Egypt’s latest annual budget contains a number of ambitious goals that will be targeted during the country’s sixth five-year development plan that has just begun. These include a focus on human development, the limiting of poverty and unemployment, and a fairer distribution of resources. But failure thus far to transform these often heard slogans into facts on the ground is a major factor in increasing support for the Muslim Brotherhood, the most powerful group opposing the Husni Mubarak regime.

Budget Targets Deficit Reduction, More Reforms

Egypt’s budget for 2007-08 projects a deficit of E£58.8bn ($10.4bn), down 5.6% from the previous year, on revenues of E£187.3bn ($33.0bn) and expenditure of E£244.1bn ($43.0bn), according to the budget law which was published in the Official Gazette of Egypt on 12 June. The cash deficit however, rises by 6.5% to E£56.8bn ($10.0bn) in 2007-08. Revenue in the new fiscal year which starts on 1 July is set to rise by 14.2% compared to the previous year, while expenditure increases by 12.3% (MEES , 17 July 2006). Tax revenue at E£120.8bn ($21.3bn) makes up 64.6% of total revenue, the same as in 2006-07, while on the expenditure side salaries and pensions, interest payments and subsidies, grants and social payments all account for the bulk of government spending. Receipts from privatization in 2007-08 are projected to fall by a third to E£1bn ($176mn), while the repayment of foreign and local loans drops by 67.7% to E£12.2bn ($2.2bn). The Egyptian government is forecasting an overall budget deficit for 2007-08 of 6.9% of GDP and a cash deficit of 6.7% of GDP (down on 2006-07), according to a Ministry of Finance report issued in mid-June, which said that the ministry was committed to a deficit target of 3% of GDP by 2010-11, with a reduction rate of 1-1.5% of GDP annually.

In comments on the budget, Egyptian Minister of Finance Yusuf Butrus Ghali noted that the government’s oil price assumption in the budget was based on $62-65/B. While Egyptian oil production has declined since it peaked in the late 1990s, LNG revenues have more than replaced stuttering oil receipts since the country became a natural gas exporter in 2004.

Government’s Objectives

Dr Butrus Ghali told parliament that the budget for fiscal 2007-08, which coincides with the beginning of the sixth five-year development plan (2007-08 to 2011-12), will focus on human development and putting a limit on poverty; unemployment; dealing with the disparity of income; achieving higher economic growth and a fairer distribution of resources; involving the private sector more effectively in economic growth and the achievement of a civil society; and moving towards decentralization in decision making. The minister also said that the policy of economic reform pursued by the government aimed to achieve sustained growth, a more streamlined investment climate in the country and a stable exchange rate for the local currency in order to preserve its purchasing power and control inflation. The government is also coordinating financial and monetary policy with the aim of lowering the budget deficit and achieving a more effective way to manage Egypt’s public debt. At the same time the government intends to continue with the opening up of the local economy to the world economy by liberalizing trade and acquiring international economic standards.

The sixth plan aims to raise the standard of living by 35% over five years so as to lift per capita income to E£13,000 ($2,293), create employment for some 3.8mn and lower the unemployment rate to 5%, according to the Minister of Economic Development 'Uthman Muhammad 'Uthman.

Review Of 2006-07 Budget

The ministry’s report said that government reforms had continued in fiscal 2006-07 to tackle obstacles to long-term growth. These measures included reforms in income tax and stamp duties, tariff reductions and trade improvement, and energy price adjustments. In addition, the 2006-07 budget saw a larger-than-expected inflow of revenues totaling E£28.6bn ($5.0bn), with a significant impact on savings on interest payments and debt reduction. In addition some of this revenue was used to finance capital spending in lower income group areas. These revenues came from the third mobile license (E£15.2bn - $2.7bn), increase in corporate taxes from revaluation of Egypt Telecom (E£3.1bn - $547mn) and privatizations (E£10.3bn - $1.8bn). According to the ministry, the combined effect of the permanent savings from the structural reforms and the windfall revenue in 2006-07 led to a fall in the cash deficit/GDP ratio to 5.5% from the budgeted ratio of 7.2%. Also the gross debt/GDP ratio of 107% in June 2006 is expected to fall to less than 93% in June 2007. Official sources point out that leading indicators are improving steadily, with inflation down to 10.5% in the year to May 2007 from 12.8% in the year to March 2007 and current GDP growth continuing at around 7%. Foreign exchange reserves presently stand at $27bn. Since 2004 the state has sold more than 79 companies under the privatization program launched by the government of Prime Minister Ahmad Nazif, including some large state enterprises like Bank of Alexandria, which was sold in October 2006.

Egyptian Budget: 2007-08

(E£Mn)

Source : Official Gazette, 12 June 2007.

Exchange Rate: $1 = E£5.67.

More Than $10Bn In FDI In 2006-07

Egypt is expecting more than $10bn in net foreign direct investment (FDI) in fiscal 2006-07, compared to $6.1bn in the previous year, the Minister of Investment Mahmud Muhyi al-Din said in June. FDI flows have exceeded expectations due to the comprehensive structural reforms under way in Egypt, the IMF recently said. Revenue from the Suez Canal reached a record $381mn in May 2007, according to the Suez Canal AuthoritySuez Canal Authority. Other sources of foreign currency for Egypt come from remittances from Egyptians living abroad, tourism and oil and gas exports. Last month ratings agency Fitch said Egypt’s creditworthiness was improving gradually thanks to ongoing economic reforms, which have led to a falling budget deficit and debt ratios, banking system restructuring, a current account surplus and strong capital inflows.

Political Uncertainty

But the government’s confident budget and development goals are set against a background of political uncertainty. The measures taken thus far to attract foreign investment and encourage widespread privatization have benefited only a small sector of Egyptian society. All evidence points to poverty and unemployment becoming worse. “The economic reforms suit big business, whether Egyptian or international,” leading liberal political scientist Nader Fergany told MEES . “Foreign companies are very happy. But thousands of small firms are being squeezed out of business. And for the majority of Egyptians, life is getting harder and harder.”

Earlier this month, opposition media reported that 90 people were injured in a country region in a scramble for fresh water that was being delivered by tanker. The villages in question have not been receiving drinking water for the past five years. Furthermore, the mass migration from rural areas to Cairo and other cities in search of work has created sprawling suburbs of haphazardly constructed shanty-towns that are homes to millions of people. Most of these areas lack all basic services.

The pervading sense of hopelessness among the vast majority of Egyptians has boosted support for the officially banned Muslim Brotherhood. The organization helps the poor, providing, for example, conspicuously more efficient healthcare than that offered by government hospitals. During the last general elections Brotherhood candidates, running as independents, won 88 seats, despite heavy-handed attempts by the security services to stop people voting for the group. Over recent months, the government of President Mubarak’s National Democratic Party (NDP) has cracked down on the Brotherhood. Forty members are on trial in Cairo, and earlier this month a further 21 were arrested.

Islamists’ Challenge

The Egyptian government has cited the perceived challenge of Islamists as a reason for slowing down the promised political reform process. The Muslim Brotherhood, for its part, insists that its desire is to achieve power within the current political process, rather than by violence, but is constantly being blocked by the government. “What we are experiencing now is an absolute dictatorship, absolute power of the individual,” Muhammad Habib, deputy leader of the Brotherhood, said in a MEES interview. “Democracy is shabby, it’s simply a façade. Elections are forged, and we would like to change things through legal, peaceful and constitutional channels.”

The Egyptian government also faces increasing pressure from the US on issues of democracy and human rights. The House of Representatives earlier this year tabled legislation to withhold $200mn from the $1.3bn that Egypt receives annually in military aid, citing Cairo’s failure to implement democratic reforms. Countering these charges, the Mubarak government says that unless it cracks down on the Brotherhood and other groups, the country could become an Islamic state which would not be in Western interests.

In effect, the Egyptian government is telling Washington that the choice is simple: authoritarianism or Islam. The crunch will come in the next parliamentary elections, in 2010. The government will have the choice of allowing a free and fair poll to be held, and face the likelihood of the Muslim Brotherhood achieving sweeping gains; or using repression to ensure an NDP victory. If the latter road is chosen many commentators believe there could be a violent popular backlash.

There is, perhaps, a third option: the implementation of the budget and five-year-plan promises – not least that of a fairer distribution of wealth – in a way that eases the plight of Egypt’s vast, growing and increasingly disgruntled population. If these steps are taken, in tandem with the introduction of genuine political reform, then the appeal of the Muslim Brotherhood might diminish.