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Egypt Seeks to Balance Budgets Without Foreign Loans

June 25, 2011

Finance Minister Samir Radwan announced that a revised budget plan had cut the deficit so that foreign loans would not be required.

The Egyptian government has, after having negotiated what is (for development banks) a great deal with World Bank and the International Monetary Fund (IMF), declined the loans. Nor are they planning to issue new bonds to raise revenue.

Much of world media news reporting on the Egyptian Uprisings has focused on the dramatic, and often very visual, political reforms. But there are important economic concerns driving these that often go unnoticed save by academics. One of these is the concern the military has had with the ballooning debt under President Mubarak, who went freely to IMF and World Bank year after year, even as he sold off every Egyptian property he could to foreign investors.

The Egyptian military, now in charge of Egypt, has not fought a war since the signing of the Camp David Accords in 1977. In the meantime, the officer class has evolved into canny businessmen with economic interests in local shopping malls, apartment complexes, tourism and other such industries. The crony capitalism of the regime, with its focus on foreign investors and foreign loans, did not benefit their investments, and rising debt could have ruinous consequences as they can see looking across the Mediterranean at Greece.

And they must balance their concern with debt, with the need to keep commitments to social justice for the poor, who have faced severely diminished quality of life under the Mubarak regime in recent decades. Here’s how they propose to do it:

First, they are assuming continued economic growth of about 3.5 percent.

In response to the concerns of the military, the Finance Ministry was able to cut the deficit from 11 percent of gross domestic product to 8.6 percent. They did this by:

  • Raising income tax from a 20 percent flat rate to 25 percent on firms and individuals earning more than 10 million pounds. Finance Minister Samir Radwan consulted with business leaders to come up with this figure–an important step because tax collection is extremely inefficient and relies a great deal on honest reporting.
  • Decreasing fuel subsidies for industry (but not food subsidies or propane gas subsidies for the poor).
  • Renegotiating contracts for natural gas sales to foreign countries. Jordan and Spain’s new fuel costs have already been negotiated, but Israel–whose gas has long been sold at well below the global market rate–has yet to be renegotiated.
  • Raising the cigarette tax from 40 to 50 percent.
  • Accepting no-strings gifts of hundreds of millions of dollars from Qatar and Saudi Arabia

The new budget needs to balance stricter financial practices with the commitment to social justice demanded by the uprisings. The new budget includes increased spending on human development–education, health and housing–compared to the last decade under Mubarak, according to news reports.

Read the Reuter story (Al-Masry al Youm ran the Reuter story)

Read the AFP story

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