CAIRO: Minister of Finance Samir Radwan raised the forecast for Egypt’s budget deficit to 9.1 percent of gross domestic product (GDP) for fiscal year 2011/12, from a previous 8.5 percent.
Before the recent uprising that ousted former president Hosni Mubarak, the deficit for the year ending June was estimated at 7.9 percent of GDP.
“The prediction of 8.5 percent of GDP deficit is somewhat accurate, but I believe it will be more around 8.8 percent,” said Mona Mansour, director of research at CI Capital.
Sultan Abou Ali, former minister of economy and foreign trade and professor of economics at Zagazig University, told Daily News Egypt, “The slowdown in production, increase in spending and slower growth of revenue are all reflective of an increase in public debt.”
Mansour explained that various factors may contribute to a higher deficit, including wage and subsidy increases.
“The government proposed to reduce subsidies, but has now put that aside due to the current situation,” she said
Increasing global oil prices will add pressure as energy subsidies account for more than 60 percent of Egypt’s total subsidies, but could be offset by lower production levels, she added.
Subsidies account for approximately 28 percent of government expenditure, according to Mansour.
Effective in April, salaries are expected to increase by 15 percent, which Mansour said will only add to expenditure. Although with workers’ strikes in almost every sector demanding higher salaries, that figure could further increase.
Tax revenues are expected to decline due to the lack of investments as well as private spending, which is anticipated to negatively affect corporate profitability.
“With businesses not operating as before, which accounts for 75 percent of total revenue for the government, this will also affect the deficit,” Mansour stated.
Mansour said not much can be done to change the outlook for the current fiscal year. “There is nothing the government can do this year except look on to the next fiscal year,” she said.
“They are trying to increase foreign investments, but that is being put on hold until more political reform is seen and there is more stability and security,” she added.
Revenue from tourism has dried up and exports have slowed, which further stresses the deficit.
“The role of the financial sector is a compensatory one, so for right now, a larger deficit is ok in order to compensate for the private sector,” said Abou Ali.
To activate and motivate the economy, he said, a larger deficit is ok for now, however, it reduces the government’s ability to improve education, health and social services.
Next year
Looking forward to the next fiscal year beginning July 2011, the government and business sector have a role to ease deficit pressures. “One should look forward to after the recession and move on from there,” said Abou Ali, suggesting that the tax rate be slightly increased.
“A reasonable increase in the tax rate gradually from 20 percent to about 30 or 35 percent would not be detrimental and would also reduce the budget deficit and help the economy,” he explained.
Abou Ali stressed the importance of creating an appropriate investment environment as well as properly targeted subsidies.
“Right now, a bulk of subsidies goes to the wrong people, to the higher income groups, and instead needs to be restructured to go to low income people and the poor,” he explained.
“The time is now to shift subsidies from indirect subsides to direct (monetary) subsidies,” he added.
“If the government does something about subsidies, the burden will hopefully be alleviated,” said Mansour.
Mansour added that higher consumer spending, companies resuming business normally as along with increased political stability should slightly ease the deficit burden.
