The gap widens
The mounting budget deficit is emerging as one of Egypt's chief economic concerns. Sherine Abdel-Razek probes the facts
During the late 1990s, in the early years of Egypt's economic reform programme, the country's budget deficit narrowed to levels that earned the praise of international organisations. The deficit, which is the difference between government revenue and expenditure, declined from 5.4 per cent of GDP in 1991/ 1992 to only 0.95 per cent in 1997/1998.
Since then, however, the deficit has been on an upward spiral. The South East Asian financial crisis brought on a decline in foreign investments as panicked investors pulled out of emerging markets. When the prices of Asian imports plummeted, Egypt's import bill rose significantly. Both factors pressured the pound and it began losing ground. The following years witnessed a succession of inopportune events -- the Luxor incident, the second Intifada, 11 September and, most recently, war on Iraq -- which have all hit the tourism and investment sectors and stripped the country of hard currency.
The resulting recession was mirrored in an increasing deficit, which reached 6.7 per cent in 2001/2002. When the pound was devalued in 2002 and 2003, an increase in the value of imports raised local prices, which led the government to increase its subsidies for 15 essential commodities to ensure their prices remained constant in the local market. The deficit rose to 7.4 per cent and is now expected to reach 10.3 per cent in the new budget.
Economists and rating agencies are becoming worried about this expanding gap. But a closer look at the budget items shows that the government can finance its way out of a number of problem areas.
A large part of the gross deficit, which stands at LE42.2 billion in the 2003/2004 budget, is to be financed through the savings of the social insurance fund for employees in both the public and private sector and through external borrowing. This leaves the net deficit at LE27.7 billion, which can be covered by issuing government bills and bonds.
There are a number of items, however, that raise considerable concern. On the revenues side, the most voluminous item is taxes. Means to boost tax revenue are numerous, ranging from tax hikes to reforming collection techniques. "Egypt's tax policy needs reconsideration," said Hanaa Kheireddin, professor of economics at Cairo University, at a recent seminar.
In spite of an expected 6.1 per cent increase in general taxes and a 9.2 per cent increase in sales taxes, Kheireddin believes the revenue generated will be insufficient and that the policy of raising taxation is counter-productive.
"If we really want to improve our tax revenues, we need to lower tax rates," she said, adding that studies have shown that the lower the tax rate, the higher the revenues, as fewer people evade payment.
She suggested the government should pass the new tax bill, which will reduce taxes on commercial and industrial profits from the current 40 per cent to 25 per cent.
Restricting tax exemptions is also necessary, Kheireddin said, as the government currently grants up to 20-year tax holidays to investors in new communities.
The challenges facing the government on the expenditure side of the budget are more difficult to tackle. The state's social commitments are clearly apparent in the high salary and pension figures. In the 2003/2004 budget, salaries and wage items alone account for 25 per cent of overall expenditure. Out of the LE38.5 billion allocated to this category, there is some LE10.7 billion earmarked as basic salaries for public sector employees.
"The policy of recruiting people in this sector is neither economical, nor socially effective," Kheireddin said. Close to 5.5 million people are currently on the sector's payroll, and the figure continues to rise.
"If we divided the LE10.7 billion figure by the number of employees, we will find that a public sector employee receives an average of LE2,000 a year -- a sum that can hardly cover his basic needs," Kheireddin said.
Pensions payments, which alone account for 8.7 per cent of next year's budget, are another controversial budget commitment. "The pensions policy is not rational," said Sayed Abdel-Mouwla, public finance professor at Zagazig University. "The government borrows from the National Investment Bank (NIB) at an interest rate in order to keep enough money in a time deposit to cover workers' pensions in both the public and private sectors. The NIB, on its part, pays a 12 per cent interest rate to its investors for these loans, which means the government ends up shouldering a large amount of money to finance these pensions."
Although economists constantly warn against excessive emphasis on the social dimension when setting the budget, the percentage of subsidies in this budget is 20 per cent higher than in the previous one. The government's aim is clear: it wants to cushion citizens against price increases caused by the pound's devaluation.
"We floated the pound to lower the balance of trade deficit, knowing that people will have less cash in their hands to buy foreign goods when local prices rise," Kheireddin said. "By increasing subsidies, however, we are neutralising the effect of this move."
Al-Ahram Weekly Online : 12 - 18 June 2003 (Issue No. 642)
Located at: http://weekly.ahram.org.eg/2003/642/ec2.htm