Egypt budget deficit hits 11% of GDP

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Egyptian Finance Minister Mumtaz Al Saeed announced on Wednesday its budget deficit reached 11% of gross domestic product for the fiscal year ending in June, far higher than the 8.6 per cent originally forecast.

The finance ministry attributed the rise to public sector salary increases and a drop in tax revenues because of faltering economic activity during the 18 months of political turbulence since the revolt which toppled Hosni Mubarak as president.

Industrial action and unrest among workers also deterred foreign investment and reduced tourist numbers, the ministry said in a statement.

The minister insisted that he was “keen to reveal the truth about the economic situation however negative it is, or however shocking some may find it”.

Meanwhile, the front page of Al-Ahram also reported that a “grinding financial crisis” and a “shortage of dollar liquidity” were to blame for fuel shortages.

The main state daily newspaper quoted an unnamed oil ministry official as saying the government owed $6bn to international oil companies and that it was able to meet only half the required $100m in weekly payments for its purchases of petroleum products.

A reduction in fuel subsidies, which account for more than 20% of the budget, is the key IMF demand for reforms.

Egypt’s Prime Minister Hisham Kandil said on Sunday he expected to reach a $4.8 billion loan deal with IMF in the next few weeks and is holding talks for additional budget support worth about $1 billion with the World Bank and the African Development Bank (AfDB).

Kandil said the government wanted to target fuel and other subsidies and would introduce a coupon or smart card system in October to ensure that only the poor had access to subsidised butane cooking gas.

Observers, however, are sceptical about Egypt’s ability to launch a coupon system in three weeks time. Coupons have been tested under the ousted Mubarak regime, but were never adopted for fear of provoking a public backlash.

“It would require lots if administrative work and an awareness campaign,” said Mohamed Abou Basha, Egypt economist at EFG-Hermes, the regional investment bank.

“This is difficult and requires time. As far as we know, the preparations have not been done yet.” The government might start with “low-hanging fruit” such as increasing natural gas prices to some industries, he said.

Second quarter figures published this week showed a sharp narrowing of the balance of payments deficit to $107m down from $4.25bn the year before. Abou Basha said the drop was the result of one-off influences such as a $1bn deposit by Saudi Arabia to shore up central bank reserves rather than a change of fundamentals.

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