Gloomy budget figures have led MPs and experts to reckon that a balanced budget is nowhere near the horizon. The government, meanwhile, remains optimistic. Gamal Essam El-Din reports As parliament adjourned for the summer, its members were thankful that two months of arduous debate over an unprecedented number of controversial bills have come to an end. One of the thorniest issues they have had to deal with was the country's spiralling budget deficit. When the fourth five-year development plan (1997-2002) was launched five years ago, the government announced that one of its major long-term objectives was to achieve a balanced budget before the next plan begins. This not having materialised, and with no foreseeable hope for it to happen -- unless a dramatic turn of events takes place such as international lending institutions forgiving the government a large part of its foreign debts -- Egypt is looking at another five years of budget shortage. The 2002/2003 budget is set to increase public spending by 11.7 per cent, from LE126.8 billion in the last fiscal year to LE141.6 billion this year, Finance Minister Medhat Hassanein told the People's Assembly on 19 May. With this year's revenues estimated at LE111.4 billion, the overall budget deficit will be in the neighbourhood of LE30.2 billion, or 8.3 per cent of Gross Domestic Product (GDP), compared to LE20.8 billion or 6.7 per cent of GDP in FY 2001/2002. To cover the deficit, Hassanein said the state is depending on funds from three sources: an estimated LE11.5 billion to be provided by insurance and pension funds, almost LE17.2 billion to be raised by issuing treasury bonds and nearly LE1.5 billion in foreign loans. The financial resources available to the government in last year's budget covered only 83.6 per cent of targeted expenditure. The figure has declined to 78.7 per cent this year. "This means that government income has dropped by almost five per cent in one year," Hassanein said. State income has been declining by an average of LE3 billion annually, while expenditure has been rising by an estimated LE10 billion per year during the past five years, Momtaz El- Said, the Finance Ministry's senior undersecretary, told parliament's Budget and Planning Committee. A 10 to 15 per cent annual increase in public expenditure compounded by a 15 to 25 per cent decrease in revenues each year has led to a dramatic surge in public debt, El-Said said. Why has the government become increasingly short of cash? A report submitted by the Central Auditing Agency (CAA) to parliament on fiscal year 1999/2000's balance sheet offers some answers. Foremost among the long-term causes underlined by the report is the fact that, since 1996, the government has been embroiled in implementing a string of mega-development projects all at once. "These projects [such as Toshka, a mega agricultural project in South Egypt] have so far chalked up more than LE3 billion in budgetary allocations," the report said. "The problem with these projects is that not only are they being carried out simultaneously, they are also not expected to generate fast cash returns in the foreseeable future." These types of projects cause severe budget drains because they need a minimum of between seven to 10 years to yield cash, in addition to necessitating imports of costly equipment over a long time span, the report said. At the end of FY1995/1996, after five years of steady and sound economic liberalisation at the hands of Egypt's former reformist prime minister, Atef Sedqi, the country came the closest ever to a balanced budget. "In FY 1995/ 1996 -- the year Sedqi left office -- the budget deficit registered its lowest ever figure of LE6 billion or 2.7 per cent of GDP," the report said. The path was reversed shortly afterwards, the report added, when the deficit climbed to LE8.6 billion or 3.4 per cent of GDP in 1997/ 1998 and LE13.9 billion or 4.1 per cent of GDP in 1999/2000, representing an unprecedented surge of 36.7 per cent in the budget deficit. Another long-term reason for the remarkable speed at which the deficit has widened is the dramatic drop in government income from the financial surpluses of economic authorities and banks over a lengthy period of time. According to Hassanein, only two authorities -- the Suez Canal and the Egyptian General Petroleum Corporation -- out of a total of 62 in which the government has invested a whopping LE285 billion were able to secure surpluses (around LE7 billion or a 2.5 per cent return on investments). The remaining 60 generated a paltry LE500 million (less than one per cent return on total investments), despite receiving LE45 billion in loans in the last five years. Overall, the deficit in authorities' and banks' financial surpluses is registering almost LE7.5 billion each year and accounting for 54 per cent of the overall budget deficit, the CAA report said. The continuing drop in revenues from taxes, customs duties and fees have caused another dent in the budget, the CAA report said. Over the past couple of years, sovereign revenues have consistently fallen below estimates. In FY 99/2000, only LE51.6 billion was generated through sovereign revenues although the estimated figure was LE56 billion. A figure of LE64.3 billion was predicted for FY 2000/2001, but the government received only LE61 billion. In FY2001/2002, sovereign revenues were forecasted to be in the neighbourhood of LE70 billion, but last year's economic slowdown has created a shortfall of at least LE5 billion. That the Egyptian economy has been unable to weather the adverse effects of the global economic slowdown has not dampened the new 2002/2003 budget's estimate of LE72 billion in sovereign revenues. "It is clear that the tax receipts have been lower by at least LE5 billion than the budget estimates of the last five years," former finance minister and Wafd Party member, Ahmed Abu Ismail, told Al-Ahram Weekly. He cited rampant tax evasion, the inefficiency of tax authorities and the market recession as reasons for the fall in revenues. Financial mismanagement, pervasive corruption in local councils and economic authorities, the rise of foreign debt servicing costs and subsidisation can be held to account for at least 15 per cent of the budget deficit, Abu Ismail said. In the short-term, the decline in capital revenues has been named by MPs and economic experts as one of the causes of the swelling budget deficit, with the fall in privatisation proceeds topping the list. According to the CAA report, the privatisation programme generated LE2 billion in FY1999/2000 -- LE1 billion lower than the 1998/1999 figure. In 2000/2001, privatisation earnings did not exceed LE500 million. This despite estimates of an annual LE5 billion in privatisation proceeds in the last three years' budgets. Other capital revenues, such as state land sales, the disposing of unsold inventories and foreign grants, declined by almost LE1.5 billion in FY1999/2000. MPs and economic pundits have forecast a similar decline, if not higher, for FY2000/2001 and 2001/2002. What needs to be asked now is: how much of this revenue shortfall will prove permanent? Abu Ismail said that even with healthy economic growth, government revenues might be LE50 billion to LE70 billion lower than expected in the next five years. "This is because the current government continues to put its social obligations before the rules of economic efficiency and fiscal prudence," Abu Ismail said. Government officials, meanwhile, see a rosier picture. Prime Minister Atef Ebeid, addressing the People's Assembly on 9 June, pointed to the high income expected to come from Egypt's sales of its new discoveries of liquefied natural gas. According to Ebeid, the value of Egypt's quota in these discoveries is estimated at $170 billion in the next 10 years. The government has so far also generated nearly LE16 billion in privatisation proceeds, he said. "These are the proceeds of [whole and partial] sales of almost 150 companies. We still have 164 companies to sell in the course of our privatisation programme," he said. Separating the budgets of the debt-ridden economic authorities from the state budget and including financial resources from the National Investment Bank and state pension funds will, Ebeid said, lead to a balanced budget at the end of the new five-year development plan (2002- 2007).
