Economic pundits and MPs have criticised the new budget as unrealistic and not reflective of economic realities. Gamal Essam El-Din reports On 10 June, Ayman Nour, a liberal-oriented independent MP, took his fellow parliamentarians by surprise when he accused Finance Minister Medhat Hassanein of exposing Egypt's national security and financial stability to great dangers. In bridging the 2001/2002 budget's gap in financial resources, Nour asserted that Hassanein had resorted to a very controversial measure: issuing Egyptian sovereign eurobonds worth $1.5 billion. "The danger with this controversial measure is not only that the money for these eurobonds was raised at a high interest rate (around 7.7 per cent). The real danger is that the eurobonds were issued by putting up strategic assets like the Suez Canal as collateral," Nour said. Nour also accused Hassanein of breaking last year's promise to invest the proceeds from sovereign eurobonds into productive projects. "The finance ministry has so far failed to put the proceeds to any productive use. It has opted, instead, to allow the Central Bank of Egypt (CBE) to invest in US treasury bills at low interest rates (1.5 per cent)," Nour said. Nour told Al-Ahram Weekly that his anti- Hassanein comment was primarily aimed at exposing the grave dangers of foreign borrowing to cover shortfalls in government finances. "I think the government, with some fiscal prudence, increased economic efficiency and greater economic liberalisation, can dispense with foreign borrowing and finally achieve a balanced budget," Nour said. Nour was one of several MPs who agreed that, in recent years, government borrowing has increased to compensate for the deficit in finances needed to meet targeted budgetary expenditures. A recent report by the Central Auditing Agency (covering the years 1995 to 2000) registered foreign borrowing and assistance at a whopping LE15 billion. On 19 May, outlining the 2002/2003 budget before the People's Assembly, Hassanein revealed that public expenditure is estimated to be LE141.6 billion. This can be contrasted with the new budget's financial resources of LE111.4 billion. "This means that the new budget's available financial resources cover only 78.7 per cent of targeted expenditures (compared to 83.6 per cent in 2001/2002's budget)," said Hassanein. Hassanein explained that 2002/2003's budget's financial resources will come from three sources: sovereign and capital revenues (LE86 billion), surpluses from state-owned economic authorities and banks (LE25.4 billion). Hassanein emphasised that the above figures are based on realistic estimates. "This is in spite of the fact that there is a large gap between the government's income and its spending," he added. SOVEREIGN REVENUES: Hassanein said that sovereign revenues are estimated to be LE72.2 billion. These include direct taxes (LE31 billion), customs duties (LE13.9 billion), sales taxes (20.7 billion) and other miscellaneous dues (LE6.6 billion). However, these figures are considered to be exaggerated and not reflective of the present economic situation. Ali Lotfi, a former prime minister and member of the consultative Shura Council, said that a lot of Hassanein's figures are clearly exaggerated in light of 1999/2000's balance sheet. "In 1999/2000's budget, it was initially estimated that taxes, customs, and the sales tax would generate LE54.5 billion. The three sources, however, ended up generating just LE48 billion, registering a deficit of LE6.5 billion," said Lotfi. "In light of this fact, I doubt that the general tax, sales tax and customs authorities will be able to collect the projected LE72.2 billion. It is a huge amount," said Lotfi. Lotfi was supported by Mounir Fakhri Abdel-Nour, the parliamentary speaker of the Wafd party. Abdel-Nour said that direct tax receipts (primarily income and stamp taxes) are projected to increase by 5.5 per cent in the new budget (from LE29.4 billion to LE31 billion). "This is an unrealistic projection given Egypt's post-1999 recession," Abdel-Nour said. The three-year recession has led to a steady decline in direct tax receipts. "I, however, have deep fears that the General Tax Authority might resort to arbitrary measures in its quest to generate the budget's projected receipts, irrespective of the potentially negative effects that these measures would have on the investment climate," said Abdel-Nour. Leftist MP, Abul-Ezz El-Hariri said that limited-income citizens will probably bear the brunt of the increased taxes. "These are the citizens who will be expected to generate the bulk of Egypt's LE32 billion sovereign revenues," El- Hariri said. All this at a time when Egypt is suffering from LE8 billion in tax evasion annually. In response, Hassanein has insisted that the new budget's projected revenues are not exaggerated. Firstly, the 1999/2000 budget balance sheet shows that receipts from direct and sales taxes are increasing all the time. "Direct tax receipts climbed from LE16.3 billion in financial year (FY) 1995/1996 to LE22.2 billion in FY1999/2000," Hassanein said. The same applies to sales tax receipts. "Revenues of this kind grew dramatically by LE6 billion in just five years, or from LE10.5 billion in FY1995/96, to LE16.5 billion in FY1999/2000. Sales taxes were projected in FY2001/2002's budget to generate LE19.8 billion in receipts. Additionally, chairman of the Sales Tax Authority, Mohamed Mahmoud Ali, has announced that a one-year application of the second and third stages of the sales tax law will raise receipts to LE22.5 billion by the end of next July. Hassanein said the government is in the process of modifying the unified tax law. "We aim to give greater tax exemptions to public-sector and government employees. The philosophy behind this is that greater tax exemptions lead to greater consumer spending. This, in turn, leads to greater tax receipts," Hassanein asserted. Hassanein, however, admitted that there are doubts that the projected receipts of custom duties would be fully met. The receipts of custom duties declined from LE11.1 billion in FY1998/1999 to LE9.3 billion in 1999/ 2000. "This was due to the liberalisation of world trade," Hassanein said. Hassanein, however, expressed hopes that a new customs law taking into account international trade developments and local market needs will compensate for the loss in customs revenues. CAPITAL REVENUES: Hassanein also indicated that capital revenues are projected to reach LE13.8 billion. This, he added, includes LE6.3 billion worth of foreign borrowing and assistance and LE7.5 billion in privatisation receipts and other independent sources. Minister Hassanein emphasised that issuing sovereign eurobonds (worth $1.5 billion) assisted the state's development plans and increased the annual growth rate. "The fact that the government provided the Suez Canal Authority as collateral for issuing such eurobonds does not mean that it will be sold in return for meeting the obligations of these eurobonds," Hassanein said. Hassanein, in response to Nour's attacks, said that "offering the Suez Canal as collateral is just a symbolic procedure." Hassanein, however, agreed with Nour that proceeds from the sovereign bonds have been deposited with the CBE rather than directed at funding development projects. "But this is due to a delay in preparing a list of promising development projects in which the proceeds of these bonds can be profitably invested. We have taken a long time with these projects to ensure that their returns will be high enough to cover the financial commitments of the bond financing," Hassanein said. In the area of capital revenues, the budget was also attacked for estimating that the privatisation programme will generate as much as LE5 billion per year. Ahmed Rashad Moussa, chairman of the Shura Council's economic affairs committee, said this is a very unrealistic figure. The committee's report said that the privatisation programme has generated around LE14.6 billion, since launched in 1993. "Last year's budget also estimated that privatisation would generate LE5 billion in receipts. In reality, privatisation generated a paltry LE500 million," the Shura's committee said. Abdel-Nour argued that Standard and Poors' decision to reduce Egypt's credit rating will further discourage foreign investors from Egypt's privatisation programme. FINANCIAL SURPLUSES: Hassanein indicated that the budget's third source of financial resources is estimated to generate LE25.4 billion in revenues. This, he added, will include the surpluses generated by such profitable economic authorities as the Suez Canal Authority and the Egyptian General Petroleum Corporation (EGPC) (LE9.2 billion). It also includes the turnover of state-owned banks and the Central Bank of Egypt (CBE) and the profits of state-owned companies (LE7.2 billion). Income generated from other sources amounts to a further LE9.0 billion. Opposition MPs, however, were doubtful that the Suez Canal would be able to raise the projected LE4.1 billion in revenues. This amount is LE400 million higher than last year's figure of LE3.7 billion. The Shura Council's economic affairs committee said that the global economic slowdown, especially in the aftermath of the 11 September terrorist attacks in the US, has negatively affected the flow of trade transport through international waterways such as the Suez Canal. The Central Bank's figures show that Suez Canal transit fees amounted to $1.8 billion in FY2001/ 2002. This figure is expected to remain constant as the canal generated $9.3 million in the first half of FY2002/2003. Additionally, Minister Hassanein stated that, with the exception of the Suez Canal and the EGPC, the country's 60 or so economic authorities are mostly loss-making. "We agree that they must be radically reformed to generate greater revenues," said Hassanein. On 19 June the cabinet decided to take the first step towards reforming economic authorities. This will take the form of turning some into holding companies and improving the financial structures of others.
