With the accumulating proofs of the financial stability of the country various changes were made in connexion with the debt charges. With the consent of the powers a General Reserve Fund was created by decree of the 12th of July Reserve funds. 1888, into which was paid the Caisse’s half-share in the eventual surplus of revenue. This fund, primarily intended as a security for the bondholders, might be drawn upon for extraordinary expenditure with the consent of the commissioners of the Caisse. Large sums were so advanced for the purposes of drainage and irrigation and other public works, and in relief of taxation. The defect of this arrangement consisted in the necessity of obtaining the consent of the commissioners—a consent sometimes withheld on purely political grounds. At the same time it is believed that but for the faculty given by the decree of 1888 to spend the General Reserve Fund on public works, the financial system elaborated by the London Convention would have broken down altogether. Between 1888 and 1904 about £10,000,000 was devoted from this fund to public works.
In June 1890 the assent of the powers was obtained to the conversion of the Preference (Privileged), Domains and Daïra loans on the following conditions, imposed at the initiative of the French government:—
1. The employment of the economies resulting from the conversion was to be the subject of future agreement with the powers.
2. The Daïra loan was to be reimbursed at 85%, instead of 80%, as provided by the Law of Liquidation.
3. The sales of Domains and Daïra lands were to be restricted to £E.300,000 a year each, thus prolonging the period of liquidation of those estates.
The interest on the Preference stock was reduced from 5 to 3½%, and on the Domains from 5 to 4¼%. As regards the Daïra loan, there was no apparent reduction in the rate of interest, which remained at 4%, but the bondholders received £85 of the new stock for every £100 of the old. The capital of the debt was increased by £1,945,000 by these conversions, while the annual economy to the Egyptian government amounted at the time of the conversion to £E.348,000. Further, an engagement was entered into that there should be no reimbursement of the loans till 1905 for the Preference and Daïra, and 1908 for the Domains. By an arrangement concluded in June 1898, between the Egyptian government and a syndicate, the unsold balance of the Daïra estates was taken over by the syndicate in October 1905, for the amount of the debt remaining, when the Daïra loan ceased to exist. The fund formed by the accumulation of the economies resulting from the conversion of the Privileged, Daïra and Domains loan was known as the Conversion Economies Fund. The fund could not be used for any purpose without the consent of the powers, and the money paid into it was invested by the Caisse in Egyptian stock. The fund therefore acted as a very expensive sinking fund, the market price of the stock purchased being above par. Up to 1904 the consent of the powers to the employment of this fund for any purpose of public utility was withheld. On the 31st of December of that year the fund amounted to £E.6,031,000. It may be added that besides the General Reserve Fund and the Conversion Economies Fund, there existed another fund called the Special Reserve Fund. This was constituted in 1886 and was chiefly made up of the net savings of the Egyptian government on its share of the annual surpluses from revenue. Of the three funds this last-named was the only one at the absolute disposal of the government. The whole of the extraordinary expenditure of the Sudan campaigns of 1896-1898, with the exception of £800,000 granted by the British government, was paid out of this fund—a sum amounting in round figures to £1,500,000.
Notwithstanding all the hampering conditions stated, the prosperity of the country became more manifest each succeeding year. During the four years 1883-1886, both inclusive, the aggregate deficit amounted to £E.2,606,000. In An era of prosperity. 1887 there was practical equilibrium in the budget, in 1888 there was a deficit of £E.53,000. In 1889 there was a surplus of £E.218,000, and from that date onward every year has shown a surplus. In 1895 the surplus exceeded, for the first time, £E.1,000,000. The growth of revenue was no less marked. “In 1883—the first complete year after the British occupation—the revenue was slightly under 9 millions. This sum was collected with difficulty. The revenue steadily rose until, in 1890, the figure of 10 millions was exceeded. In 1897 a figure of over 11 millions was attained. Continuing to rise with ever-increasing rapidity, a revenue of close on 12 millions was collected in 1901 and 1902, in spite of the fact that during the latter of these two years the Nile flood was one of the lowest on record. In 1903 the revenue amounted to 12½ millions, and in 1904 the unprecedented figure of £E.13,906,000 was reached.”[7] Yet during this period the amount of direct taxation remitted reached £E.1,900,000 a year. Arrears of land tax to the extent of £E.1,245,000 were cancelled. In indirect taxation the salt tax had been reduced by 40%, the postal, railway and telegraph rates lowered, octroi duties and bridge and lock dues abolished. The only increase of taxation had been on tobacco, on which the duty was raised from P.T. 14 to P.T. 20 per kilogramme. At the same time the house duty, with the consent of the powers, had been imposed on European residents. The fact that during the period under review Egypt suffered very severely from the general fall in the price of commodities makes the prosperity of the country the more remarkable. Had it not been for the great increase of production as the result of improved irrigation and the fiscal relief afforded to landowners, the agricultural depression would have impaired the financial situation. In this connexion it should be stated that during 1899 the reassessment of the land tax, a much-needed reform, was seriously taken in hand. The existing assessment, made before the British occupation, had long been condemned by all competent authorities, but the inherent intricacies and difficulties of the problem had hitherto postponed a solution. After careful study and a preliminary examination of the land, a scheme was passed which has given satisfaction to the landowning community, and which distributes the tax equitably in proportion to the fertility of the soil. The reassessment was completed in 1907.
While the country thus prospered it also suffered greatly from the restrictions imposed by the system of international control. This system produced a great disproportion between the sums available for capital and those available for The cost of internationalism. administrative expenditure. Although the money for public works could be obtained out of grants from the General Reserve Fund, there was no fund from which to provide a sufficient sum to keep those works in order. Moreover, to avoid having to pay half the amount received into the General Reserve Fund the government was compelled to keep certain items of revenue and expenditure out of the accounts altogether—a violation of the principles of sound finance. Then there was the glaring anomaly of allowing the Conversion Economies to accumulate at compound interest in the hands of the commissioners of the Caisse, instead of using the money for remunerative purposes. The net result of internationalism was to impose an extra charge of about £1,750,000 a year on the Egyptian treasury.
All these cumbersome restrictions were swept away by the khedivial decree of the 28th of November 1904, a decree which received the assent of the powers and was the result of the Anglo-French agreement of April 1904 (see § History).Egypt gains financial liberty. The decree did not affect the inability of Egypt to tax foreigners without their consent nor remove the right of Turkey to veto the issue of new loans, but in other respects the financial changes made by it were of a radical character. The main effect was to give to the Egyptian government a free hand in the disposal of its own resources so long as the punctual payment of interest on the debt was assured. The plan devised by the London Convention of fixing a limit to administrative expenditure was abolished. The consent of the Caisse to the raising of a new loan was no longer required. The Caisse itself remained, but shorn of all political and administrative powers, its functions being strictly limited to receiving the assigned revenues and to ensuring the due payment of the coupon. The nature of the assigned revenue was altered, the land tax being substituted for those previously assigned, that tax being chosen as it had a greater character of stability than any other source of revenue. By this means Egypt gained complete control of its railways, telegraphs, the port of Alexandria and the customs, and as a consequence the mixed administration known as the Railway Board ceased to exist. Moreover, it was provided that when the Caisse had received from the land tax the amount needed for the service of the debt, the balance of the tax was to be paid direct to the Egyptian treasury. The Conversion Economies Fund was also placed at the free disposal of the Egyptian government. The General Reserve Fund ceased to exist, but for the better security of the bondholders a reserve fund of £1,800,000 was constituted and left in the hands of the Caisse to be used in the highly improbable event of the land tax being insufficient to meet the debt charges. Moreover, the Caisse started under the new arrangement with a cash balance of £1,250,000. The interest of the money lying in the hands of the Caisse goes towards meeting the debt charges and thus reduces the amount needed from the land tax. The bondholders gained a further material advantage by the consent of the Egyptian government to delay the conversion of the loans, which under previous arrangements they would have been free to do in 1905. It was agreed that there should be no conversion of the Guaranteed or Privileged debts before 1910 and no conversion of the Unified debt until 1912. Such were the chief provisions of the khedivial decree, and in 1905, for the first time, it was possible to draw up the Egyptian budget in accordance with the needs of the country and on perfectly sound principles.
In the system adopted in 1905 and since maintained, recurring and non-recurring expenditure were shown separately, the non-recurring expenditure being termed “special.” At the same time a new General Reserve Fund was created, made up chiefly of the surpluses of the old General Reserve, Special Reserve, and Conversion Economies funds. This new fund started with a capital of £13,376,000 and was replenished by the surpluses of subsequent years, by the interest earned by its temporary investment, and by the sums accruing by the liquidation of the Daïra and Domains loans. During 1905 and 1906 about £3,000,000 was paid into the fund through the liquidation of the Daïra loan. From this fund, which had a balance of over £12,000,000 in 1906, is taken capital expenditure on remunerative public works in Egypt and the Sudan, and while the fund lasts the necessity for any new loan is avoided. The greater freedom of action attained as the result of the Anglo-French declaration of 1904 enabled the Egyptian government to advance simultaneously along the lines of fiscal reform and increased administrative expenditure. Thus in 1906 the salt monopoly was abolished at a cost to the revenue of £175,000, while the reduction of import duties on coal and other fuels, live-stock, &c., involved a further loss of £118,000, and an increase of over £1,000,000 in expenditure was budgeted for. The accounts for 1907 showed a total revenue of £E.16,368,000 and a total expenditure of £E.14,280,000, a surplus of £E.2,088,000. The annual growth of revenue for the previous five years averaged over £E.500,000. About one-third of the annual revenue is derived from the land tax; customs and tobacco duties yield about £3,000,000, and an equal or larger amount is received from railways and other revenue-earning departments. The chief items of ordinary expenditure are tribute and debt charges, the expenses of the civil administration, of the Egyptian army (between £500,000 and £600,000 yearly), of the revenue-earning departments and of pensions.