Although far from balanced, the new budget does at least lighten the economic load on the Egyptian lower class. Sherine Abdel-Razek reports Projecting expenditures of LE177.4 billion and LE125.1 billion worth of revenues, Egypt's 2004-2005 budget brings a deficit of around LE52 billion or 10 per cent of GDP, a noticeable rise from 9.1 per cent of GDP for the current fiscal year. While around LE15 billion of this deficit is financed by social security, pension funds and borrowing from abroad, the balance will be covered through the money market -- by issuing government bonds and bills. This part of the deficit, amounting to some LE37.4 billion, is not yet covered and adds to the government's already-huge public debt, which now stands at LE277 billion. Addressing the Shura Council last week, Minister of Finance Medhat Hassanein defended the new budget, saying that more factors than simply how far it was in the red need to be considered. Hassanein said that the deficit went hand in hand with a noticeable increase in allotments for the social budget. Hassanein said stable food subsidies, spending on services such as education and health, and the annual 10 per cent increase in the salaries and wages bill together comprise around 43 per cent of the new budget's expenditures. According to economists and local government officials, a deficit is standard fare for the budgets of even the most developed economies. The government, basing its calculations on the LE37.4 billion figure, says the deficit is only 7.5 per cent of GDP. However, the fiscal deficit has been continuously cited by international organisations and rating agencies as one of the main nagging problems in the Egyptian economy. Local economists believe that the large deficit could discourage investment by pushing up interest rates and raising questions about the government's commitment to fiscal discipline. "The parallel increases in fiscal deficit and public debt are likely to raise worries for domestic and external investors and donors about the prospects in the longer term of interest rates and inflation," said a Cairo-based financial expert in a recent seminar. One of the main factors behind the rising deficit this year is the pressing political need to make key foodstuffs available at prices affordable to millions of poor Egyptians. The devaluation of the Egyptian pound has increased the cost of imports and sparked a rise in the cost of living estimated at between 10 per cent and 20 per cent. Egypt is a net importer of food items. A supplement of LE1.6 billion was added to the 2003-2004 budget to cover the increased costs of subsidising 25 staple foods, like bread, tea, sugar and cooking oil. In the last several months, there have been periodic re-appearance of queues for subsidised bread, a phenomenon absent from Egypt for the last three years. The shortage was due to a drop in local production of wheat and an increase in international prices. A package of new food subsidies announced earlier this month will cost between 2.5 and three billion pounds every year. LE11.6 billion is to be directed to basic food items and to cover the cost of a new government decision to add seven new items on the ration cards through which Egyptians get subsidised food necessities. Hassanein said that the subsidy allotment in the draft budget is to "deal with the increase in world prices of basic necessities". Hassanein also asserted that most of the increase in non- subsidy expenditures is allotted to salaries and pensions, as there is no increase in the allocations for administrative expenses for state officials such as new vehicles and furniture. However, critics saw the same shortcomings in the new budgets as in previous ones. The increase in subsidies was not accompanied by a technique to guarantee that the most needy and deserving are those benefiting from it. Experts are calling for a new system to define those who really need both food and education subsidies to lower the burden on the state budget. Debt service expenditures, which rose to LE50 billion in the 2004-2005 budget, consume 40 per cent of revenues. The government said it was planning to reduce the debt and its servicing through a debt-for-equity scheme. In exchange for the debts it owes to the pension funds, the government will offer assets in some state- owned firms, a policy that the government claims will eliminate LE13 billion from the debt. With revenues continuing to flounder, the taxation system is still in need of substantial reform. While the government boasts that it neither imposed new taxes nor increased tax rates during the past year, many experts are calling for "rationalising tax exemptions". For example, the government currently gives a tax holiday of up to 20 years for industrial investments in new communities.
