Economists debate Egypt’s fiscal performance

Amr Ramadan
8 Min Read

CAIRO: The Egyptian government recently touted the success of its stimulus programs in achieving favorable GDP growth rates, deficit and debt reductions as well as structural reforms.

Questions remain though regarding whether this growth has succeeded in addressing long-standing issues of poverty, welfare spending, inflation and unemployment.

Magda Kandil, executive director of the Egyptian Center for Economic Studies, and Jennifer Bremer, chair of the public policy and administration department at the American University in Cairo (AUC), spoke to Daily News Egypt about the successes and shortcomings of the government’s fiscal performance and prospects for the current financial year.

Egypt recorded GDP growth of 5.9 percent in the three months ending June, and 5.3 percent for the 2009/10 fiscal year, according to Cabinet reports released in July.

A Ministry of Finance statement released recently said that preliminary budget figures for fiscal year 2009/10 show that the Egyptian government successfully outperformed its deficit target of 8.4 percent of GDP, with the preliminary deficit standing at less than 8.3 percent of GDP.

The statement added that total gross debt ratio of budget entities was kept steady over the past three years within a range of 80-82 percent of GDP, but down from 121 percent before implementing a slew of structural reforms in 2004/05, and despite increased public spending which totaled some 3 percent of GDP in face of the two crises.

Kandil’s analysis reveals that although the growth, deficit and debt rates are favorable, the government’s projections were conservative to begin with.

“The government underestimated growth and the target for revenues, which came out better than anticipated,” she said.

For her part, Bremer did credit the government’s efforts in reducing the deficit, but she had reservations as to the extent of this “success.”

“The government is doing a good job of gradually reducing its deficit, which nonetheless remains too high as a share of the total economy,” said Bremer. “By comparison, the upper limit for the Euro group is supposed to be 3 percent, compared to Egypt’s 8 percent plus, and most of the countries, except the UK, are within that range, despite the crisis."

Discussing the governments chosen policies, Kandil cited over-performing revenue streams as the main catalyst.

According to the ministry statement, the main underlying factors are that income, sales and customs taxes outperformed their suggested targets. Preliminary tax receipts from non-sovereign items outperformed the budget by 11 percent.

“The effects of higher revenues shrank the budget deficit compared to target and contained the deficit, despite higher spending by the government on infrastructure and capital as part of the stimulus package,” Kandil said.

“Also, efforts to contain the wage bill and spending on goods and services may have been discretionary to contain current spending at a time when savings were necessary to stimulate the economy via higher capital spending,” she added.

The flipside

While the government has been able to achieve these favorable statistical outcomes, both analysts agreed that it has not been successful in addressing social ailments such as poverty and welfare spending, as well as inflation and unemployment.

Kandil said the government’s stimulus packages managed to keep growth at a reasonable rate and to keep inflation within its comfort zone. Annual urban inflation rate came in at 10.7 percent in June.

However, she said, “the higher growth did not help to bring the unemployment rate down, which remains high, reflecting lack of success to increase the value added in sectors that would generate higher returns to a large group of the working class.”

“In addition, there are concerns that growth has not helped poverty as the return on investment is circulating within a small segment of the population,” she added.

“Further, there is a lot of waste in government spending, particularly untargeted subsidies in the form of subsidized prices of fuel and food products that highly benefit those who do not need them and constrain government resources from addressing other social priorities for those who need such support,” Kandil said.

Bremer agreed regarding the importance of subsidy reform and said that more needs to be done to bring down inflation.

“The poor cannot negotiate higher wages as prices rise, so they are hurt the most. Even so, much more needs to be done to ensure that growth creates more jobs and to improve the efficiency of income transfer programs, such as subsidies.

“Sooner rather than later,” she said, “the government needs to reverse the decline in the quality of key public services, notably education but also healthcare.”

One of the main obstacles facing the government in fiscal year 2010/11 is fiscal consolidation, Kandil said.

“Fiscal consolidation should top the priority,” she said. “The high debt ratios and deficit figures, albeit below target, remain alarming and constitute a drag on private activity as the government finances the deficit mostly domestically and banks prefer to mobilize liquidity to lend the government, reducing available credit for private activity.”

She pointed out that the bank credit to the private sector remains low and asserted that “it is crucial [that] the government aims at lower deficit targets going forward to bring the debt ratio down and increase investors’ confidence in the sustainability of public finances in order to boost private investment and attract long term FDI flows.”

Acknowledging that it is an elections year, Bremer said that elections always create a temptation “to put off tough reforms and to shovel benefits out the window to the hopefully grateful populace.”

“Egypt is no exception to that, so election years are not favorable to reform.”

Nevertheless, Bremer recommended that the Egyptian government emulate the reforms that were the basis of the Chinese success. “The government needs to improve education, which benefits workers as well as employers by making workers more productive,” Bremer said.

“In addition, they need to continue hacking away at the thicket of regulations and approvals so business can be more efficient and to make it more attractive for informal companies to move into the formal sector, so that small firms are not trapped on the lower rungs of the ladder.”

Finally, she advised giving taxing authority and more decision-making power to local governments and then holding them responsible for delivering growth in their respective areas. “These were all elements of the Chinese success formula, in one way or another,” she said.

Although many would be cautious to compare Egypt’s relatively diminutive economy with China, Kandil said that with the appropriate reforms, the country has all the necessary resources and advantages to realize the 10 percent growth China and India are currently achieving.


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