INTERVIEW-Egypt cancels some free-zone privileges

CAIRO May 6 (Reuters) - The Egyptian government has abolished the privileges of energy-intensive companies in free zones as part of a budget amendment approved by parliament on Monday, Investment Minister Mahmoud Mohieldin said.

Mohieldin told Reuters in an interview on Monday night the move would affect companies in five industries, including steel, fertilisers, petrochemicals, natural gas liquefaction and natural gas transport.

"All tax and custom exemptions for these companies, along with all other free zone privileges, will be cancelled immediately," he said. The decision would apply to about 39 companies, he added.

"We will keep for three years the custom exemption only on capital goods and machines for companies which are still being set up," he said.

The move will reduce the number of companies with free-zone privileges in Egypt to 1,104, with a work force of 233,000.

A statement from the ruling National Democratic Party said on Monday that energy-intensive companies have made higher profits because of increases in international prices of oil and gas, which they buy in Egypt with subsidised prices.

"They no longer need the tax and custom privileges provided by free zones ... so society is entitled to take them back," it said.

"Cancelling the free zones exemptions would provide us with a decent amount of money," Mohieddin said.

WAGE INCREASES

Egypt's parliament approved steep increases in fuel and cigarette prices and vehicle licence fees on Monday to cover the costs of a 30 percent public-sector pay hike that President Hosni Mubarak proposed last week.

The Egyptian government expects the package will generate 12 billion pounds ($2.24 billion) for the budget to pay for the wage increases and keep the cost of fuel subsidies under control, but experts say it could drive inflation up.

Mohieddin admitted the new wage increases would push up inflation in the short term but said it could have been worse.

"We are using renewable real sources so we are neutralising the effects of the wage increases on our fiscal stance, and hence neutralising future structural inflation," he said.

Finance Minister Youssef Botrous-Ghali told Egyptian television late on Monday the budget changes would not affect the deficit, which would stay at its expected rate of 6.9 percent of GDP in the financial year 2008/09.

Egypt's fiscal deficit has been a headache for Egypt's economic reformers, averaging 8.4 percent of GDP since 2003/4. GDP at constant prices is rising at about 7 percent a year and urban inflation in the year to March was 14.4 percent, the highest in three years.

"We don't want the deficit to increase. This would crowd out investment and create pressure on the central bank to tighten monetary policy, hampering economic growth," Mohieldin said.

"In the short and medium term we also see signs that some items like wheat are relaxing in the international market, easing the impact of imported inflation," he added. (Editing by James Jukwey)