Egypt economy needs stimulus, gradual subsidy reform: Finance minister

Ahram Online, Wednesday 24 Jul 2013

Interim finance minister Ahmed Galal aims at fiscal discipline without hampering growth; says securing IMF loan neither urgent nor sufficient

Social Justice
A protester holds up his palm, reading "Social Justice" during a protest for labour rights on Labour Day or May Day, in Cairo 1 May, 2011 (Photo: Reuters)

Egypt's economy needs fiscal discipline which does not stifle economic growth, as well as internal structural reform in the longer term, newly-appointed interim Finance Minister Ahmed Galal has said.

''Now is not the time to impose heavy taxes on people and investors," Galal said during an appearance on CBC private satellite channel on Tuesday night.

"You don't want to cut spending; you want to reopen factories that have closed and encourage exports."

Egypt's economy is in a shambles after over two years of political turmoil which followed the fall of long-time dictator Hosni Mubarak in January 2011 and Islamist president Mohamed Morsi earlier this month.

Egypt’s total budget deficit reached LE205 billion (roughly $29.2 billion) – representing 11.8 percent of GDP – in the first 11 months of the 2012/13 fiscal year, a 50 percent increase on the same period in the previous fiscal year.

The country's escalating financial woes led then-president Morsi to approve a 24.2 percent increase in local and foreign borrowing to finance the budget deficit on 29 June, a day before the end of the 2012/2013 fiscal year.

Galal expressed alarm over Egypt's domestic debt, which he said accounts for 94 percent of national income, and that interest on the debt accounted for 25 percent of budget expenditures.

The former World Bank economist and first-time minister, who otherwise offered few specifics on upcoming policy, confirmed that the interim government was committed to pushing ahead with the implementation of a smart card system for distributing state-subsidised fuel launched by the previous administration.

Echoing the former government's latest announcements, Galal confirmed that the new system would initially be used to prevent smuggling rather than ration fuel to card holders.

According to former petroleum minister Osama Kamal, no less than 20 percent of Egypt's subsidised fuel is lost to smuggling and black markets.

Galal did not specify when and how the cards, which until late June were officially intended to ration subsidised fuel, would be used for that purpose.

Egypt's wasteful fuel subsidy system consumes around a fifth of budget expenditure. 

Past governments, including Morsi's have struggled to implement subsidy cuts, which would be deeply unpopular. Despite pressure from the International Monetary Fund (IMF), the law passed by Morsi on 29 June increased total government spending on energy subsidies by LE20 billion ($2.8 billion).

Asked about Egypt's stalled negotiations with the IMF over a long-sought $4.8 billion loan, the minister said it was "neither urgent nor sufficient'' for Egypt's economy.

"This issue has been given more importance than it merits in my view," said Galal. "This loan is not a question of life and death."

Galal, who said he had been privy to negotiations over the IMF loan in the past, did not rule out Egypt returning to the negotiating table over the loan, "though this time it will be on our own terms,'' he added.

The IMF's dissatisfaction with Egypt's proposed economic reforms to secure the loan in April led the finance ministry to revise the 2013/14 draft budget, reducing total expenditure by nearly 15 percent, to LE589.3 billion (roughly $98.5 billion), according the state-owned Al-Ahram daily newspaper.

Yet an agreement with the international lender eluded Morsi's government.

The minister said the $12 billion in aid recently pledged to Egypt by Saudi Arabia, the United Arab Emirates, and Kuwait would tide it over for some time, but that ultimately structural reform was essential to achieving long-term economic recovery.

Asked about the 2013/14 budget, which was stalled after the fall of Morsi's regime, Galal refused to comment on whether it would be subject to amendment, saying it was too early to tell.

Egypt is currently operating on the budget for the 2012/13 fiscal year that ended on 30 June, as the new state budget remains in the files of the now-dissolved Shura Council, Egypt's upper house of parliament.

But the minister stressed that economic policy should have a social dimension, and that major decisions would be subject to broad discussion during the interim period.

"We will not burden the people with more than they can bear," said Galal.

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