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Piecemeal changes in Egypt's spending plans, despite revolution

Advisor to the Ministry of Planning tells Ahram Online how the government will cope with low rates of growth and faltering private sector investment

Salma Hussein, Wednesday 25 May 2011
Alexandria Road
Unfair path prolonged. Roads are set for Egyptians with second homes. (File photo)
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In the days following Mubarak's departure, Egypt's new government sent a strong message that went almost unnoticed by the general public. The Ministry of Economic Development reverted to its old name: the Ministry of Planning.

Former Prime Minister Ahmed Nazif first changed the ministry's name in 2004 to match the image of Egypt his government wanted to give: no more government planning -- market forces would be the main driver of the economy.  

So when its name reverted after the revolution, the symbolism sent chills through the business community.

Asraf El-Araby, Advisor to the Ministry of Planning, says many investors believed the new name would give a bad impression. They expressed worries that the government would begin to step away from its previous liberal economic reforms.

When investors worry, the economy shakes. And that was what happened.

"The first quarter is a bad one. We don't expect the next quarter to be much better," admits El-Araby, who also advised the former Minister of Economic Development, at the beginning of his interview with Ahram Online.

In contrast, the first half of the fiscal year, which runs from July 2010 to June 2011, ended "very well, according to plans", he says, with a growth rate of 5.6 per cent and promising signs from other indicators.  

Factor these good figures in to the bad indicators of the January-June 2011 period and the Egyptian economy would conclude the year with growth of between 2-2.5 per cent.

In the aftermath of the 25 January uprising, many sectors of the Egyptian economy took a hit: tourism, construction, steel and cement production and industry.

Indicators of economic activity were still soaring throughout January, supporting overall growth figures for the first quarter, but the following two months saw a clear retreat. Accurate official indicators will be announced in the next few days.

The difficult mix of low growth and maximum employment

As for the next economic plan for the year 2011-2012, investment is planned to fall "significantly", as the private sector, responsible for more than 70 per cent of total investments, will still be on shaky ground. Yet growth will range between 3-3.5 per cent, according to El-Araby.

"This is an ambitious yet realistic figure," he says. "We have the challenge of attaining the best mix of public investments in different sectors to maximize employment."

For the first time the plan will also target geographical distributions of growth, aiming to reduce development gaps between different regions.

"To be realistic, we are not optimistic at all about the private sector contribution to investment; we are expecting it will slow down," says El-Araby.

Private investment in Egypt is expected to fall to some LE200 billion, down from the LE228 billion predicted in the previous year. "We are looking at whetting their appetite with small industrial and agricultural projects where they can partner with the government, if that will make them more confident," says El-Araby. No details of these projects has yet materialised.

On the other hand, public investments will total LE40 billion LE, the same level as the previous fiscal year, of which around LE28-30 billion will come from the state Budget. The balance will be made up of grants, debts and self-financed projects by local authorities.

Within this sum, priority will be given to pre-university education. Technical education investments will increase 60 per cent, meaning more equipment, workshops and teacher training programmes.

Agriculture also stands to benefit from these investments. "We have increased financing by between 30 and 140 per cent in many agriculture domains, compared to the previous plan," says El-Araby.

Would small changes meet large popular demands?

El-Araby says the "manoeuvre margin is very limited" to make a complete shift in the way public money is spent, in spite of a revolution.

As this is the final year in a five-year development plan, there remain unfinished projects in the public sector, including hospitals, schools and roads. "It would be very difficult not to accomplish them, even if they are not at top priority by the new standards."

A toll-free road linking Cairo to Egypt's Mediterranean coast was in the last two years a clear sign of governmental bias towards the needs of the rich, developed at the expense of more deprived regions.

El-Araby says this kind of project will be continued if the development contracts have punitive terms to ensure the government meets its obligations.

He also faces severe restrictions when it comes to planning. "There is another problem confronting any Finance minister: Three-quarters of the budget are must-dos," says El-Araby.

One quarter of the budget covers civil servants wages, another is for debt service and the third is for the food and energy subsidies. The only margin left is in public investment and maintenance.

By the time the plan for the next fiscal-year is developed a new elected Parliament will be in place and things will be more "stable and clear", hopes El-Araby, who believes new circumstances would undoubtedly give way to a different plan and state budget.

Burning need for subsidies reform is frozen

In El-Araby's personal view, energy subsidies -- which will account for LE80bn this fiscal year -- have to be scrapped. This would allow much-needed funds to be redirected to education and health.

"Things are very complicated and there is a need first for transparency on this issue," says El-Araby. "We are not sure on what basis the Ministry of Finance calculates the energy subsidy bill."

El-Araby stresses that no decision has yet been reached on whether energy subsidies will be reformed or remain untouched. "I highly doubt that this government could breach this taboo."  

One of the most extensive use of these subsidies is in energy-intensive industries such as fertiliser, cement and steel production. A total of 40 key factories, which see profitability rates of 30 to 60 per cent, account for a fifth of the total energy bill.

El-Araby thinks it's too tricky to tackle this issue at present. "These industries have many linkages to other sectors of the economy. If I raise their costs, prices of many goods will go up", he argues.

No studies, however, have been made to show the macroeconomic effect of scrapping these subsidies.

Accountability? 'We're not used to that'

This year also saw a dramatic change in the way Egypt's economic plan was formulated: the ministry calls it 'collective planning'.

Ministry officials held meetings across the country with sector stakeholders, government figures, private sector investors, civil society and even representatives of the Revolution, to hear their opinions and advice on future development.

"For the first time we heard criticisms from these stakeholders about the way we develop plans, specifically that our plans over-estimate the role of private investments," says El-Araby.

Planners usually assess investment needs and evaluate the share the state budget can bear, relying on the private sector to fill the gap. However El-Araby admits that the ministry does not apply any scientific model to assess "how far private investments matched our expectations".

"We are not used to accountability," he says, citing past instances when members of Egypt's parliament altered infrastructure plans to suit their personal tastes, demanding good roads be built near their properties, for instance. They never looked into whether this investment was feasible.

"I expect the 2011-2012 plan would raise accountability 25 per cent, thanks to collective planning," says El-Araby, who believes that stakeholders, having discussed their needs, will be able to raise complaints about the design and implementation process.

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