There is no doubt the new government in Egypt is lucky to start its term with a guaranteed $12 billion in economic assistance from Saudi Arabia ($5 billion), the United Arab Emirates ($4 billion) and Kuwait ($3 billion). This good luck is supported by the fact that almost 50 per cent of this assistance is cash grants and in-kind donations (oil and gas products). The Arab economic assistance package should have direct positive effects on the macro fiscal and economic status of Egypt as follows. First, the zero interest deposits portion of the package ($6 billions) will dramatically increase the country's foreign reserves, which were $14.92 billion at the end of June 2013. The increase will reduce pressure on the Egyptian pound against foreign currencies and allow the Central Bank of Egypt to act more efficiently in meeting market demand for foreign currencies. This will stabilise the currency's value, limit the foreign currencies black market, reduce the deficit of the balance of accounts, and decrease production and investment costs in Egypt. Second, the cash grants and in-kind donation portion of the package ($6 billions) should reduce the budget deficit by almost 20 per cent, assuming the accuracy of budget deficit estimates. Lowering the budget deficit should lessen the government's dependence on public debt that is currently accounting for almost 85 per cent of GDP. This will improve the country's fiscal indicators and it will decrease the government's interest payment that accounts for almost 27 per cent of the government's expenditure. Third, receiving $3 billions equivalent of oil and gas products from the three Arab Gulf countries will considerably support the energy sector in Egypt in the short run. The government will not incur transportation and insurance costs that should be paid in case of importing these products. The government and the Central Bank will also not suffer to find the needed foreign currency, as was the case over the last two years. Also, alleviating the energy crisis will decrease consumers' transaction costs in terms of time saving and eliminating the black market. This will improve the business environment in Egypt. The abovementioned positive influences assume that the new government of Egypt will act in a traditional way. According to this way, the government will use the Arab assistance package to ease the macro fiscal status of the country, to improve its fiscal indicators, and to decrease the budget deficit or at least to limit it at the budget estimate of LE195 billion. However, the government may consider other fiscal policy options to maximise the benefit of this package. One of the possible options is to use the cash grants to support government investments. Over the last two years, the government could not actually implement more than 60 per cent of allocated funds. The gap between the budget and actual figures can be explained mainly by the lack of financial resources and partially by insecurity and instability. A considerable percentage of cash grants can be devoted to finance specific governmental investment projects. This will help the government to stimulate the economy and to encourage the private sector to inject money into it. This will also enhance the economy's ability to create new job opportunities. In this regard, the target would be implementing 80 per cent of the LE63.6 billion allocated to government investment in the fiscal year 2013/2014. Another option is to utilise a considerable portion of the cash grants to support private companies that declared bankruptcy over the last two years or those that are experiencing financial hardship. This option would bolster companies to resume operations and to restore their capacities. This would absorb a segment of unemployed labour in the short run and would contribute to GDP. Adopting this option needs a comprehensive database of the concerned companies and a serious analysis of the subsidy mechanisms the government can use without distorting the market. A third option is to target one of the key service sectors, such as education or health, with extraordinary expenditure. This expenditure would improve one service highly demanded by ordinary people. Public health and education systems mainly service the poor and middle-income people in Egypt. This expenditure would contribute to human resources development efforts in Egypt and it would have a political impact, given that social justice was and remains a key demand of the Egyptian revolution. These options are not the only options that would maximise the expected benefit of the Arab assistance package. Other out-of-the-box options can be proposed in this regard, including but not limited to tax breaks, infrastructure boosts, and export support. The new government should act bravely to enhance the economic impact of its fiscal instruments. The new government should realise that risk aversion is not always the wiser option, especially in times of crisis.
The writer is professor in the Faculty of Economics and Political Science, Cairo University.
