(Adds detail, debt costs)
By Tom Pfeiffer and Patrick Werr
CAIRO, July 22 (Reuters) - Egypt's budget deficit will rise 12.5 percent to 135.0 billion Egyptian pounds ($22.26 billion) in the fiscal year that began on July 1, a draft budget issued on Sunday, though the government is already struggling to find funding for the shortfall.
Egypt's borrowing costs have soared since the overthrow of President Hosni Mubarak in a street revolt last year, which sent the economy into a tailspin and left local banks taking almost the entire burden of lending to the state.
The outgoing army-backed government has tried to rein in the deficit by cutting energy subsidies for industry but new Islamist President Mohamed Mursi needs to secure emergency funds from abroad to head off a budget and balance of payments crisis.
For now, three weeks into office, he is still trying to put in place his own cabinet and there is scant sign of progress.
Total expenditure will climb to 533.8 billion pounds this year from 476.3 billion in 2011/12, the ministry said in the draft budget, posted on its website on Sunday.
A quarter of that would go to pay the interest on debt, which will rise 26 percent to 133.6 billion pounds. Subsidies on basic foodstuffs will grow by 41 percent but overall subsidies fall 15 percent because of lower outgoings on fuel.
The budget deficit represents 7.9 percent of projected gross domestic product (GDP), down from 8.2 percent a year earlier, said the ministry. The estimate implies GDP growth of 4-4.5 percent, substantially above the level forecast by economists.
The government says it can achieve that target through growth in domestic demand - consumer spending has weathered last year's uprising relatively well - and a gradual return in investment.
But the latter is likely to require a return to political stability in Egypt. For now, tensions between Mursi and the military risk paralysing policy and further eroding confidence.
Economists polled by Reuters this month saw the economy growing 3 percent in the 2012/13 fiscal year, faster than the around 2 percent expected for 2011/12 but around half the level in the years before the uprising.
Average yields declined at an auction of 5 billion Egyptian pounds ($824.4 million) of 91-day and 273-day treasury bills on Sunday, continuing to ease after the arrival of a new president raised hopes of a return to political stability.
"There is relative growing stability in the political scene in Egypt, not the ultimate stability that the market is optimally seeking, but we are on the right track, " said Khalil El Bawab, EFG Hermes director of fixed income asset management.
He said the recent declines in T-bill yields corrected a spike towards the end of June when the final round of the presidential election took place and results were unknown.
"For that to be a sustainable trend, we have to see FDI, and fixed-income money flowing into the country," he added.
Reflecting the uncertainty over Egypt's finances, the government is selling long-term debt at near-record rates. The average yield on ten-year bonds auctioned on Sunday was 17.02 percent.
(Reporting by Patrick Werr and Tom Pfeiffer; Additional reporting by Mala Pancholia)
((patrick.werr@thomsonreuters.com)(+20-2-2578-3290)(Reuters Messaging: patrick.werr.thomsonreuters.com@thomsonreuters.net))
Keywords: EGYPT BUDGET/
