A burdensome budget
Insufficient subsidies and a huge deficit are among the main shortcomings of the Egyptian government's latest budget. Sherine Abdel-Razek reports
The fiscal year (FY) 2003-2004 budget will be the largest in Egypt's history, with expenditures standing at LE158.6 billion, up from LE141.6 billion in FY 2002-2003. The budget's size is not in and of itself controversial. The fact that it comes at a time of acute economic uncertainty and after a major currency devaluation, however, is striking.
The free-fall of the pound in relation to the dollar, since floatation took place on 29 January, led to an increase in subsidies for imported basic commodities and dollar-denominated foreign debt servicing. The net budget deficit is expected to be around LE27.7 billion, which represents around 6.4 per cent of GDP -- compared with 3.7 per cent in the FY 2002-2003 budget.
This high deficit will put Egypt under threat of lowering its sovereign rating globally, as was the case last year. Last May, Standard And Poor's downgraded Egypt's sovereign rating to "junk" status after the government revealed its FY 2002-2003 budget.
While it has been passed by the Shura Council, the upper house of parliament, the budget bill is still under discussion in the People's Assembly (PA). The PA has to approve the budget "item by item", after which it will be given the go-ahead by a presidential decree and then implemented by the Ministry of Finance starting July.
However, the government's intended means of financing the deficit, which are reflected in the budget, are drawing sharp criticism. The difference between the LE158.6 billion in expenses and the LE116.5 billion in revenues puts the gross deficit at LE42.1billion. Loans from the national investment bank and retirement funds will cover around LE14 billion of this while the rest, the net deficit, is to be covered by issuing treasury bills and bonds, in other words, by increasing the internal public debt.
While over-reliance on borrowing to finance the deficit is a common criticism of the new budget, the government seems to be convinced of its utility. Despite admitting that it is a huge burden, Abdel-Fattah El-Gebali, senior advisor to the minister of finance, pointed out that financing the deficit by borrowing from the national investment bank and issuing bonds and bills, is the most suitable policy for the Egyptian economy. He added that it compared favourably with other methods of financing, such as printing money or borrowing on the international markets.
"More important than the size of the deficit and local debt is the current fiscal reform programme, aimed at increasing the efficiency of expenditures and lowering the cost of public borrowing by restructuring debts so that high cost loans are replaced by others of lower cost," El-Gebali said.
However, many members of parliament and economists do not share El- Gebali's opinion.
"The idea of the government borrowing money to finance irrational expenses has become really troubling," said MP Kamal Ahmed. He referred to a recent report by the Central Auditing Agency which said that these expenses, ranging from the maintenance of public roads to buying cars for government officials, exceeded allocations in the FY 2001-2002 budget by LE9 billion. The report also pointed out that the government bought 35,000 cars during FY 2001-2002 under these auspices.
"Look at the huge amount of money wasted by the different ministries and state authorities on publishing condolences and congratulations in the national newspapers. Now we are borrowing money that our children will have to pay, putting a lot of pressure on future budgets," said Ahmed.
In spite of the fact that in dollar terms the FY 2003-2004 deficit is 27 per cent lower than last year, it is still one of the largest deficits in Egypt's history.
According to El-Gebali, it is extremely difficult to reduce public expenditure and thus reduce the deficit. El-Gebali pointed out that in order to enhance the social safety net -- a main aim of the current budget -- it would be impossible to reduce subsidies for basic commodities, salaries and wages, social insurance and pensions.
"On the contrary, we have had to increase subsidies to LE8 billion this year [in order] to cover the increase in prices of commodities in addition to the 10 per cent annual rise in the salaries of state employees," El-Gebali said.
Another criticism raised over the past week was related to the inadequacy of present government subsidies. While El- Gebali asserts that the level of government subsidies has been very carefully calculated to cover inflation and the rise in import prices, MP Kamal Ahmed has his reservations.
"Since Abdel-Aziz Hegazy's government in the mid-1970s, we have been hearing that the government will deliver subsidies only to those who need them," said Ahmed. "However, this never happens. All Egyptians benefit from these subsidies, thus the per capita benefit is minimal. People living in villas can get staple commodities such as sugar and flour at the same prices as the poor," he added.
Subsidy policy, in general, was criticised during the Shura Council's discussions of the bill last week and are not expected to receive a warm reception in the PA either.
So, since there is little that can be done on the expenses side to reduce the deficit, what about revenues?
The government pointed that the new budget aims to increase tax revenues by lowering tax brackets, thus increasing the number of taxpayers. Moreover, the government plans to formalise the informal sector by including its revenues in the budget. Shawki El-Sayed, a Shura Council member, expresses his fears that this particular policy might backfire.
"Facing this new burden, members of the informal sector might lower their production to evade taxes. The plan has to be a comprehensive one to develop this sector as well," El-Sayed said.
From his side, Ahmed finds that some of the sources of revenue planned for in the budget have been overestimated as a result of the present economic climate. "We cannot realise the targeted level of investments if we continue with the existing tax regime, which shaves off two- thirds of any investment revenue," he concluded.
