The International Monetary Fund (IMF) called on Egypt last week to sort out its decades-long budget fix in the next fiscal year. The North African country seeks to slash the State budget deficit to three per cent of gross domestic product GDP in the fiscal year (FY) 2014-15 from an average eight per cent in the past two years. This is an uneasy target, given the current global downturn, analysts say. Earlier, Egyptian Prime Minister Ahmed Nazif said reducing the budget deficit to three per cent was delayed from 2012 due to repercussions of the global financial meltdown. Against a backdrop of growing population and widening subsidy schemes, it is doubtful that the Government would be able to achieve this target, experts say. "The delay is a direct impact of the global downturn, which has affected public revenues. Growing public expenditure has overburdened the State budget, and of course subsidies," Hany Riyad, an analyst at the Cairo-based Financial and Legal Consultants Centre, told the Egyptian Mail in an interview. "The Government expects a deficit of LE100 billion ($18.2 billion) in FY2009/10. But given that the State budget deficit surpassed LE57 billion in the first half of FY2009/10, we forecast a deficit exceeding LE115 billion, which would represent more than ten per cent of GDP," Riyad forecast. Egypt's State budget deficit stood at LE57.5 billion from July to December 2009, while the country's overall deficit for FY2009/2010 is expected to hit LE100 billion, according to the Ministry of Finance. Egypt is not the only country irked by a budget deficit as many other countries have this financial headache too. Greece, Spain and Portugal are among those struggling to control their budget gaps, prompting investors to dump the countries' assets and question the sustainability of the recovery in the global economy. Subsidies in Egypt are expected to hit LE95 billion in FY2008/09, Nazif said last month. Fuel subsidies are expected to total LE66 billion in FY2009/10, according to the country's Minister of Oil Sameh Fahmi. Meanwhile, tax revenues are expected to fall to LE145 billion from LE167 billion in the previous year as corporate results are poised to decline in the wake of the global downturn. Therefore, it is a must to slash public outlays and maximise receipts, according to Riyad. "Fuel subsidies should be lifted to cut public spending, and implementing value-added tax scheme would help increase revenues in the long run," he argued. Reducing the deficit by 1.5 to two per cent GDP in 2011 "would provide an upfront signal to investors that progress towards the medium-term objective is well under way," the IMF said. In a previous report, the Washington-based institution has said that the financial and economic crisis "is affecting the fiscal accounts of virtually all Fund members through several channels." "First, many countries have supported the financial sector directly, primarily through 'below-the-line' operations affecting governments' assets and liabilities, as well as operations giving rise to contingent liabilities," it said. "Blanket coverage has been provided in Egypt and Saudi Arabia; several other countries (Hungary, Indonesia, Mexico, Poland, and Russia) have committed themselves to provide more limited guarantees (e.g. trade credit to exporters and interbank lending)," the Fund said. To combat the economic slowdown, the Government has carried out a crisis stimulus plan featuring fiscal, monetary, and direct support measures in the form of LE15 billion in additional spending, including higher subsidies and social benefits. On the monetary side, the Central Bank of Egypt cut interest rates six times last year, reducing overnight deposit and lending policy rates by 325 and 275 basis points, respectively. "Running a state budget is more like a household budget. The ideal situation is a surplus. But growing public spending and limited revenues create a gap. Egypt's State budget deficit averaged 8.5 per cent in the past ten years," he said. "Wages, debt servicing, subsidies and investment are the main public outlays. Wages and debt servicing are a must, and no government could touch their funds. That leaves out subsidies and investment to be slashed," he explained. "Public investments are necessary to increase local demand and push the economic wheel. Subsidies will be the most vulnerable to be lifted gradually," he said, calling for value added taxation to pump more revenues into the State coffers. A value-added tax is assessed and collected on the value added to products in each business transaction. "A value-added tax scheme requires tamed inflation rates. Double-digit inflation may hamper an effective implementation," he added. Egypt's inflation stood at 13.6 per cent in January, against 13.1 per cent a month earlier, according to the State-run Central Agency for Public Mobilisation and Statistics (CAPMAS).
