CAIRO: For the first time in Egypt’s history, local public debt has surpassed LE 680 billion, according to the Ministry of Finance.
Local public debt registered at LE 570 billion in September 2008, or 54.9 percent of the gross domestic product – its percentage of GDP is now up to 58.5 percent, according to the Finance Ministry’s report, publicized in local newspapers.
“The number is alarming, though not terrifying, Dr. Alia El-Mahdy, dean of the Faculty of Economics and Political Science at Cairo University told Al Masry Al Youm daily.
However, Simon Kitchen, economist at EFG-Hermes investment bank, pointed out that the figure needs to be put in context. “You can’t just look at it on the level of absolutes. If the economy is growing, it can support more debt.
He cited the more relevant figure of total government debt, which combines external and public sector debt.
“[National debt] has come down a lot since the beginning of the decade . since 2004 even . [at that time] both domestic and external debt combined exceeded 130 percent of GDP if you include the public sector. Now it’s about 70 or 80 percent, he explained.
Public debt was 84.7 percent of GDP in 2008.
That is not to say that spending concerns are unsubstantiated.
“The problem is the government is still running a high fiscal deficit. There is little prospect of debt ratios falling unless the government cuts its borrowing and reduces deficits. Of course, as a ratio to GDP, the number will improve if GDP grows, and if the government obtains higher tax revenues, Kitchen clarified.
The report by the Ministry of Finance listed the governments’ tax revenues as down by 5 percent from service and commodity tax, to LE 23.3 billion. Proceeds from customs tax proceeds were down 22.8 percent, to LE 4.7 billion, while corporate tax decreased by 26 percent to LE 9.7 billion. External debts totaled $30.5 billion until June 2009, but are now at $29.2 billion.
Asked to predict the government’s ability to generate revenues to spur GDP growth, such as with the newly enforced property tax, Kitchen said, “The property tax will have minimal impact, maybe half a percentage point of GDP. He listed other potential strategies for reducing debt.
“Another thing [the government] is thinking of is a value added tax. They’re also considering cutting subsidies. I don’t think this year . there’s the election for one thing. Also, they want to replace subsidies with cash transfers to the very poorest, and they want to make sure they’re well targeted. That will take time to prepare.
Dr El-Mahdy of Cairo University explained that a recent discussion at the university had mulled the various options for reducing debt, particularly as Egypt prepares to reduce its taxes on goods traded from the EU and Arab countries.
“If the government is reducing customs to zero between Egypt and the EU, and within the Greater Arab Free Trade Area, they have to figure out another way of collecting money.
El-Mahdy believes that micro and small enterprises should owe an easily calculated annual tax. “As has been done in Latin American countries, entrepreneurs should pay a simple tax, based on the size of their firm and its location. They should not have to wait for receipts to come in and bills to be prepared in order to calculate the amount owed, they don’t have the capacity for this.
She cited the taxation of taxi drivers, who pay LE 500 annually to renew their license, as an example of a successful effort by the government to distribute the tax burden and generate revenues.
She added she had heard rumors of a value added tax, but that, “there have been no laws or preparation for it, so I’m not so sure that it will happen. We already have a sales tax.
El-Mahdy wished to clarify her quoted statement to Al Masry Al Youm, which quoted her as saying that public debt is “still within the safe limits so long as it didn’t exceed 50 percent of GDP . She stated that at the time she was not aware that the figure exceeded 50 percent, explaining that, “in economic theory there are no thresholds for public debt as a percentage of GDP. it is a value judgment. In the EU for example, if the figure surpasses 60 percent, it is considered alarming. But some would say that even 80 percent is normal, especially at a time when the government is spending significantly in order to grow the economy.
In the US, for example, figures similar to Egypt’s approximately 60 percent were last seen in 1990. In 2009, the estimated percentage of debt to GDP exceeded 90 percent, with projections to top 100 percent by 2011.