Egypt needs economic reform to manage deficit
Cairo - Egypt must carry out painful economic reforms in order to get a grip on a budget deficit that is widening due to large state subsidies, a fall in exports, and a dramatic drop in revenues from tourism and the Suez Canal, economists said.
The main focus for the government in the coming months should be to boost revenues and cut spending to bring the deficit to a tolerable level and offer services to the poor, they said.
“Reform is actually a matter of no choice,” said economist Fakhry el-Fiki. “Our country is in for an economic disaster if it keeps on moving like it does now.”
Egypt’s budget deficit was about $17.2 billion at the end of November and was predicted to reach $30 billion — 11.5% of Egypt’s gross domestic product (GDP) — by July, the end of the current fiscal year.
Egypt bridged the gap between revenues and spending in recent years by borrowing from local and foreign sources. The loans, however, have resulted in public debt reaching about $300 billion.
The country’s foreign currency reserves were $16.5 billion at the end of January, down from $36 billion five years earlier. Most of the reserves are owned by other countries.
Tourism revenues fell to $6.1 billion in 2015, according to the Tourism Ministry, down from $7.5 billion in 2014, and less than half the $12.5 billion reported in 2010. The outlook for the tourism sector in 2016 is bleak in the light of continued flight suspensions by Russia and Britain, countries from where more than 3 million tourists used to travel to Egypt every year.
Egypt’s exports fell by approximately 22% in 2015 compared with the previous year, economists said.
“This is why the reform cannot wait a day,” said Rashad Abdo, head of local think-tank the Egyptian Economics Studies Forum. “There is an urgent need for attracting investments, raising exports and above all reducing spending.”
Egypt has taken measures to redress its economic balance by restructuring its subsidy regime. In 2015, the government reduced fuel subsidies to $7.7 billion, from $9 billion in the previous year. In addition to food and electricity, fuel subsidies make up almost 25% of Egypt’s spending.
The government also plans to make deeper fuel subsidy cuts in 2016, partly benefiting from falling international oil prices.
Apparently acting under pressure from the World Bank, from which it plans to borrow nearly $400 million, the government raised income taxes and reduced those on private firms to attract investments.
Egypt has to turn to the World Bank for assistance since its traditional Gulf lenders, which lent it up to $20 billion since June 2013, also face economic difficulties because of falling oil prices.
The government recently introduced a measure that aims to cut hundreds of millions of dollars from the salaries of Egypt’s 7 million civil servants. Civil servants’ salaries consume about 25% of Egypt’s budget.
The government’s raised tariffs on a range of imports, including household appliances, nuts, clothing, shoes, pet food and fruit, to reduce foreign currency spending on imports.
Egypt’s poor, about one-quarter of the country’s 90 million people, are likely to be the worst affected.
“These measures will inevitably reflect negatively on citizens, especially the poor, who are strongly affected by the slightest of commodity price fluctuations,” Fiki said. “This is why the government must ensure that the reform is not done at the cost of these poor citizens.”
To cushion the effects of the measures on the poor, the government sells foodstuffs, including cooking oil, meat, rice and vegetables, at reduced prices. The campaign is, however, narrow in scope, leaving the vast majority of Egypt’s poor having to cope with the price rises.
Mahmoud al-Asgalani, founder of the lobby group Citizens against Price Hikes, said, after working among Egypt’s poor for years, he knows how some government decisions translate into financial suffering for millions of people.
“This is why I say it is the poor who will foot the bill at the end of the day,” Asqalani said. “True, the reforms the government is implementing are meant to save the economy but millions of people will fail to put food on the table until this economy is saved.”