The war tab
As the fiscal year comes to a close, the government assesses the effects of the war in Iraq on economic growth. Mona El-Fiqi reports
Regional political instability, coupled with an international economic slowdown, have exacted a heavy toll on the Egyptian economy during fiscal year (FY) 2002/ 2003.
According to government figures for FY 2002/2003, a foreseen 4.6 per cent growth in annual Gross Domestic Product (GDP) will not be realised. "The GDP growth rate during three quarters ending on 31 March came to only 2.5 per cent," said Minister of Planning Osman Mohamed Osman at a press conference last week. The war on Iraq came at the top of the reasons, both internal and external, leading to the plunging growth rate, he said.
A ministry report on the country's economic performance during the third quarter of FY 2002/2003 lists some of the other causes.
For one, the construction sector's production declined by 13.9 per cent during these nine months compared to the same period last year.
Weaker production in many sectors, combined with the aftermath of the pound's devaluation at the end of January, was reflected in a rising inflation rate that is expected to hit a three per cent average for the fiscal year.
Commodity prices soared by 3.3 per cent during the last quarter, the report said, while those of food products rose by five per cent compared to the same period last year.
As expected, the atmosphere of uncertainty during the build-up to the war threw its shadow on investment activities. The value of total investments fell to LE41 million from LE46 million at the end of March 2002.
Osman described the 2.1 per cent increase in industrial production during the quarter as "very moderate", when compared with an expected six per cent. "This humble increase explains how important the implementation of the Industry Modernisation Programme for both private and public companies is," he said.
Other sectors, meanwhile, have made notable gains. During the nine-month period, oil exports rose by 16 per cent due to mounting international prices following the war on Iraq.
Moreover, the increase in revenues of oil, agricultural and industrial exports led to a reduction in the total trade balance deficit by 4.3 per cent. This came despite a $100 million year-on-year increase in the import bill during the three quarters reaching $9.8 billion .
A number of projects to improve the business climate are in the pipeline, Osman said, which include issuing the new banking law, the industrial zones law and the labour law. New investment incentives, such as tax rate reductions, are also in the offing.
Budget deficit skyrockets
PARLIAMENT passed the 2003/2004 budget last week with a deficit of LE27.7 billion. The deficit, caused by a rise in the cost of public debt services, salaries and subsidies, represents a 65 per cent increase from the previous year's LE17.4 billion.
Economists had expected the deficit enlargement due to the 20 per cent decline in the value of the Egyptian pound following its floatation in late January. The devaluation was reflected in a hike in the value of subsidies and a surge in foreign debt costs.
The net budget deficit, including revenues from state pension savings, is set to rise in 2003/2004 to nearly seven per cent of GDP from 5.4 per cent in 2002/03. The gross deficit comes at LE42.2 billion or 10.3 per cent of GDP, the highest in a decade.
Analysts have always called for the lowering of government administrative expenditures while trying to increase tax and customs revenues. However, "the government's draft 2003/04 budget provides no hints of fiscal adjustment," Merrill Lynch said in a research report issued before the draft was approved.
According to the report, Egypt's narrow tax base was a key problem to boosting revenues.
Al-Ahram Weekly Online : 26 June - 2 July 2003 (Issue No. 644)
Located at: http://weekly.ahram.org.eg/2003/644/ec6.htm