The Egyptian budget for the year 2002-03 (beginning 1 July) forecasts a hefty jump in the deficit as increases in revenue fail to keep pace with government expenditure. The net final deficit according to projections in the Official Gazette published on 13 June will reach E9.9bn (1=E4.51), up 426% from E1.9bn in the previous year (See Table). The budget foresees a 121.9% climb in the total deficit to E17.4bn, with expenditure up 12.7% to E143bn, while revenue increases only 7.1% to E125.6bn. Prime Minister Atef Obeid has said that Egypt is committed to keeping its budget deficit at around 4% of GDP, which is currently at about 100bn. However, expressing little confidence in the numbers, economists believe that the government figures are seriously underestimating the deficit and suggest that it is more likely to total 6-7% of GDP in 2002-03. The 2001-02 budget had forecast a deficit of 2.6% of GDP and while closed accounts are not yet available some analysts expect the deficit to be much higher after the slump in tourist income which followed the 11 September attacks on the US. According to Credit Suisse First Boston analyst Tatiana Morozova, the 2001-02 deficit will tally 3.2% of GDP, exploding from the 0.1% seen in 1998-99.
The budget provides only basic detail on the specifics of deficit financing, suggesting this will be accomplished simply through domestic savings and sale of assets, and there is scant information on financing through foreign and domestic loans and credits. Sales of assets (privatization proceeds) are forecast to remain constant at E5bn, although many are skeptical that they will be realized, given the lagging pace of the privatization process. The figure is unrealistic according to Ahmed Rashad Moussa, Chairman of the Shura Council's economic affairs committee. While last year's privatization proceeds were also estimated at E5bn, they only generated E500mn.
Troublingly for Egypt, debt servicing is expected to increase substantially for both the current expenditure and capital sectors of the budget, with total domestic public debt servicing climbing to E33bn and total foreign public debt servicing jumping to E7.6bn, giving a combined total of E40.6bn, which is up 19.8% from the previous year's E33.9bn. The CBE report said that Egypt's foreign debt at the end of March was 27.8bn after climbing by 1.3bn dollars between July and March in fiscal 2001-02 due to the issuance of dollar bonds and the slump in the Egyptian pound against the dollar. The government's domestic debt was reported at E214.2bn at the end of March, increasing by E19.4bn between July and March in fiscal 2001-02.
It is also of some concern that public sector expenditure, which is currently at already high rates, is set to increase, with disaggregated figures showing salaries, subsidies, military, and pension figures all climbing. However, Finance Minister Midhat Hasanain noted that 41% of the budget's expenditure has been earmarked for social services, including health, subsidies, pensions, youth services, sports, culture and religion, with sufficient money set aside to ensure job opportunities for 750,000 young entrants to the workforce to help curtail Egypt's growing unemployment. Current expenditure, at E107.9bn, continues to dwarf investment expenditure, which will only reach E20.4bn, although encouragingly this is up from the previous year's E15.3bn. For comparative purposes, the latest government statistics put Egypt's year-on-year inflation at 2.5% in March this year, which is unchanged from February and up only slightly from the 2.4% seen in March 2001, suggesting that it is remaining relatively stable.
The budget envisages a sizeable and growing portion of revenue coming from taxes and customs charges, prompting accusations in an Al-Ahram Weekly 27 June-3 July report from Ali Lofti, a former Prime Minister and member of the consultative Shura Council, that the figures are exaggerated. He noted that in the 1999-2000 budget taxes, customs and sales taxes were expected to generate E54.5bn, but ended up bringing in only E48bn. Furthermore, customs and tax administrations have failed to collect revenue for 2001-02, according to a report in Al-Wafd on 21 July. The three administrations' accounts remain unclosed with E70bn still payable with sources at the Finance Ministry attributing the shortfall to the liquidity crunch suffered by traders and business owners as a result of the dollar's strength against the Egyptian pound. However, Mr Hasanain insists that the figures can be realized, and points out that the 1999-2000 budget shows that receipts from taxes are continuing to increase, climbing from E16.3bn in 1995-96 to E22.2bn in 1999-2000.
Suez Canal receipts, one of the country's main foreign exchange earners, are forecast to climb to E4.1bn from the previous year's E3.7bn, although petroleum revenues, another key foreign exchange generator, are set to fall to E4.5bn from E4.7bn. Tourism, which outranks both petroleum and the Suez Canal in terms of foreign exchange revenue, remains a wild card due the unpredictable nature of the industry. Optimism is growing after a pickup over the last few months following the slump after the 11 September attacks on the US, although the improvement is not yet sufficient to make a fundamental difference to the economy. "There has only been a slight increase in tourism and we need to see a strong recovery to get the economy moving again," notes Mardig Haladjian, Vice President - Senior Credit Officer, at Moody's. Others are more pessimistic in their assessment and JP Morgan notes in a 2 July report that the conflict between Israel and the Palestinian Authority is having a negative impact on the Egyptian economy and warns that tourism and capital inflows will be adversely affected.
The recent improvement in tourism -- much from Arab tourists avoiding Western cities -- has increased foreign currency inflows and helped to ease pressure on the Egyptian pound, notes one local economist. The Egyptian pound was trading at about 1=E4.90 on the black market last week, which is an improvement on the levels of over 1=E5.40 seen at the beginning of this year. Also helping to ease pressure on the Egyptian pound is the weakening dollar, which has fallen on the back of a crisis of confidence in US accounting procedures following the collapse of Enron and its auditor Arthur Andersen, and the disgrace of US telecommunications company WorldCom, which admitted to inflating earnings by nearly 4bn.
Despite the easing downwards pressure on the Egyptian pound, local economists fear it is simply a temporary respite, and that in the absence of fiscal reform, Egypt could continue to face a foreign exchange liquidity crunch as the dollar rebounds. "The problems are still the same and regardless of the black market rate improving, Egypt has an inflexible policy," said one local economist. Critics would like to see the Egyptian Government phase out its official exchange rate (currently at 1=E4.51 following the 14 January 0.2% devaluation) and gradually let it float freely against other currencies. However, the government has continued to resist due to the potential domestic unrest that may ensue, and as it has defended the peg it has has whittled away it foreign exchange reserves, giving it less of a cushion in the future (MEES, 21 January). Questions continue to arise over the extent to which Egypt has dug into its foreign currency reserves to prop up the pound because the figures remain relatively opaque (MEES, 4 March).
Fiscal reform, accompanied by a continued commitment to the privatization process, is the way to bring down the country's growing debt load, according to both local and international economists. Unfortunately, the government continues to window dress with small scale reforms without tackling the fundamental problems (MEES, 25 March). An example is its recent removal of the 5% limit on the 12 most actively traded stocks on the Cairo and Alexandria Stock Exchange. "While this is a good move, the stock market is reflective of the economy and these little policies will not spur the market and energize the economy unless they are coupled with macro-reforms," warned one economist. She points out that the Egyptian government also needs to reaffirm its commitment to the privatization process. "It keeps announcing the privatizations, such as that for Misr Hotels, but nothing has actually happened recently," she complains (MEES, 18 March).
The government has also tried to reduce imports in an attempt to manage its foreign currency shortage, yet economists generally view this as a band-aid measure. A July report by the Central Bank of Egypt ascribed the expanding surplus on the balance of payment current account during the first quarter of this year (193.5mn versus 171.6mn in the year-ago period) to a 29% drop in the trade balance deficit as a result of a 22.1% decline in import payments and 13% decline in export payments, with the latter due to lower oil exports.
Economists say that the government window dressing is failing to alleviate the growing concern stemming from the increases in borrowing as it tries to plug up the gaping deficit. A recent report by the Central Auditing Agency covering 1995-2000 registered foreign borrowing and assistance at a substantial E15bn. Recent attempts to borrow money from international aid agencies followed the precipitous fall in foreign exchange income as the tourist industry slumped after 11 September. International donors pledged to give Egypt 10.3bn (including 2.1bn for quick disbursement) at the Sharm el-Sheikh conference in February (MEES, 11 February), but there is much uncertainty surrounding these funds and it is not known if the country will ultimately receive all of the aid. With the slight pickup in tourism and improvement in the foreign exchange situation, Egypt's government said a couple of months ago that it had decided not to take up the International Monetary Fund's offer of a 500mn compensatory funding facility (CFF). MEES understands that at the annual consultation meeting that the IMF attended in Egypt in the first half of July Egypt made no request for aid and that discussions covered a broad range of macro economic policies, which did not include loan discussions. However, an IMF source told MEES that the fund is "still open to them making a request."
The Egyptian Government's failure to take the loan is being seen by many as a further attempt to stall on reforms, since the CFFs are typically accompanied by conditionality. This 500mn offer is expected to require exchange rate liberalization, although the IMF has not yet released details of all the requirements. "Egypt's lack of understanding over the depth of the crisis they're in is illustrated by the government turning up its nose at the IMF loan," notes one local economist, pointing out that if Egypt is even failing to recognize the size of its budget deficit, it doesn't bode well for its commitment to put in place the far-reaching economic reforms needed to reduce its reliance on hand-outs from international aid agencies. Rating agency Standard & Poor's would appear to agree and on 22 May it lowered Egypt's long-term foreign currency issuer credit and senior unsecured debt ratings to BB from BBB-, bringing them down to speculative status or what is commonly called "junk" (MEES, 27 May). S&P said that there is little chance to reverse the deterioration because financial and structural reform is being carried out at an excruciatingly slow pace.
Egyptian Budget 2002-03 (EMn)
Domestic Public Debt Service
Foreign Public Debt Service
Commodities and Services
Miscellaneous Current Expenses
Surplus on Current Expenditure
Sales and Service Taxes
Other Recurrent Revenues
Suez Canal Revenues
Other Economic Entities
Public Sector Companies/Agencies
Central Bank Revenues
Other Current Revenues
Financed from Reserves
Finances from Net Repayments/Interest
Local and Foreign Grants
Financed by Savings
Financed by Foreign/Domestic Credits
Capital Transfers (out)
Domestic Public Debt Service
Foreign Public Debt Service
Transfer Deficit on Economic Agencies
Capital Transfers (in)
Net Capital Deficit
Foreign and Domestic Loans and Credits
Sale of Assets To Finance Investment