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Budget deficit déjà vu
Published in The Egyptian Gazette on 11 - 05 - 2011

CAIRO - Last week, Egypt's Minister of Finance Samir Radwan forecast a State budget deficit of 10 per cent of the gross domestic product (GDP) in the fiscal year 2011/2012, which begins on July 1.
Cheerful as usual since he took office in February, Radwan said Egypt would need $12 billion investments to get the economy back on track.
As production rates have taken a blow since the start of the January 25 revolution that ousted president Hosni Mubarak, the country's sovereign revenues from taxes are expected to fall by at least 50 per cent, analysts say.
Taxes account for 65 per cent of Egypt's public finances, according to official data. Therefore, Egypt's macroeconomic landscape seems to be gloomy, taking into account the country's public debts, which have breached safety levels, accounting for 97 per cent of GDP. Debts total LE1.08 trillion, including an external debt worth $34 billion.
But the picture is not so bleak when compared to countries in the European Union for instance. In 2010, Ireland's budget deficit stood at 32.4 per cent of GDP, the largest government deficit in the Eurozone, according to the EU statistics office Eurostat.
In 2010, Greece had a government debt of 142.8 per cent of GDP. Italy, Belgium and Ireland had government debts at 119, 96.8, and 96.2 per cent respectively, according to Eurostat.
For almost four decades, budget deficits have been chronic symptoms of Egypt's economy. Last week, Egyptian former minister of economy Sultan Abu Ali said that the budget deficit "should not make us worry". "We faced budget deficit before," he said, referring to the 1980s.
In the fiscal year 1987/1988, the budget deficit rose to an historic record high at 33.5 per cent of GDP. Foreign debts back in 1987 totalled $42.3 billion, accounting for an all-time high at 173.1 per cent of GDP, according to World Bank figures. The predicament is not new then.
"Egypt's economy is not weak, but the economic management is," Abu Ali told a forum on Egypt's economy after the January 25 revolution in South Valley University in the Upper Egyptian city of Qena last week.
Abu Ali made it clear that the revolution "will have good impact in the long run".
"It [the revolution] has turned Egypt into an economic tiger on the Nile, as it [Egypt] boasts the human capital, which was deemed a foe by the former regime. Countries like Japan and Switzerland have nothing but their human resources," Abu Ali explained.
Revolutions throughout history had temporary economic repercussions. Political turmoil affects investment and production rates. A slump in major sectors is natural. It fades away when the political upheaval comes to a halt.
On the sidelines of a business forum held in Cairo last September, Richard Banks, the Middle East Director at the Euromoney Conferences, said Egypt was in political transition. But Banks and all participants never thought a public revolt would topple Mubarak's regime after only 18 days of demonstrations.
Decades-long inflation remains the country's most serious challenge in the coming years. Inflation in the most populous Arab country of 80 million people rose to 11.5 per cent in March from 10.7 per cent a month earlier, according to the State-run Central Agency for Public Mobilisation and Statistics (CAPMAS).
Annual inflation stood at 21.1 and 16.2 per cent in 2008 and 2009 respectively, according to CAPMAS. It reached a record high of 23.6 per cent peak in August 2008.
Inflation has persisted for nearly 30 years; since Mubarak took the helm in 1981 after late president Anwar el-Sadat. Inflation in 1988, 1989 and 1990 stood at 18, 19.3 and 20.4 per cent respectively, according to CAPMAS.
Growth rates were slowing in 1988, 1989 and 1990 at 3.5, 2.7 and 2.3 per cent of GDP respectively. Growth stood at less than one per cent in 1991, according to World Bank figures.
Inflation has caused chronic imbalance between costs of living and individual incomes in Egypt. It also has widened the budget deficit, weakened the purchasing power of the pound and nourished speculation on land and real estate.
A budget deficit has to be financed by issuing Government debt to domestic or overseas investors. Consequently, if the budget deficit rises to a high level, the Government may have to offer higher interest rates to attract buyers of public debt.
In other words, higher Government borrowing at present would inevitably increase taxes in the future, and this in turn would squeeze spending by corporations and households.
Alarmingly, accumulated debt would force the Government to spend more annually to service debts. Seeking 'any port in a storm' as the old English proverb goes, the Government has to redefine priorities, so that the focus will be on infrastructure and labour-intensive investments.


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