CAIRO: Despite the continuous stream of government reports of a historic resurgence in the country’s economy, some prominent economists are sounding alarm bells over the ongoing increase in overall public debt.
Gawdat El Malt, chairman of the Central Agency for Public Mobilization and Statistics (Capmas), directed sharp criticism Monday to the People’s Assembly Planning and Budget Committee in a meeting attended by Minister of Finance Youssef Boutros Ghali.
“The problem is not with borrowing money because all governments borrow money, El Malt said. “The problem is we are not borrowing just to sustain ourselves, not for investment.
Public debt has ballooned from LE 246 billion in 2000, representing 72 percent of gross domestic product (GDP), to LE 550 billion by Q3, 2006, representing 88 percent of GDP, according to the Ministry of Finance (MOF).
Still, the government points out the 2006 number is a vast improvement as it only grew by 8 percent over the comparative period in 2005, compared with 17 percent growth the previous year. The LE 511 billion figure recorded in 2005 represented 95 percent of GDP and an LE 81 billion increase over the previous year.
Final 2006 figures have not yet been released, but most economists expect public debt to remain more than 90 percent of GDP.
Adding to the government’s defense and hinting of positive indicators on the 2006 report to be released, Ghali said the economy grew in 2006 at a higher rate than that of the public debt growth rate.
Magdi Sobhy, economist at Al Ahram Center for Political and Strategic Studies, says few could doubt the improvement in the overall economy, but adds the government is still not targeting the most substantial reforms needed to drive public debt and budget deficit down. The budget deficit stands at more than 8 percent of GDP.
“Even if it is true that the [public debt] rate of growth has slowed down, it is a cumulative number that is already very large, Sobhy told The Daily Star Egypt.
“Besides, even the government will tell you most of the money used to payoff existing debt came from land-mark privatization deals such as the third mobile license and Bank of Alexandria sale. These are one-time events, not reoccurring ones.
One of the factors that has contributed to increasing public debt, and increasing budget deficit as a result, has been increasing government subsidization of energy to combat local inflation and encourage foreign direct investment, according to Sobhy and Ghali.
Despite allocating an all-time high LE 53 billion in the 2006-7 budget to energy subsidies, the government still had to raise fuel prices by 30 percent in July due to skyrocketing oil prices internationally. The decision’s fallout is said by economists to still be felt today in an inflation rate that has reached 12.2 percent in November, according to Capmas.
In October, Moody s Investors Service downgraded Egypt s government bond ratings to Baa3 with a negative outlook in local currency and Ba1 with a stable outlook in foreign currency. The report praised the modifications implemented by the government to the Egyptian Accounting Standards to meeting international ones, despite the immediate negative impacts on economic indicators.
The organization further stated its confidence in the ability of the government to implement its stated goals for further reforms.
Although the reclassification has led to major upward revisions in deficit and debt numbers, Moody’s believes that the clarification, along with other structural budgetary reforms, suggests that the Ministry of Finance is bringing public finances under control in a context of greater transparency, report Author Pierre Cailleteau said.
Indeed, the government target of reducing the deficit by 1 percent per year up to 2010-11, bringing the general government deficit below 4 percent of GDP, does not seem out of reach.
Sobhy says finding a solution to the public debt problem requires the government to liberalize the local economy from monopolies by effective implementation of the 2005 law and empowering the newly-formed Competition Commission.
Doing so, he says, will force producers to become more competitive on the local market and, in turn, produce higher-quality goods able to compete on an international level.
“Take Vietnam, for example, Sobhy says. “Not too long ago, they had a revolution of sorts that made them the top relocation destination for ready-made garments and shoe factories. They were able to produce high-quality goods at competitive prices and saw 20-plus annual increases in export figures.
“That’s what we need here. I think high oil prices helped our numbers look good in 2006, but we’re going to face a real problem sustaining those numbers in the coming years because oil prices are expected to drop.
