In the second of three instalments, Doha Abdelhamid sees some hope in the undertaking of the first wave of fiscal reforms Towards the latter part of the 1980s, Egyptian authorities were faced with the unenviable convergence of major economic and fiscal imbalances, a growing budget deficit, high inflation, savings, investments, debt and deteriorating local currency. In 1991, the government signed two economic reform and structural adjustment agreements with the World Bank and the International Monetary Fund to stabilise the economy via a package of speedy-recovery reforms and guarantee "fiscal sustainability" by balancing public revenues and expenditures. This coincided with efforts to attract more investment and adopt the principles of market economics. The measures focused on stabilising and restructuring the budget deficit and exchange and interest rates. Remarkably, the budget deficit declined from 5.5 per cent of GDP in 1991-92 to one per cent in 1997-98. An increase in revenues reduced 40 per cent of the budget deficit, while public expenditure reductions created the other 60 per cent. The increase in revenues resulted from a hike, equivalent to two per cent of GDP, in exports, improvement in oil companies' revenues and an increase in Suez Canal profits. Moreover, the adoption of the sales tax boosted revenues by an amount equivalent to 1.4 per cent of GDP. A decline equivalent to 11 per cent of GDP in the expenditure side also shrunk the deficit. This stemmed from a decrease in public investments in the social sectors and was compensated by more private sector involvement in these areas. Also, decreasing the number of subsidised food items from 18 to only four commodities -- namely bread, sugar, wheat and oil -- lowered the subsidies bill from 5.2 per cent of GDP in 1991-92 to 1.6 per cent in 1997-98. An agreement with the Paris Club of donor countries in May 1991 rescheduled the due date for the sovereign debt and consequently eased the debt burden and its drain on the budget. The Paris Club accord resulted in the reduction of $19.6 billion of total outstanding debt and saved around two per cent GDP over the six year period. The structural adjustment programme introduced a restrictive monetary policy which helped in shaving inflation rates. The policy had two pillars: fiscal policies that targeted the budget deficit and contained liquidity growth. This measure had direct ramifications on the marked reduction of inflation rates from 20 per cent in 1987-88 to 3.8 per cent in 1997-98. This brought about confidence in the local currency and was substantiated by the reduction in the dollarisation rate from 50 per cent to only 19 per cent. One of the major weapons of attack in the stabilisation programme battle was the use of exchange rate as a nominal anchor. While the marriage between the Egyptian pound and the dollar in 1991 halted foreign exchange instability, the major discrepancy between interest rates on the pound and dollar caused massive inflows of hot capital to Egypt. This boosted international reserves from $3.9 billion in 1991-92, covering 3.5 months of the country's import cover, to $9.5 billion in 1997-98, covering 11 months of the same needs. Issuing treasury bills came as a counter move to sterilise the massive foreign inflows, and the proceeds were deposited in the Central Bank of Egypt. These open market operations amounted to some 0.6 per cent of GDP during 1991-92 and 1997-98. We can surmise that the reform programme adopted during the 1990s was successful. Despite the dwindling economic growth rates experienced in the early-1990s, macro-economic stabilisation policies bore fruit towards the mid-1990s with the private sector becoming a partner in the development of the economy. The GDP growth rate was at 5.7 per cent in 1997-98, and investments in industry grew at a higher rate than in agriculture and services. In addition, the growth rate of per capita income went up to around 3.5 per cent in 1997-98 from zero per cent in 1990-91. However, with the termination of the reform programmes towards the end of the 1990s a lax attitude towards growth in many of the key economic sectors and activities was witnessed. This coincided with a series of internal and external shocks (such as the Luxor event and the South East Asian crisis) that were inhibitive to progress and had multiple effects on overall performance and economic outlook. A decline in both tourism and oil revenues, due to the Luxor killings and a decrease in international oil prices, negatively affected the trade balance. The capital account was also not far from the same trends due to an obvious correlation with Foreign Direct Investment (FDI) from Asian countries and Russia. Subsequently, the account incurred a deficit equivalent to $3.6 billion in 1999-2000 after realising a surplus of $1 billion in 1997-98. Similarly, the budget deficit grew from one per cent of GDP in 1997-98 to 4.7 per cent of GDP in 1999-2000. At the other end of the spectrum, balance of payment pressures escalated due to the dollar to pound exchange rate which led to the erosion of foreign currency reserves by around 25 per cent between 1998 and 2000, and reached $15 billion at the end of 2000. Despite that fact, Egypt enjoyed an imports cover of eight months and reasonable debt service, according to international best practice criteria. At the dawn of 1998-99, many of the national account's figures were corrected. This led to an adjustment in the value of fiscal deficit and raised scepticism about the validity of growth rates realised in the early period of reform. The government had to abandon some of the contractionary policies it adopted during the first- phase reform to pull the economy out of the state of recession it experienced in the late 1990s. It expanded public investments from 5.5 per cent of GDP in the mid-1990s to 8.4 per cent in 1998-99. However, this figure declined in 1999-2000 when the government decided to tighten its investments in mega-projects, due to the unavailability of money. This move came as a part of a new package of fiscal reforms that addressed maladies in the post first-phase reforms. Bringing the National Investment Bank into the supervision of the minister of finance, in order to tighten the grip on investment overruns that added to budget pressures, was the core of the package. Hence, current expenditures as a percentage of GDP declined from 30 per cent in the early 1990s to 20 per cent towards the end of the decade. According to available information, the following can be deduced: wages and salaries represent the majority of public expenditures. They accounted for 47.6 per cent of total current expenditures in 1990-91, 57.8 per cent in 1997-98 and 58.2 per cent in 2001-02. In 1991, it was envisioned that the deficit could be reduced by down-sizing civil service employees to cut the wage bill and as part and parcel of civil service reform. However, wages and salaries increased from 23.6 per cent of total current expenditures in 1990-91 to 32.5 per cent in 2001-02. This may be attributed to the slow-down in the privatisation programme towards the end of the 1990s, which laid further pressures on the wage bill. Needless to say, this issue is quite socially- sensitive as the government has been viewed as the "employer-of-last- resort" since the socialist era. This may be attributed to the insufficient efforts of the private sector to retrain the labour force in modern value- added techniques as long as the government is willing to gobble up this role together with its dangling expenses. With the rise in the size of the wage bill, interest payments followed suit. Interest payments in the mid- 1990s reached 24 per cent of total current payment and 35.8 per cent during 1993-94. However, the 2000- 01 final accounts showed a decline in interest payments that amount to 25.7 per cent, an extremely positive achievement realised by the government. Subsidies fell by 21 per cent in 1990-91, 7.7 per cent in 1996-97 and 6.3 per cent of total current expenditures in 2001-02. However, recent trends differ as subsidies increased to LE15.6 billion in 2004-05, due to the increase in international prices of basic goods. Upon a review of current expenditures according to economic divisions, we find that social spending (particularly on education and health) took precedence over other public expenditures. For example, from 1981-82 until 2001-02 education expenses increased by twenty-fold, from LE0.3 billion to LE19.8 billion. Expenses increased further in 2003- 04 to LE23.8 billion and up to LE25.9 billion in FY2004-05. Accordingly, the government achieved success in controlling debt servicing, investing in the social sectors that touch the daily lives of citizens and working on rationalising public expenditures despite the inevitability of increasing wages and subsidies.
