looks at how the government will make ends meet in 2010/2011
The budget for 2010/2011 is soon to be submitted to parliament. Earlier this week it was approved by the cabinet. Initial figures released show Egypt needing some LE399 billion next fiscal year. Revenues are expected to reach LE280.5 billion, up from LE258 billion in the current year, so the government will have to find a means of procuring the remaining LE109 billion.
Just as revenues are expected to increase, so is expenditure, by 28.9 per cent. Part of that increase can be seen in allocations for wages, which are up LE9 billion, taking up a whopping LE95.6 billion. Spending on subsidies is targeted to go from LE95 billion in the current budget to LE115 billion in the next.
This combination of increased spending coupled with an inability of rising revenues to meet expenditure is forecast to result in a budget deficit equivalent to 7.9 per cent. And that is what observers worry most about. Earlier this week, Standard & Poor's Ratings Services said it maintained a stable outlook for Egypt, praising the strength of its banking system, commitment to economic and fiscal reform, and an improved monetary policy framework. But S&P had some reservations, among which were "large fiscal deficits and a fairly high debt burden, compared with other similarly rated peers."
But Mona Mansour, director of CI Capital Research, is not overly concerned about the deficit. She points out that while still high, the percentage remains below the 8.5 per cent budget deficit the government had forecast.
Mansour does not find the budget deficit worrying "as long as we are moving in the right direction and doing something about it. Gradually the deficit will narrow down." She pointed out that the government has already taken measures to lower its deficit by intending not only to better target subsidies but also to rationalise its energy subsidies. It is also encouraging more private sector involvement in the economy.
Mansour is also not worried because as the global economy picks up so will the Egyptian economy, which should mean improved company earnings and more companies being set up, thus reflecting in better tax revenues. The government has forecast that the Egyptian economy will grow by 5.8 per cent in the next fiscal year, raising GDP to LE1.4 trillion up from LE1.2 trillion.
In the meantime, Mansour said that the improved economy would allow the government to go ahead with the implementation of reforms it had put off because of the global crisis, such as the introduction of value added tax. And by the second half of 2010/2011, the property tax should have kicked in. The collection of both taxes will mean increased revenue, she explained, adding that improved growth and revenue combined with the rationing of government expenditure on subsidies should see a decrease of the budget deficit to the GDP ratio.
The government originally planned to cut the budget deficit to three per cent by 2012, but following the global financial crisis that date was pushed back to 2015.
Rationing subsidies, however, is no easy task. Mansour pointed out that as the global economy picks up, the price of oil products would rise as well, eating up a good part of the budget. "This underlines the urgent need to deregulate energy prices," she said.
Escalating prices are not the only reason why the subsidy bill will inflate. Yomn El-Hamaki, head of the Department of Economics at Ain Shams University, says it is only natural that spending on subsidies grows with the growing population. She said subsidies must be reformed not only because of their size, but because they are not satisfactory to the people and they disfigure the price structure of the market.
For El-Hamaki, depending on the 62 million ration cards in use is the best way to ensure subsidies are properly distributed. "Whether that subsidy takes the form of direct financial support or the supply of basic needs could be left for each individual to determine." She lamented that subsidies are taking up twice what is being spent on education and more than double what is being spent on health. Some LE48 billion has been earmarked for education in the new budget, up 14 per cent compared to this year's budget.
El-Hamaki's concern with the budget deficit is the government's resorting to borrowing from the local market through treasury bills and bonds issued by the Ministry of Finance. "This borrowing from local banks has the effect of crowding out the private sector." She explained that it encourages banks to invest funds in the safe haven of bills and bonds rather than productive projects.
Government debt is expected to reach 82 per cent of GDP in the upcoming budget. Experts say according to international standards, public debt is better kept at 60 per cent of GDP.
This domestic debt, according to Yomn, has an effect on prices. "Inflation is actually higher than the announced figures," she said. "We consume more than we produce and we import more than our exports, and our need for investment is bigger than our savings. These are structural problems that must be dealt with."