Slowdown raises Egypt's budget deficit

Annelle Sheline
5 Min Read

CAIRO: Government spending decreased by almost 7 percent in the past six months, falling from LE 163.5 billion to LE 152.4 billion, according to figures released by the Ministry of Finance.

Revenues fell even faster to LE 94.7 billion, a drop of 25.8 percent as the deficit rose to almost 5 percent of GDP at LE 57.5 billion. Last year the deficit registered at 3.5 percent of GDP.

According to a ministry statement, “this rise in the budget deficit reflects a slowdown in local economic activity and the effect of the global financial crisis on the state general budget.

Although the budget deficit widened as the revenue to spending ratio descended, Egypt’s drop in public spending in the midst of the global financial crisis is nearly unique. Keynesianism dominated economic policy across much of the world, as governments from the US to Saudi Arabia injected short-term public spending in order to generate economic growth and job creation.

Reham ElDesoki, chief economist at investment bank Beltone Financial, clarified that the fact that the numbers decreased is misleading, as Egypt’s policy makers actually increased spending budgets.

“Egypt’s spending actually increased by double digits. if you look at capital spending, [such as investments in infrastructure], it’s increased 27 percent, and government wages by 14 percent.

ElDesoki explained, “The drop in total expenditures was mainly due to a 45.8 percent decline in spending on subsidies, constituting around 25 percent of total expenditures, as international food and energy prices dropped from their peak levels in 2008 while the drop in revenues resulted from an 8.5 percent decrease in tax monies.

“This was not a cut in subsidies, she continued. “The drop in subsidy spending is out of their control. Had [decreased energy and food prices] not happened, we wouldn’t have seen a decrease.

Although energy and food prices tumbling from their 2008 highs represents a boon for the Egyptian economy, which would not otherwise have weathered the global economic crisis as gracefully, the figures reinforce the government’s lack of control over significant swaths of its finances and Egypt’s subsequent vulnerability to global market fluctuations.

Even Egyptian policy makers with beneficent intentions often find their hands tied, as in the case of falling revenues. ElDesoki’s analysis for Beltone gave tax revenues, specifically income taxes and customs, as constituting around 70 percent of total revenues.

She explained, “Income tax fell mainly because of the drop in tax on corporate profits from the Egyptian Petroleum Company, the Suez Canal and other companies. Customs revenue fell because of the slower growth in trade.

Again, the government can do little to squeeze these revenue sources in an unfavorable global climate. Efforts to enhance internal taxes, such as the impending property tax, represent a more reliable but politically prickly source of funding.

Sales tax revenues, for example, increased by 2 percent, while property taxes increased four-fold. ElDesoki shed light on the property tax rise as due to “taxes on treasury bills and bonds. it was 0 in the first half of 2008/09 and LE 3.1 billion in the first half of 2009/2010. Treasury bills and bonds come under property taxes.

Given Egypt’s relatively strong growth, policy should be able to shift away from deficit spending towards narrowing the budget gap. Attempts to cut public spending in the long-term have benefited the economies of Finland, Sweden, Canada and New Zealand for the past three decades, according to the Guardian’s coverage of a briefing prepared for British parliament, following the UK’s decision to pursue spending decreases.

But Egypt may find its own attempts to cut spending thwarted. ElDesoki pointed out that the LE 74 billion allocated to cover the year’s subsidy costs may be insufficient in the face of rising prices of food and energy, “resulting in a budget deficit of 9.1 percent in 2009/10.

Yet ElDesoki expects “the budget deficit to decline to 7.1 percent in fiscal year 2010/2011, as revenue reforms are implemented, reaffirming that if Egypt can begin to rely less on the outside world and more on internal sources of revenue, greater stability is likely.

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