Liberal-oriented MPs have berated the government for drawing up a budget that they allege espouses 'socialist' objectives in an age of liberalisation. Gamal Essam El-Din reports Click to view caption The third and most controversial budget of Prime Minister Atef Ebeid's government was approved by the People's Assembly on 10 June. Finance Minister Medhat Hassanein, addressing the assembly on 19 May, said the 2002/2003 budget sets out long-term objectives and far-reaching reforms to achieve economic stability and higher employment levels. A number of developments influenced the government's decisions in drawing up the budget, he said. "Last autumn, in the wake of 11 September, the world lost its business confidence, markets declined and oil prices were volatile," Hassanein said. Not only was the government unable to hold on to its pre-September optimistic growth rate forecasts, it also decided to adjust the foreign exchange regime, reduce imports and depend more on local production, he said. Public expenditure in the new fiscal year aims to address seven long-term objectives -- strengthening the state's social roles, improving government employees' standard of living, slashing public debts, raising the growth rate to 4.5 per cent, rationing public spending, meeting the needs of the military and security forces and addressing the financial troubles of economic authorities. Hassanein said the new budget will increase public spending by 11.7 per cent -- from LE126.8 billion in the last fiscal year to LE141.6. With this fiscal year's revenues estimated at LE111.4 billion, the overall budget deficit for this year will be in the neighbourhood of LE30 billion, or 7.2 per cent of Gross Domestic Product (GDP). The net budget deficit -- the figure excluding pensions and insurance payments -- will stand at around LE17.2 billion, or four per cent of GDP (compared to LE9.6 billion in 2001/2002). This unprecedented projected expenditure figure, Hassanein said, will be financed mainly through self- dependent financial resources, including customs, taxes and revenues of the Suez Canal, the Egyptian General Petroleum Corporation (EGPC) and Telecom Egypt. Although the 2002/2003 budget passed easily through the People's Assembly and the Shura Council, due to the overwhelming majority enjoyed by the ruling National Democratic Party (NDP), the budget was, in fact, strongly critcised by many MPs, including some from the ruling party's ranks. Liberal-oriented critics included prominent businessmen Mounir Fakhri Abdel-Nour, the speaker of the opposition liberal- oriented Wafd Party, and Ahmed Ezz, a high-ranking NDP member and chairman of the assembly's Budget and Planning Committee. Abdel-Nour told Al-Ahram Weekly that the budget was too "socialist-oriented" for a government claiming to be turning Egypt into a full- fledged market economy. Ever since Egypt re- adopted the old socialist five-year development plan system in 1982, budgets have been designed with seven long-term objectives to serve these plans. "I would like to describe these as, rather, the budget's seven chronic fallacies. They are aimed to serve socialist objectives irrespective of whether they conform to sound economic and fiscal rules," Abdel-Nour said. SUBSIDIES: Strengthening the state's social role -- the budget's first objective -- has entailed the allocation of a whopping LE57.8 billion, or 41 per cent of total public expenditure, to subsidies. The figure, which is LE5.8 billion more than that earmarked by 2001/2002's budget, will chiefly be going to the most needy members of society, Hassanein said. "This unprecedented allocation will be used to fund a stream of direct and indirect subsidies. The direct subsidies (LE6.7 billion) will primarily cover basic food supplies, housing and transport provided to low- income citizens. The indirect subsidies (LE51.1 billion) will improve education and health services and support pension funds," he said. Abdel-Nour said that 20 years of experience have shown that these subsidies not only strip the country of economic efficiency, but also fail to serve the purposes for which they are earmarked. "For example, the new budget has allocated almost LE31 billion [compared to LE27 billion in 2001/2002] to improving education and health services. Despite these huge appropriations, education and health services delivered by government schools and hospitals are in constant deterioration," Abdel-Nour said. Parents of government school students pay an estimated LE15 billion a year to private tutors to compensate for the poor quality of instruction their children receive at school. It is also well known that most of the food subsidies are delivered through unofficial channels to average and higher income groups. "This system has to be radically reformed to ensure that subsidies are more efficiently allocated to the poor, so as not to drain the budget needlessly," Abdel-Nour said. Joining forces with Abdel-Nour, Ezz firmly believes that annual subsidies need to be gradually phased out or at least substantially rationed. "Greater subsidies contradict with economic liberalisation and hinder the achievement of any noticeable improvements in a range of public services, especially in the areas of education and health," Ezz said. "Why should we continue subsidising services when liberalising their prices will be both economically sound and socially beneficial?" Ezz cited the example of Gordon Brown, the United Kingdom's chancellor of the exchequer. Brown, Ezz said, decided to raise taxes by 8.5 billion sterling pounds next year to improve the performance of the country's National Health Service. Hassanein acknowledged that the government has been slow to reform the subsidy system. "Ahead of drawing up the 2002/2003 budget, we [the government] were in heavy debate over the subsidy system. This system will be changed as part of the second generation of fiscal reforms aimed at achieving greater liberalisation of the Egyptian economy," he said. Addressing the assembly on 8 June, the prime minister said the government's increased budgetary allocations to subsidisation is part of the ideology and obligations of the ruling National Democratic Party (NDP). "We cannot cut subsidies when the vast majority of the population are limited-income citizens," Ebeid said, his comments drawing strong applause from NDP MPs. Abdel-Nour believes Ebeid's argument reflects his political ambitions more than anything else. "The talk about NDP's social obligations is nonsense. The World Bank estimates that more than 50 per cent of the Egyptian people are living under the poverty line. The budget's subsidy system has done little to counter this fact," Abdel-Nour said. EMPLOYMENT: To improve the living standards of state employees, there is an allocation of LE34.7 billion (or 25 per cent of total budgetary allocations) in the new budget. This figure is nine per cent higher than 2001/2002's allotment, which stood at LE31.9 billion. Hassanein said the increase is primarily due to a special bonus, costing an estimated LE1.8 billion, to be given out to the nearly 5.5 million government employees to raise their salaries by 10 per cent. The remaining sum will be used to appoint 170,000 new graduates in government posts (costing an estimated LE400 million) and to cover the costs of government- supported administrative reform and human resources development programmes. Abdel-Nour said the government's commitment to employ more young graduates offsets economic and administrative reform policies. "This will aggravate the problem of 'masked unemployment', which is appointing people and giving them salaries when there are no real jobs for them to do. It is another drain on the budget in the name of social obligations," he said. The alternative is to create a more investment-friendly climate where real jobs can be provided in productive projects. The assembly's budget committee has revealed that budgetary allocations for raising salaries have risen by LE10 billion over the last 20 years. Inspired by Ezz, its business-oriented chairman, the committee has urged the government to reduce the number of its employees by three quarters. "This will relieve the budget of a huge burden and upgrade the government's administrative system," the committee report on the 2002/2003 budget said. Ebeid, nevertheless, stood his ground. "Appointing graduates reduces unemployment and enhances the purchasing power in society. The latter objective is indispensable to spur consumer spending and fight recession," he said. DEBT: The third objective of the new budget is slashing foreign and domestic public debts and their servicing costs. On 30 June 2001, Hassanein said, the government's general debts stood at LE194.8 billion -- almost 54.4 per cent of GDP -- but were still within secure limits (a debt that is more than 60 per cent of GDP is considered insecure). Also, a large portion of these debts (around LE101.1 billion) is owed to the government- owned National Investment Bank and invested in productive projects, he said. Most MPs took issue with this budget aim, to which a weighty sum of LE38.2 billion has been earmarked. "This is a heavy budgetary burden, not only because it has been raised by 12.5 per cent in one year, but because debt servicing has been the main reason for our increasing budget deficit in recent years," Abdel-Nour said. He put total public debt (domestic and foreign) at LE328 billion, breaking the figure down to LE195 billion for domestic debts and LE133 billion for foreign debts. "This means that, in fact, the total public debt accounts for 91.6 of GDP and this is by no means a secure percentage," he said. Three spending areas -- subsidies, wages and debt servicing -- deplete 62.5 per cent of total expenditure, Abdel-Nour said, adding that the government thereby has only 37 per cent of the budget's allocations at its disposal. Hassanein presented entirely different figures. The government's domestic debts stand at LE194.8 billion and foreign debts are $26.6 billion, he said. Out of the latter figure, the government only has $10 billion to service, as the remaining $16.6 billion are owed by economic institutions and the private sector. "There is no need for alarm because these debts were mainly borrowed to fund development projects, rather than to serve short-term consumption ends," Ebeid assured. Abdel-Nour described Ebeid's approach as simplistic. When Ebeid came to power in October 1999, domestic debt was estimated at LE147 billion, increasing to LE164.3 billion in June 2000. If they now stand at almost LE199 billion, the government is borrowing LE30 billion more every year, he said. GROWTH: Raising annual growth rates from 3.5 to 4.5 per cent and GDP from LE387 to LE405 billion in the first year of the new five-year development plan (2002/2003-2006/ 2007) will consume LE73.2 billion of the new budget. The government will be required to spend only LE28.7 billion on the plan in its first year, Minister of Planning Osman Mohamed Osman said. The remaining LE44.5 billion will be paid by the private sector, which includes the private, public business and cooperative sectors. However, opposition MPs have serious doubts that the private sector can fulfill its part of the development plan, especially since the economy has not fully recovered from the disastrous effects of the 11 September events. GOVERNMENT SPENDING: The budget's fifth objective is rationing government spending. The bill to pay for the day-to-day running of government is to be reduced from last year's 3.3 per cent of total public expenditure to 3.2 per cent in the new budget -- a total of LE4.4 billion. "It suffices to point to the expensive cars allocated to cabinet ministers and the army of crony consultants employed by the government in order to understand that this will never work," Abdel-Nour said. SECURITY: Finance Minister Hassanein said the government will be providing the country's armed and police forces with the necessary funds to enable them to protect Egypt from foreign aggression and terrorist acts. ECONOMIC AUTHORITIES: The budget's final objective -- addressing the poor financial performance of economic authorities -- has been the stickiest issue in all the parliamentary debates. Hassanein said the government would financially restructure loss-making economic authorities by separating their budgets from that of the state. He said that until this commitment is fully realised, the new budget will be burdened with LE3 billion to service the debts incurred by these authorities, in addition to the estimated LE3.8 billion to be given out to these authorities in subsidies. "This government has made many promises to tackle the financial problems of these economic authorities, but nothing has materialised," Abdel- Nour said. Since the 1960s, economic authorities, especially the Egyptian National Railway (ENR), have been forced to sell their products and services cheap. "This is no longer acceptable in an age of economic liberalisation," he said. Ezz joined Abdel-Nour in urging the liberalisation of prices of products and services offered by economic authorities as a first step towards addressing their alarming financial losses and relieving the state budget of a huge burden. "This will help them stave off financial ruin through recovering their costs, expanding on their investments and improving quality," Ezz said. As a start, Ezz suggested that subsidisation of water and electricity utility prices be gradually phased out over the next four years. ENR's status received the largest share of the attention during the debates. Momtaz El-Said, the Finance Ministry's senior under-secretary, explained that as part of the government's economic reform programme in 1990, it was planned that train ticket rates would be gradually liberalised over a 10-year period. "The rates were raised by 10 per cent, but the government did not complete the liberalisation programme for social reasons," El-Said said. The ENR's losses have resulted in its poor performance, which, in turn, was the major reason for the 20 February Upper Egypt train disaster, Ezz said. Ebeid, however, saw no reason for distress over the conditions of economic authorities. "Out of 62 economic authorities, three generate enormous revenues: the Suez Canal Authority [LE9 billion], EGPC [LE8 billion] and Telecom Egypt [LE3 billion]. The total of LE20 billion generated are used to cover the losses incurred by the rest of the economic authorities and some is left over to meet other needs as well," he said.
