to public nurseries and develop an integral strategy to improve the quality of child care services and facilitate establishment of new businesses.
  - Develop work arrangements adapted to women’s constraints, such as part-time jobs and telework.
  - Improve social policies targeted to women such as maternity leave, parental services, and child care, notably in the private sector.
  - Provide safe transportation arrangements for women to reduce barriers from long commutes and pervasive harassment.
  - Strengthen women’s access to finance to promote entrepreneurship and participation in the labor market; recent evidence suggests women employers tend to hire more women.

### Conclusions and reform priorities
- Egypt’s young and growing population present an opportunity for growth, but realizing the demographic dividend requires:
  - Increasing private sector participation in economic growth and job creation.
  - Addressing obstacles that led to suboptimal allocation of production factors and constrained productivity.
  - Addressing bottlenecks that constrained matching of labor supply with existing labor demand, particularly for women and youth.
- Authorities’ reform program has set the basis for structural change toward higher private sector-led growth and job creation:
  - Key steps already taken include lifting generalized energy subsidies, floating the exchange rate, and initiating reforms to improve the business environment and increase private sector participation.
- Additional structural reforms needed to achieve higher job creation, investment, productivity and potential growth:
  - Create an adequate and stable regulatory regime that provides a level playing field for all business participants.
  - Improve private sector access to finance and land.
  - Improve domestic infrastructure and promote trade integration.
  - Implement measures to remove labor supply rigidities, especially for women and youth.

### Annex highlights — Growth decomposition and employment-output elasticity
- Growth decomposition (methodology notes):
  - Uses framework in Dabla-Norris et al. (2013) based on Hall and Jones (1999) with a Cobb-Douglas production function.
  - Variables used include: (i) real GDP in constant national prices; (ii) employment – number of persons employed (including self-employed) in millions; (iv) capital stock in constant national prices; (v) index of human capital per person; (vi) share of labor compensation in GDP at current national prices; (vii) share of capital compensation in GDP at current national prices (calculated as 1 minus the share of labor compensation); (viii) population.
- Employment-output elasticity estimation (Egypt, 1991–2017):
  - Regression ln(employment)t = ß ln(real GDP)t + u.
  - Instrumental variables: two lags of real GDP used as instruments; minimum likelihood estimator used to address small sample issues.
  - Robustness specification includes lagged employment to compute long-term elasticity where long-term elasticity = ß/(1-ρ).
- Table 1. Employment-GDP Elasticity for Egypt (reported estimates):
  - Log Real GDP: 0.581*** ; 0.278** (in two specifications) [robust standard errors: 0.007 and 0.121 respectively].
  - Log Employment (lag): 0.520** [0.211].
  - Constant: -1.085*** ; -0.506** [0.049] [0.229].
  - Observations: 26 26
  - R-squared: 0.992 0.993
  - ß: 0.581 0.579

### Tax revenue mobilization (high-level findings)
- Egypt needs to increase tax revenues to create room for social spending and investment in human and physical capital.
- Recent patterns and potential:
  - In the last decade, tax revenues remained broadly stable around 13 ½ percent of GDP.
  - Benchmarking suggests Egypt’s tax revenues are lower than the average of the region and of its peers.
  - Peer analysis and stochastic frontier analysis indicate Egypt could raise tax revenues by 3 to 4½ percent of GDP based on its characteristics.
- Policy directions to raise additional tax revenues:
  - Broaden the tax base of the VAT.
  - Increase the coverage of the personal income tax.
  - Review tax incentives and prevent base erosion under the corporate income tax.
  - Strengthen tax administration by fully implementing an integrated, segment-based structure.
- Background context:
  - Large fiscal deficits increased the debt-to-GDP ratio to above 100 percent by 2016/17.
  - Government is implementing fiscal consolidation by reducing energy subsidies, rationalizing the public wage bill and increasing tax revenues through VAT and tax administration reform.
  - Total tax revenues hovered around 13½ percent of GDP in the period 2004/05 between 2016/17.
  - The global financial crisis and the Arab spring led to a small decrease in tax revenues in 2009/10–2011/12.
  - Recent introduction of the VAT and increase of excises on domestic goods—mainly petroleum products—have increased tax revenues to slightly above 13 percent of GDP.

*International Monetary Fund — ARAB REPUBLIC OF EGYPT (excerpt).*

### 3.      The composition of taxes has changed significantly. Corporate income taxes showed a

### cr1815 - 3.      The composition of taxes has changed significantly. Corporate income taxes showed a

### Changes in tax composition (findings)
- Corporate income taxes showed a sustained decrease over the last decade from a peak of 6 percent of GDP to around 3½ percent of GDP in 2016/17.
- The decrease in the corporate income tax was mainly driven by a decrease in taxes from state owned enterprises such as the Egyptian General Petroleum Corporation (EGPC) and the Suez Canal Authority.
- The general sales tax (GST) decreased gradually until the recent pick-up due to the replacement of the GST by the value-added tax (VAT).
- The personal income tax remained low reflecting the challenges in tax administration due to the large informal sector and in the taxing of professional income.
- The introduction of taxes on T-bills created additional revenues that increased over time due to the increase of interest payments on T-bills; however, on a net basis these revenues do not provide additional resources to the government given that there are higher interest payments on the spending side.
- Custom duties also decreased in this period.
- Property tax revenues doubled in the last year, but remain very low, at 0.1 percent of GDP.

### Benchmarking Egypt’s tax revenue performance (findings)
- In 2016, Egypt had a tax to GDP ratio of 13 percent of GDP.
- Comparators and averages:
  - Average of MENAP oil importers: 14.7 percent of GDP.
  - Average of emerging and developing countries (EDM): 16.7 percent of GDP.
- Egypt had the fifth lowest tax revenues compared to MENAP oil importers and performed better than Sudan, Afghanistan, Pakistan and Syria but had a lower tax-to-GDP ratio compared to peers such as Lebanon, Tunisia, and Morocco.
- Egypt’s tax-to-GDP ratio is in line with the average of MENAP and CCA countries but this lower average is mainly driven by resource rich oil exporting countries that have a low tax-to-GDP ratio.
- Revenues from the sales tax (GST) were around 2.6 percent of GDP compared to:
  - Average in the region: 6 percent of GDP.
  - Average of emerging and developing countries: 5.7 percent of GDP.
- Drivers of low sales tax revenues:
  - Small tax base that did not include services.
  - Large exemptions in items such as basic goods aimed at protecting the most vulnerable.
  - GST rate of 10 percent was relatively low compared to the region.
- Introduction of the VAT could increase revenues significantly over the medium term, but Egypt’s revenues from the VAT will likely remain below the average of its peers.
- Corporate income tax in 2016: around 3½ percent of GDP, above the regional averages:
  - Average of MENAP oil importers: 2.8 percent of GDP.
  - Average of emerging and developing markets: 2.9 percent of GDP.
- Around 60 percent of the corporate income tax stems from state-owned enterprises such as Egyptian Petroleum Corporation Company (EGPC), the Suez Canal Authority and the Central Bank of Egypt.
- Personal income tax in 2016: around 1.6 percent of GDP (compared with 2 percent of GDP for MENAP oil importers and 2.6 percent of GDP for emerging and developing countries).
- Trade revenues (mainly customs duties): 0.9 percent of GDP in 2015 compared with 1.5 percent of GDP for the region.
- Excise revenues: limited data show Egypt’s excise revenues are broadly in line with the average of the region.

### Estimating Egypt’s tax capacity (methods and results)
- Two methods used: “peer analysis” and “stochastic frontier analysis.”
- Both rely on panel regressions using observable country-specific characteristics that may change over time to explain tax performance.
- Definitions:
  - Tax capacity: estimate of the level of tax revenue that a country can collect given its economic, social, institutional and demographic characteristics.
  - Tax gap = actual tax revenue subtracted from tax capacity; explained by the tax policy gap and the tax administration gap.
  - Tax policy gap: design of tax policy via (reduced) tax rates, exemptions, tax deductions, etc.
  - Tax administration gap: performance of the tax administration (non-compliance, underreporting, underpayment).
- Model inputs noted as important determinants of tax revenue: income level (GDP per capita), trade openness, level of education (public education spending), institutional factors such as corruption and governance, share of agriculture in value-added, old-dependency ratio.
- Sample and estimation:
  - Sample includes 103 emerging markets, net oil exporting countries excluded.
  - Panel data covering 2000–2014; data averaged over 3 and 4 year periods.
  - Peer analysis uses a fixed estimator specification (Hausman test).
  - Stochastic frontier analysis uses the Mundlack version of the random-effects model (Pitt and Lee 1981).
- Main quantitative results:
  - Peer analysis: Egypt's estimated tax capacity (percent of GDP) = 16.80
    - Tax Policy and Administration Gap (percent of GDP) = 3.10
    - Regression summary statistics (peer analysis table as presented):
      - GDP per capita (log) 2.570.270
      - Trade Openness 0.630.001*
      - Share of agriculture in value-added -0.06    0.384
      - Old-dependancy ratio -0.17    0.004*
      - Corruption 2.230.093*
      - Public Education Spending 0.560.006*
      - Constant 2.640.911
      - Number of observations 172
      - Number of countries 103
      - R-squared 0.44
  - Stochastic frontier analysis: Egypt's estimated tax potential (percent of GDP) = 18.20
    - Tax Policy and Administration Gap (percent of GDP) = 4.50
    - Regression summary statistics (stochastic frontier table as presented):
      - GDP per capita (log) 0.070.243
      - Trade Openness 0.020.001*
      - Share of agriculture in value-added -0.01    0,000*
      - Old-dependancy ratio -0.01    0,000*
      - Quality of institutions -0.29    0.029*
      - Corruption 0.160.007*
      - Public Education Spending 0.050,000*
      - Constant 3.140,000*
      - Number of observations 222
      - Number of countries 103

- Interpretation:
  - Given Egypt’s characteristics, Egypt can raise revenues by 3 to 4½ percent of GDP if strong tax policy and tax administration reforms are implemented.
  - Peer analysis implies a gap of 3 percent of GDP; stochastic frontier analysis implies a gap of 4½ percent of GDP.

### Options for increasing revenues (policy recommendations and options)
- VAT and sales taxes:
  - Replacement of the GST with the VAT increased the tax rate from 10 percent to 14 percent and included services previously outside the GST base.
  - Many goods exempted under the GST (food, electricity, natural gas) remain exempt under the VAT.
  - Exemptions benefit the poor but are not well targeted; a larger share of benefits accrue to higher income households.
  - Main challenge: broaden the VAT tax base by including exempted goods into the tax base.
  - Mitigation: use a portion of additional VAT revenues to increase targeted social assistance programs.
- Personal income tax:
  - Main challenge is to include more individuals in the personal income tax base given a large informal economy and prevalent cash payments.
  - Compliance for professional income (self-employed such as doctors, lawyers, accountants) is particularly low due to absence of withholding.
  - Progressivity can be improved by increasing top rates, tax credits for low incomes, widening tax brackets and allowing for automatic indexing of tax brackets.
  - The recent increase in the tax credit for low incomes is noted as a positive step.
- Corporate tax:
  - Structurally sound, but extensive tax incentives and avoidance lead to base erosion.
  - Ample tax incentives exist under the Investment Law, such as the Free Zones (FZ).
  - Information on the costs and benefits of various incentive regimes is difficult to find.
  - Problems: companies under exemptions often produce for the domestic market, distorting competition and preventing a level playing field.
  - Positive steps: new investment law restricts eligibility criteria and increases the fee for firms operating in the FZ regime; provision of income statements for companies under the FZ regime to the Egypt Tax Authority.
  - Longer-term desirables: eliminate the free zone regime to new entrants and develop options to phase out FZ regimes for existing companies.
  - Additional measures: transfer pricing regulations, rules against debt shifting, and measures against treaty shopping to prevent base erosion and profit shifting.
- Customs duties:
  - Simplify the tariff structure, eliminate discretionary power to grant exemptions, and review the role of customs duties to encourage domestic production to promote revenues and economic efficiency.
  - Tariff structure is complex with tariffs varying significantly by commodity group; tariffs are highest for final products produced in Egypt and on some products likely to be imported by more well-off households.
  - Use of customs duties as a policy tool to restrict imports could be reviewed as it can undermine economic efficiency.
  - Improve transparency and revenues by eliminating customs exemptions provided on a discretionary basis.
- Property tax:
  - Property tax has large potential to raise revenues and increase progressivity of the overall system over the medium term.
  - Property taxes doubled from 2015 to 2016 but remain very low at 0.1 percent of GDP.
  - Property tax can compensate and complement weak personal income tax systems and is harder to evade given immobility of the tax base.
  - Administration and implementation require significant investment in establishing comprehensive cadasters and other administrative infrastructure.

*International Monetary Fund — ARAB REPUBLIC OF EGYPT (extracted content).*

### 20.      The regime for small and micro enterprises could be simplified not to raise revenues

### 20.      The regime for small and micro enterprises could be simplified not to raise revenues

### Objectives and diagnosis of the current SME/small and micro enterprise regime
- The primary objective of simplifying the regime is not to raise revenues directly but "primarily to prevent larger firms from masquerading as small."
- The current law is described as "complex and underperforms" in preventing misclassification.
- The system uses "several criteria to classify enterprises in one of the three regimes" which makes it "demanding in information" and imposes "administration and compliance costs."
- The system "underperformed also in terms of equity since most taxpayers are misclassified due to underreporting of turnover."
- Given "the low revenues from small and micro enterprises," the main objective is to:
  - have these enterprises engage in the tax system by filing taxes, and
  - protect the tax base by preventing larger firms disguising themselves as small firms.

### Recommended design features for a simplified regime
- Use a single indicator such as "the turnover for the tax base."
- Provide "simple rules for both the taxpayers and the tax administration."
- The government plans a new SME regime tax law "which the government is planning to implement" with the aim to address these issues.

### Tax administration: current structure and weaknesses
- The Egyptian Tax Administration (ETA) has responsibility for both direct and indirect taxes, but "tax administration is not yet fully integrated at the operational level."
- The ETA is "largely structured by tax type under a headquarters structure with separate field office networks for direct tax and VAT that utilize separate IT systems," resulting in:
  - "duplication of core functions," and
  - "separate performance reporting."
- "Core operational processes are generally less strong than is desirable."
- The ETA has "an extensive field office environment with many small offices and a large workforce," which could lead to risks in:
  - "tax compliance, institutional management, service delivery, and monitoring and efficiency of filing and payment."

### Medium-term reform vision and organizational recommendations
- The medium-term goal: "Fully implementing an integrated and segment based structure supported by reformed IT systems and processes."
- Observations about segmentation:
  - The large tax office (LTO) is "generally better integrated across tax types, and performs more in line with good practice."
  - "Segmentation has not been rolled out to taxpayers below the large taxpayer turnover threshold."
- Recommended reforms under a medium-term revenue strategy (MTRS):
  - "Consolidating the number of offices,"
  - "Adopting a function-based approach rather than tax-type operations in medium and small taxpayer offices,"
  - "Rationalizing staffing."
- Role-specific recommendations:
  - LTO: "high-skilled subject matter experts to manage the business complexity surrounding the largest taxpayers and prevent tax-avoidance."
  - MTO: "high quality services, good auditors and debt collection staff to maximize compliance and prevent tax-evasion and non-payment."
  - STO: for the small taxpayer offices where "revenue contributions ... are generally low" but the "number of taxpayers is large," "simplified taxes and reporting obligations are recommended."

### Short-term priorities to start improving compliance and revenue
- Strengthen existing IT systems.
- Build "risk assessment programs by segment" to "identify the main risks to the revenue basis and improve taxpayer compliance."
- Combine databases and improve information for decision making to:
  - support "cross-checking information and detect discrepancies across tax types for each taxpayer."
- Establish stable and implied tax codes such as "the new SME law," and unify tax procedures and treatment to "improve tax compliance."
- Improve taxpayer information and "clarifying the law and regulations in some areas" to "help to eliminate room for disputes and reduce potential governance issues."

*THE ARAB REPUBLIC OF EGYPT, INTERNATIONAL MONETARY FUND*

### 14.      The modernization of the operational framework typically involves moving away from

### 14.      The modernization of the operational framework typically involves moving away from 

### Operational framework: current state and recommendations
- Current system:
  - The CBE currently operates a hybrid system with an interest rate as an operational target and a reserve money indicative target.
  - In 2005, the CBE moved from a quantitative operational target to a price target (overnight inter-bank rate), and launched an interest rate corridor system.
  - Steering the overnight interbank rate within the corridor is currently the stated operational target of the CBE.
  - Since floating the currency in November 2016, the CBE also uses a monetary targeting framework to ensure price stability, including an NDA cap and an NFA floor aimed at controlling credit to government and banks, and an indicative target limiting the reserve money expansion.
  - Despite the complexity, the CBE manages to accomplish the reserve money path and control short-term interest rates volatility.

- Recommendation to redefine the operational target:
  - The operational target of monetary policy should be redefined to strengthen the CBE’s commitment to maintain the overnight rate close to the policy rate.
  - To achieve a full-fledged interest rate based framework, it is preferable to position the target rate in the middle of the interest rate corridor with standing facility rates moving in tandem with the policy rate rather than the current objective of having the overnight rate within the corridor.

### Development of money markets
- Importance:
  - Development of money markets is critical to increase the effectiveness of the transmission of monetary policy.

- Recommended initiatives:
  - Consolidation of the Central Depository of Securities in one environment to enable usage of Treasury Bonds as collateral pledged in repo operations.
  - Development of a primary market auctioning system.
  - Development of a collateral management system.
  - Development of an electronic trading platform for government securities aimed at boosting liquidity in the secondary markets.
- Status:
  - The CBE is undertaking the above initiatives to foster money market development.

### Enhancing forecasting and policy analysis
- Typical modernization tasks:
  - (i) Developing a reporting, database and near-term forecasting system based on available set of variables.
  - (ii) Updating and monitoring the database on a timely basis.
  - (iii) Developing simple projection model of the economy that embodies policymakers’ views about the transmission mechanism and the standard set of shocks that affect the economy.
  - (iv) Developing a consistent model-based macroeconomic forecast.
  - (v) Developing measures of uncertainty in the forecast.
  - (vi) Studying specific risks in the baseline forecasting.

- CBE progress and needs:
  - The Monetary Policy Sector at the CBE has made an outstanding effort to improve its analytical capacity, including hiring and training qualified staff and investing significantly in IT resources.
  - There is tangible evidence of improved quality of models used, but continuous improvement of the accuracy and adequacy of the models and existing capacities is warranted.
  - Systematic surveys of inflation and other variables market expectations are desirable; this is work in progress and should be strengthened further as market expectations play a prominent role in IT regimes.

### Communications
- Role of communication:
  - Communication brings transparency, enhances central bank accountability, helps shape expectations, builds confidence, and can contribute to price, output, and financial stability.
  - As central bank credibility is consolidated, communications can substitute to some degree for the disproportionately stronger policy actions that a less credible central bank would need to take.

- CBE actions:
  - Creation of Communications Department.
  - Publication of a Quarterly Monetary Policy Report.
  - Monetary Policy Committee meetings are followed by the release of a statement explaining the reasons for decisions.
  - CBE officials maintain continuous contact with market participants and the informational content of the CBE website has been improved.

- Further refinements recommended:
  - Ensure that communication follows a long-term planned approach, including a calendar of public appearances and media contacts for high level officials.
  - Adopt strategic communications policies supported by clear, consistent, and policy-focused messaging.
  - Maintain a continuously evolving approach to media engagement and crisis communications.
  - Strengthen the CBE’s institutional capacity to support these refinements.

### Conclusions
- Transition to inflation anchor:
  - As Egypt transitions from using the exchange rate as the nominal anchor to one that relies on inflation, lessons from other countries that have successfully made the transition can be instructive.
  - The CBE has already made notable progress along the path to an inflation targeting regime.
  - Continuing efforts in line with the experience of other successful IT adopters will help ensure that the objective of low and stable inflation over the long term can be attained.
  - Achieving this will support the authorities’ overall goals of high and inclusive growth, accompanied by higher living standards and job opportunities for its growing population.

*Italicized source: IMF staff report chapter content.*

### 14.      Egypt needs controlled foreign corporation (CFC) rules as a safeguard against tax

### 14.      Egypt needs controlled foreign corporation (CFC) rules as a safeguard against tax

### Need for CFC rules and objective
- An Egyptian owned company could accumulate passive income (such as interest, royalties and dividends) in a low taxed offshore subsidiary to avoid Egyptian tax.
- CFC rules can counter this by allowing Egypt to immediately bring into its tax base the income earned by those foreign subsidiaries.

### Treaty-shopping safeguards and limitations of recent measures
- Recent measures against treaty shopping could be complemented by additional safeguards in domestic law.
- Recent Egyptian DTTs include a beneficial ownership test to limit ‘treaty shopping’ by denying treaty benefits in specific cases.
- The beneficial ownership test:
  - Is demanding in terms of information/verification.
  - Might not be effective for Egypt in practice.
- The newly signed multilateral instrument will add another test to existing DTTs, with a similar objective.
  - The test is of a general nature, referring to concepts such as ‘artificial’ and ‘principal or main purpose’, which require legal interpretation by courts.
  - Their practical impact might be very limited for a country like Egypt.
- Policy consideration:
  - Adopt a more specific rule in Egypt’s domestic law that limits benefits of a treaty to residents meeting concrete criteria, such as:
    - conducting an active trade or business,
    - trading shares on a recognized stock exchange,
    - having a substantial number of shareholders resident in the home country.

### Capital gains: reform areas and implementation challenges
- Offshore relocation
  - Egypt might not be able to tax capital gains if an Egyptian shareholder decides to move parts of its assets or the entire company abroad.
  - Possible response: introduce an ‘exit tax’ on unrealized capital gains if assets are taken overseas.
  - Cash flow problems might arise; mitigation options include:
    - deferring the tax collection to the actual sale of the shares in the future, or
    - installment payments over several years.
- Offshore indirect sales
  - Challenge: taxpayers using corporate shells in low-tax jurisdictions to indirectly sell immovable property located in Egypt.
  - Policy responses:
    - Include a specific source rule in the domestic tax law to ensure the right of levying Egyptian capital gains tax on such sales.
    - Secure taxing rights in DTTs.
  - Detection and enforcement may be hard, but provisions should be designed to especially target high-value transactions, e.g. licenses in extractive industries, telecommunication and real estate (PCT 2017b).
- Domestic sales
  - Legal history and current status:
    - The law amendment of 2014 repealed the exemption of gains on listed securities and introduced a 10 percent final WHT.
    - However, the amendment has been suspended until 2020; instead, a stamp duty was put in place on all share transactions.
    - Capital gains on unlisted companies are still being taxed as ordinary income at prevailing income tax rates, as well as the stamp duty.
  - Issues and recommendations:
    - The differentiated treatment of capital gains creates distortions and arbitrage.
    - The suspension period might be used to come up with a more neutral system with a uniform treatment of different types of capital gains.
    - Regulations need to be developed for effective enforcement–although this is generally a challenging issue for tax administrations.

*Source: IMF chapter text.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1815.pdf_