CAIRO: Egypt has only a small window of opportunity after Sunday’s parliamentary election to push through politically unpopular economic measures to help it reach the 7 percent growth it says is needed to reduce unemployment.
By borrowing to finance a large budget deficit, the government risks crowding out lending to private business. Officials favor early action to reduce the gap, hoping that any discontent will cool before next year’s presidential contest.
After the parliamentary vote, attention turns to a presidential poll expected in the second half of 2011. President Hosni Mubarak’s current six-year term runs to September.
Neither vote is likely to weaken the ruling National Democratic Party’s grip on power, but the government remains sensitive to the timing of austerity measures that might cause public wrath to erupt in the run-up to the presidential poll.
"Memory is short," said a government official who asked not to be named. "If we do it now, they will have forgotten."
Among deficit-cutting steps on hold are a real estate tax, a value-added tax (VAT) and more effective targeting of subsidies to the poorest that would hike the price many consumers pay for subsidized petrol and cooking gas.
Many Egyptians are deeply suspicious of any economic reforms, viewing them as designed to make the rich richer at the expense of the poor, analysts say.
That may be one reason why cost-cutting measures have been deferred until the parliamentary election is out of the way.
"Any increase in prices now, given the current inflation and unemployment rates, would reflect badly on the (ruling) national party in the parliamentary election even if the government does forge the vote," said political analyst Nabil Abdel Fattah.
The government insists voting is free and fair.
"It would be hard for it to convince the people that a big number of people voted for the national party after it raised prices," said Abdel Fattah, who works at the Al-Ahram Centre for Political and Strategic Studies.
Costly subsidies
The government says it sells petrol and butane cooking gas not just below their international price, but below their production cost. As a result, subsidies, mainly for energy, eat up around 25 percent of the state budget.
The burden has been starving infrastructure, education, and other programs needed to boost economic growth and has helped inflate the budget deficit, which was a hefty 8.1 percent of gross domestic product in the year to end-June.
"If you look out two to three years, you have got to start seeing that deficit start being cut," said Oliver Bell, head of emerging markets research at Pictet Asset Management.
"You have got to see the subsidies tackled, and these are not politically easy things to do, so you want a stronger government," said Bell, who is based in London.
The government has financed the deficit mainly by selling domestic treasury bills and bonds. Analysts say that by doing so, it has crowded private borrowers out of the market.
This has been mitigated over the last year by a thriving carry trade, with foreign investors taking advantage of a flood of cheap dollars, from US efforts to boost its economy, to buy high-yielding Egyptian government securities.
Market Jitters
Foreign investors held LE 59.9 billion ($10.4 billion) in treasury bills in August, up from LE 9.1 billion a year earlier, according to central bank statistics.
Election uncertainty has yet to deter foreign appetite for Egyptian debt, but adds to risks of volatility. The usually steady pound fell against the dollar in October and November, dipping 1 percent in a few days to a five-year low.
"I guess it creates that kind of a backdrop where everyone’s a bit jumpy," said another analyst based outside Egypt.
The competition from foreign investors for government paper is spurring local banks to expand domestic lending, analysts say. Yet at the same time the inflows of funds threaten to fuel inflation, already running at 11 percent.
Prime Minister Ahmed Nazif has said Egypt needs a minimum of 6 percent growth to absorb new entrants to the labor force and 7-8 percent growth to dent unemployment.
Egypt’s economy grew by around 7 percent in each of the three years before the global economic crisis, but growth then slipped to 4.7 percent in 2008/09 and 5.1 percent in 2009/10.
Angus Blair, head of research at Cairo-based Beltone Financial, said the government was unlikely to reduce overall spending on subsidies before next year’s vote, but in the meantime might target them better to the neediest people.
"Subsidies by nature are inefficient and expensive. Egypt, with its growing population, doesn’t have any alternatives" except to reduce them eventually, he said.
Additional reporting by Yasmine Saleh and Edmund Blair
