Galal to Beltone Financial: Egypt targeting budget deficit of 9% in 2013-2014

Galal to Beltone Financial: Egypt targeting budget deficit of 9% in 2013-2014

Minister of Finance Ahmed Galal  (Photo from Centre for International Governance Innovation website)

Minister of Finance Ahmed Galal
(Photo from Centre for International Governance Innovation website)

Finance Minister Ahmed Galal affirmed to Beltone Financial Holding in a conference call that the interim government will “adopt policy reforms, as if the IMF was in town, but not necessarily along the IMF’s policies” and aims to reduce budget deficit from 13-14% to 9% in the next fiscal year, according to a statement the Cairo-based investment bank issued on Wednesday.

The conference call is the second held by Beltone following last week’s call with presidential advisor Mostafa Hegazy. Participants in these calls include investors and managers of global investment funds from the US, Europe, and the Middle East as well as sovereign funds.

During the call, Galal pointed out that the interim government was appointed at a time when all macroeconomic indicators signalled a very weak economy, including a budget deficit that reached 13-14% of GDP, borrowing costs had soared, poverty rate had increased and growth had slowed down considerably.

He said that the new interim government has decided to go for a path that “is really difficult to achieve,” which is bringing about macro stability specifically in terms of the budget deficit, while adopting an expansionary fiscal policy, in addition to addressing social inequality. This path was made more possible through the support provided from Saudi Arabia, the UAE and Kuwait totalling USD12 billion of which USD5 billion are already dispersed, Galal said, noting that this financial support provided the Ministry of Finance with room to manoeuvre to “achieve exactly what it aimed to achieve.”

However, external financing from Gulf countries will not make the government complacent and will not become an excuse for inaction, Galal said. One area of reform the ministry is actively pursuing is energy subsidy reforms which involve a three-phased plan, that is still not completely defined, but aims to end smuggling and leakage, the statement quoted Galal as saying. This is being achieved by using the so-called smart card system that will be implemented in the next two to three months. The second phase constitutes a plan for gradually closing the gap between international and domestic prices over two to three years.

Galal added that the economy is growing below its potential of at least 4-4.5% GDP, leaving considerable room for growth without creating inflationary pressures. Since boosting growth is the ultimate objective of the ministry, the ministry believes this is not the right time to increase taxes. However, the ministry is working on some tax reforms, which include replacing sales taxes with a Value Added Tax system (VAT), which will help increase tax revenues, and moving ahead with implementing the real estate tax.

On the recently announced stimulus package of EGP 22.3bn, the funds will be directed toward investments in infrastructure of all kinds.  The source of funding of the package is the grants pledged and received and some other areas of savings within the budget. This will allow the government to expand without widening the budget deficit.

Galal noted that this is only the first phase of stimulus spending. When additional funding is received, the government will launch more stimulus packages, with the ministry increasing public investment across all sectors to boost economic growth. The government aims to achieve at least 3.5% real GDP growth in FY13/14.

The minister added that the government aims to reduce the need for borrowing from the domestic market, allowing banks to increase credit to the private sector.

The ministry said it believes that it has a “very comfortable” plan to achieve major objectives that it has set forth, and is already moving in that direction, adopting a number of reforms that will pave the way for subsequent governments.

An economic plan and the political roadmap, in addition to government’s aim to provide an investment climate conducive for investments should help attract FDI inflows back to Egypt, Galal said.

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