CAIRO - Narrowing Egypt's budget deficit will be the target for the Ministry of Finance this year. But more socio-economic pressures are expected to nag the man in the street, analysts say. Reducing the deficit would necessarily mean raising the State's revenues by expanding tax policies or slashing public outlays to an extent that might lead to poorer services, particularly healthcare and education, analysts add. Minister of Finance Youssef Boutros Ghali made it clear that the objective in the fiscal year (FY) 2010/2011 is to bring the budget deficit down to 7.9 per cent of gross domestic product (GDP). The country's budget deficit stood at 8.1 per cent of GDP in FY 2009/2010. Egypt's fiscal year begins on July 1. The country's GDP stood at LE1.2 trillion in FY 2009/2010 and is expected to hit LE1.3 trillion in FY 2010/2011, according to official data. By FY 2014/2015, the Egyptian Government foresees a budget deficit of around three per cent of GDP. Egypt seeks to replace the current sales tax regime with the value-added tax (VAT) system, which is forecast to pump more cash into the country's coffers. The State's revenues from sales tax totalled LE30.7 billion in FY 2009/2010, according to the Ministry of Finance. Total taxes on commodities and services are forecast to hit LE80.9 billion in FY 2010/2011. Value-added tax is a type of indirect tax that targets a commodity or service. In the VAT system, a sum of money is levied at a particular stage in the sale of a product or service. But how would this new mechanism help narrow the gap? “The VAT system is wider than the sales tax. Besides, it puts an end to double taxation that may occur in the sales tax regime. The end consumer may pay tax on an item that was taxed before. The new system will guarantee tax justice,” Sherif Shawqi, a researcher at Alexandria University, told the Egyptian Mail in an interview. “Containing the State budget deficit will depend on sustaining economic growth. An accelerating pace of growth will ensure more financial and monetary stability,” Shawqi said. The economy has been “resilient to the crisis”, as the International Monetary Fund (IMF) put it last year. “Financial contagion was contained by limiting direct exposure to structured products and low levels of financial integration with world financial markets. Sustained and wide-ranging reforms since 2004 reduced fiscal, monetary and external vulnerabilities and improved the investment climate,” the IMF said in a report on the health of the Egyptian economy. The Government spent LE24 billion ($4.1 Billion) in the past two years to stave off repercussions of the global downturn, which swept over the world in 2008. The country's economy grew by an average seven per cent of GDP prior to world recession. Egypt's economy slowed to 4.7 of GDP in FY 2008/2009 from an average of seven per cent in the previous two years. In FY 2009/10, it picked up by 5.2 per cent. “Subsidies will remain the focus of public spending. Rising world prices of commodities, especially food and energy, may add more pressure on the State budget,” he explained. Subsidies for energy and staple commodities stood at LE66.5 billion and LE16.8 billion in FY 2009/2010 respectively, according to the Ministry of Finance. In FY 2010/2011, while energy subsidies are expected to rise to LE67.6 billion, staples on ration cards are seen to fall to LE13.6 billion. Roughly 65 million Egyptians benefit from the ration card system. ”Inflows of foreign direct investment (FDI) will also play a role in pushing growth rates,” he added. Over the past six years, Egypt has taken a raft of measures to boost growth rates and attract more FDI inflows. Since 2004, Egypt has netted $49.2 billion in FDI. “These (reforms) bolstered the economy's durability and provided breathing space for appropriate policy responses,” the IMF said. According to the IMF, if revenues perform better than expected as a result of strengthening activity, “it would be prudent to save these.” So, a reduction in spending is advisable to save some of the revenues. But subsidised bread, which is sold at LE0.05 per loaf, took alone LE11.6 billion in FY 2009/2010. The Government has earmarked LE10.5 billion in FY 2010/2011 for bread. Minister of Trade and Industry Rashid Mohamed Rashid said in November that a Russian ban on wheat exports might burden Egypt's budget by an extra $400-$700 million in the fiscal year (FY) 2010/2011. The most populous Arab country of more than 80 million imports nearly 50 per cent of its annual wheat needs, estimated at 14 million tonnes per year, according to the Ministry of Trade and Industry.
