The new cabinet, sworn in last month after President Hosni Mubarak sacked the last one under pressure from anti-government protesters, has announced a range of measures including hiking some state salaries and pensions by 15 percent.

It has also pledged to keep subsidies in place in a nation where 40 percent of the 80 million people live on less than $2 a day. Protesters have shaken the ruling system by taking to the streets complaining of poverty, high prices and repression.

"The armed forces are there to protect the demonstrators and to protect the country but the powers have been handed over, not to the military, but to the vice president. So if that formula works, we will be in a much better position," Samir Radwan told Reuters in a telephone interview.

He made the comments after president handed powers to his new vice president, Omar Suleiman. It followed a statement from the military high command that it would protect the nation, a step some feared amounted to a coup.

"Nobody likes military rule, that is for sure. Our military have so far shown that they are the safety valve of this country," he said.

"The government is functioning. Yesterday I had the meeting of the ministerial committee that monitors the economy every day ... We have no intervention from the military. My communications are with the prime minister," he said.

Radwan said the economy was holding up well in the wake of the protests, which at times have paralysed several cities, disrupted some company operations and sent shudders through global markets. Egypt's pound has slid to 6-year lows.

"So far we have been doing very well under the circumstances. The budget is safe. We have not added any pressure so far on the budget in view of the package I have launched last week. The banking system is functioning very well," he said.

Asked about his message to foreign investors, he said: "Stay the line, this will be a slight kink, stay the line."

He said foreign direct investment in Egypt had been climbing prior to the crisis but the disruption would hit gross domestic product growth, which was now not expected to achieve forecasts that had suggested it would expand by about 6 percent in the year to June 2011.

Asked how much would be knocked off forecasts, he said: "It would be reasonable to expect 2 percentage points and it is very similar to the global crisis impact."

Economic growth had risen to 7 percent before the global financial crisis but slipped back to just below 5 percent.

He said the budget deficit, despite the spending package the government had announced, would increase from the 7.9 percent of gross domestic product that had been expected in 2010/11 but would still be comparable to the 8.1 percent reported in 2009/10.

"The budget deficit is likely to increase from 7.9 percent to 8.1 percent," he said.

Prices in the year to January rose 10.8 percent, a state statistics agency reported on Thursday. Food prices have been rising at a much higher rate, however, and are the biggest concern for poor Egyptians.

Radwan said the disruption to vegetable and food exports would help keep a brake on prices in the local market.

Asked if he expected an inflation hike, he said:

"Not necessarily, because exports of vegetable and fruits, which is the major driver of inflation here, exports have gone down dramatically so there is enough for the local market, and I don't expect prices to shoot up at this stage."