Egypt’s approved 2011-2012 fiscal year budget plan, which still carries a high deficit and no plans for accepting foreign loans, raised concerns among experts in an economy that has been pummeled by a revolution.
In the second draft of the budget, which was approved by the country’s ruling military council, expenditures will be LE 491 billion, while deficit is set at LE 134.3 billion, 4 billion higher than last year.
Minimum wage, on the other hand has been reduced to LE 684, after Egypt’s new cabinet had proposed last month that it would be LE 700.
Government employees, who are two million, will be receiving LE 9 billion in wages.
Health expenses decreased from LE 24 billion to 23.8 billion, while education spending went from LE 55 billion to LE 52 billion, and housing from LE 21 billion to LE 16.7 billion.
Hossam El-Hamalawy, Egyptian socialist activist known for his famous blog, Arabawy, which discusses Egypt’s politics and social issues, labels these moves as “shocking” and austere measures.
Experts, however, believe there are vital steps the government has not considered when devising the budget.
“The government has pursued the budget as if it’s capable of doing it completely on its own,” said Magda Kandil, executive director for Economic studies.
“I don’t think the government will able to get to the solution on its own, they have to work closely with the private sector, the businesses, and the economists.”
Currently, the new budget cut down subsidies and grants from LE 95 billion to LE 90 billion.
For Kandil, this number is not enough especially when the government does not spend “wisely.”
“The way this money is spent could be revisited in order to really be providing social justice,” she said. “We could put this money towards education, health, and several other departments that need improvement in the country.”
As investor confidence has been shaken after the events of the January 25 Revolution, Kandil believes that the budget’s approach to overcoming obstacles will also have to change.
Revising the way the country deals with the private sector is crucial as they will be valuable in moving the country’s economy forward during this murky transition.
“Whatever the government tries to do at this point will be very little and it may not help,” she said.
“Policy should be focused on supporting the private sector, the budget is one instrument and this is why we’re trying to advise the government on what to do.”
Before the revolution, it was onerous for small and medium enterprises (SMEs) to export or produce goods, as there were no transparent policies outlined by the government that could easily facilitate business for these companies.
Today, if these local enterprises are going to invest in order to revive the economy, their issues must be addressed.
“Let’s focus on the local investors, if we get domestic investors to be confident again in the Egyptian market, the foreign component will come voluntarily,” Kandil pointed out.
“Sitting down with SME’s and seeing how we can facilitate in order to address problems in terms of laws and regulations is what we should do,” she added.
According to the Ministry of Finance, devising a new approach to alleviating debt and budget deficit is one of the plan’s top priorities.
The budget states that overall debt will amount to 81.1 percent of production; reaching LE 1,274 billion in June 2012 and interest on loans will reach 12.5 percent after standing at 10.7 percent in fiscal year 2010-11.
Moreover, internal state debt will grow at a rate of 13.3 percent reaching LE 11.9 billion, while foreign debt will increase by 2.8 percent from the previous fiscal year reaching LE 165 billion.
Egypt recently declined a $3.8 billion loan from the World Bank, which according to Hossam Bahgat, director of the Egyptian Initiative for Personal Rights (EIPR), the bank had asked Egypt to pass a freedom of information law, disclosure of assets and a ban on conflict of interest for government officials as well as full budget transparency including hidden "special funds".
The government, however, has declined the loan due to "stipulations".
Since the country will not be borrowing, it is not yet clear how the country will be dealing with deficit, inflation, as well as expenses.
“Although the decision has been taken, the rationale to decline the loans is not clear,” said Kandil. “I take issues from an economic point of view because the interest rate was only at 1.5 for $ 3 billion and the IMF confirmed there were no hidden stipulations.”
Currently, the rate of interests for domestic loans is at 12-13 percent.
“The loans would’ve amounted to huge saving in terms of interest payment and it is needed because we still have a huge deficit, despite attempts to scale it down by the government,” Kandil added.
Kandil also argued that accepting the loan would have given the country a lot of credibility in the eyes of investors, as it would show that the government is confident in accepting and paying back what it borrows.
The budget expects to increase local production from LE 1,373 billion in 2011 and 2012 to LE 1,570 billion.
Domestic debt will increase by 13.3 percent to LE 11.9 billion and foreign debt will increase by 2.8 percent to LE 165 billion.
The budget also proposes that the average salary increases from LE 17,324 to LE 19,447.
The financial plan also takes into consideration new reforms such as tax on cigarettes, tax amendments, and increasing the tax base.
While the plan may have its shortcomings, Kandil hopes that the government will consider changing the way the state spends.
“Although we are concerned about the size of the deficit, the decisions have been taken so let’s start from this point and tell the government what to do and go forward,” she added.
“We need to continue seeing a scale down of spending, change the way we spend, and see more subsidies that are in support of production.”