Egypt’s new finance minister is on a mission that is seemingly impossible: he has pledged to reduce the budget deficit while at the same time spending more to get the economy moving, create jobs and buy some social peace.
Ahmed Galal, a member of the interim government installed by the military in July, told the Financial Times that $12bn in loans and grants from Arab countries would help reduce the deficit without forcing the adoption of “contractionary policies” that would further shackle an already sluggish economy.
“You want to boost economic growth by increasing public investment, which has always been the victim of all attempts at fiscal responsibility in the past,” said Mr Galal. “At the same time you want to do something to bring about greater equality. The only solution for this is to bring fresh money from outside.”
However, the former World Bank economist cannot undertake drastic reform as a member of an interim government against a backdrop of low-level violence and political uncertainty.
Successive governments have been struggling to formulate a coherent economic policy since the downfall of Hosni Mubarak in 2011, attempting to balance demands for social justice and jobs with pressures from international lenders to rein in spending and pay mounting bills.
Mr Galal is hoping to succeed where his predecessors have failed. He is aiming to reduce the deficit from 14 per cent of gross domestic product in the fiscal year that ended June 30 to around 10 per cent this year.
This month the government launched a $4.2bn programme for “economic development and social justice”, which includes a mix of labour-intensive public works projects, improvements to the business environment and poverty alleviation measures, such as the abolition of school fees and reductions in the prices of basic goods and transport services.
Mr Galal said Egypt was also in talks with international oil and gas companies to increase exploration and production in exchange for a more rapid repayment of around $6bn they are owed by the government.
He acknowledged, however, that the return of foreign direct investment and tourism, both main engines of economic growth that have sputtered since the 2011 revolt, hinged on the restoration of security and political stability.
To that end, he said the government regarded the implementation of its “political road map” for a “more sustainable and credible path towards democratisation” as crucial to the success of any reform programme. Parliamentary and presidential elections are planned within the next six months as part of arrangements put in place after the army ousted Mohamed Morsi, the Islamist president.
“No economically stable development would be possible without sustainable political systems,” Mr Galal said. “So for me it is not a side issue. For me the political institutions of Egypt are going to determine the fortune of Egypt in the future, not only in the economic front but in every other front.”
But many fear the road map will not be enough to restore stability amid a fierce crackdown against supporters of Mr Morsi’s Muslim Brotherhood group. An assassination attempt against the interior minister and a spate of attacks against the security services have also raised fears of a violent insurgency such as the country experienced in the 1990s.
Under Mr Morsi, the budget deficit widened as his Brotherhood group balked at imposing the unpopular austerity measures needed to secure a loan from the International Monetary Fund, fearing loss of voter support.
But with the concessionary loans, grants and free petroleum products that have poured in from Gulf countries relieved at the ousting of the Brotherhood, the interim authorities feel able to defer a return to the IMF until a new government is elected next year.
Mr Galal said he also expected the reduction in the deficit to be partly funded by savings in the energy subsidies – they cost the government $17bn last year – after the implementation of a smart card system that could help keep track of subsidised fuel and prevent smuggling.
He said he did not foresee any increases in the price of fuel to consumers in the first phase of the programme, but said that just curbing leakage from the system would make some savings.
The funds from the Gulf have also boosted Egypt’s foreign reserves to around $18bn, allowing the country to reduce the cost of its domestic borrowing by about 300 basis points. This, Mr Galal said, will bring down the debt service bill, which accounted for almost a third of state expenditure in the last fiscal year.
Mohammad Abu Basha, Egypt economist at EFG-Hermes, the regional investment bank, said the government’s deficit target might be overambitious, but the funding gap could narrow.
“I think there will be enough funds for the first half of 2014, but I don’t think we will be able to dispense with the IMF completely,” he said. “We are not expecting to see any economic reforms in this period and the balance of payments has yet to recover, so there will be need for more support. This could come from the GCC (Gulf Co-operation Council) or more sustainably from the IMF.”
Source: The Financial Times