Some officials think that money (or extra resources) is a precondition for reform. They are wrong because the spirit of reform is the use of the same amount of resources differently to achieve more growth and prosperity for all. Sometimes, money can help remedy the unexpected side effects of reform, but it is never a precondition for it. Over the last few decades, Egypt has received many exceptional resources that have fallen as if from heaven and been foolishly wasted. These exceptional resources have included the Camp David Agreement's windfall of billions of dollars in economic and military aid, followed by huge debt relief through international concessions offered under IMF agreements. Then there were the proceeds of privatisation and the extraordinary flow of foreign direct investment into our hydrocarbons sector, as well as the hundreds of billions of pounds taken from pension and insurance funds and added to the resources of the government budget. Despite all this, the results have been gloomy: mushrooming public debt, a large budget deficit, inflation and high unemployment rates while the average real growth rate has been hovering around two per cent annually since the 1980s. The accumulation of Egypt's economic failures resulted in the political and social upheaval of January 2011. It was not because of the January uprising that the Egyptian economy deteriorated, however. It was because of the bad policies that were implemented, in addition to corruption and inefficient administration. Sadly, these three pillars that produced economic failure are still in place. Since January 2011, Egypt has received about $55 billion in foreign aid, whether in money or in kind. Some of this amount has been in the form of grants. In addition, just last week Egypt received from Saudi Arabia aid and commitments for new projects and trade financing totalling about $22 billion. The only target that the Egyptian government missed during the Saudi king's visit was to get a new deposit at the Central Bank, which means continuing pressure on the pound. Despite this generous aid, the administration is still hungry for money. When the chairman of the Central Bank and two other ministers accompanied by a delegation of about 20 other officials recently attended the spring meeting of the IMF and the World Bank in Washington, the talk there was about getting extra money. In order to satisfy them ahead of the meeting, the World Bank announced that it was ready to release $1 billion, the first tranche of a $3 billion loan that was agreed in principle as soon as the parliament approved the government's economic programme in Egypt. It takes a great deal of political will and dedication, and not just money, to put reforms in place. Moreover, a strong political will for reform should be supported by an adequate vision, strategy and policy, as well as laws able to shore up the economy from a shallow, muddy position to where it can safely sail towards a better future. Any attempt to move forward without rooting out institutional corruption and administrative inefficiencies will fail. This article will look at some aspects of Egypt's public finances in order to illustrate the fallacy of the argument that says that money can buy reform. In fact, money scares away reform. Vicious circle: Egypt has been locked in a vicious circle of borrowing for decades, borrowing and then borrowing again to make payments for previous borrowing. Year after year, and one government after another, the accumulated public debt has almost exceeded the value of the country's GDP, and the economic policies of successive governments have not been able to find a way out of the vicious circle. In order to understand the cost of borrowing, take the example of a company that wants to borrow LE1 million for a year at an interest rate of 15 per cent. This company should make sure beforehand that it will make at least LE1.3 million at the end of the year in order to be able to pay back the original debt, the interest, taxes and other expenses before it can count any profit. If you (as a borrower) fail to do so, you won't be able to recover from the loss. The government is now borrowing at rates exceeding three times the rate of economic growth, and it will be required to pay about 17 per cent interest on new treasury bills maturing in less than 10 years' time. The banks can't say no to the government, but they can increase interest rates because of the high risk of lending. Having done just this for years, the banks now don't feel happy about the government's borrowing, especially as they don't see any real plans for reform on the horizon. Receiving financial help from the Arab Gulf states and extra borrowing from the banks have become the norm rather than a way of introducing real reform. When money is needed the first option is not to borrow, unless the guaranteed return on borrowing is higher than the cost. In cases where the money is needed for social or sovereign spending, the government should either reduce its spending or raise real revenues through taxes and the like. It should not borrow more than it can pay back within a specific timeframe. The safe rate for the budget deficit is three per cent of GDP, and the safe limit of public debt is 60 per cent of GDP. These are well-known international financial measures. Yet for decades successive Egyptian governments have been working against established wisdom, borrowing what they can't pay back. The result has been a mountain of public debt that is crushing the whole country. Table (1) illustrates the accumulated budget deficit from 2006-2007 until 2013-2014. The figures clearly show that the annual growth of the budget deficit is frightening. According to the Ministry of Finance's figures, the country's budget deficit grew over the period from 2006-2007 to 2013-2014 by 172.2 per cent at an annual average of 24.6 per cent, or nearly seven times as much as the GDP growth rate over the same period. This is a crippling figure, and it gets worse if we relate the budget deficit to net real growth, which is 1.7 per cent (after deducting the rate of population growth). The accumulation of the budget deficit isn't new, but it is a historic feature of Egyptian budgets. What to do: Under former president Hosni Mubarak, governments tried to use exceptional resources to consolidate their finances. These included international debt relief, borrowing at a very low rate from the National Investment Bank, using privatisation proceeds to fund current expenditure, getting grants and assistance from the US, EU and Arab Gulf states, and effectively confiscating money owned by the pensions and national insurance funds (public and private) to artificially reduce budget deficits. Instead of trying to design and implement new financial policies, post-Mubarak governments have been following the same old policies of excessive spending and excessive borrowing from the local banking system and from abroad. As a result, the economy is in a trap and can't move without external assistance. This is a very dangerous political situation indeed. The mushrooming budget deficit is not only politically dangerous, but it is also economically catastrophic as an increasing portion of our national income is being regularly allocated to service our national debts. Egyptians are now paying annually about 15 per cent of their GDP to service the public debt and this ratio is rising. Table (2) illustrates the rising cost of debt services in recent years. During the mentioned period, the total service of debts (payments of interest and instalments) increased by 188 per cent at an average rate of 26.8 per cent against a 24.6 per cent increase in the budget deficit. This difference of 2.2 per cent represents the increase of borrowing costs, which will continue to rise as long as the public finances are in a mess. On March 14, interest on Egyptian government bills maturing in November 2025 was 17.099 per cent, while the average rate on 357-day bills was 13.944 per cent in the same auction. The next generation of Egyptians will shoulder this horrific cost of borrowing. It is good that Saudi money has come to the rescue, but don't forget that money that comes easily also goes easily. A lasting effect will only be achieved through reform. The tax system needs to be reformed, not by distributing the tax burden equally but proportionally. The share of tax revenues in the national income should increase from less than 15 per cent of GDP to 25 to 30 per cent to allow for investment. The waste of resources should be stopped, and corruption should be eradicated from within the public administration. Radical changes are needed in preparing and implementing the budget. Sound financial rules should be applied without hesitation, mainly to bring down the national debt and budget deficit without cutting down on investment and social services for the poor. I suggest that we pass a law to force the government to tidy up its own finances. It is the responsibility of the parliament to prepare and pass such a financial law setting out a schedule for limiting the budget deficit to about six to seven per cent of GDP over five years, and the total public debt to 60 to 70 per cent of GDP. Financial discipline does not come casually or voluntarily. It has to be achieved by law. The parliament will soon have to review the 2016-2017 budget. This will be very difficult, but a budget will have to be passed as the new financial year is approaching. We should not allow the budget deficit and the public debt to keep growing out of control, simply because Egypt can't afford it. The writer is former senior political affairs officer at the UNDPA.
