Egyptian Finance Minister Youssef Boutros-Ghali’s remarks last week on satellite channels sparked discussion. He announced the public budget deficit, praised the Egyptian economy’s resilience in facing the crisis, and stated that borrowing was the natural way to finance the shortfall. Ghali expected funds from the USA to be directed to the World Bank, which, alongside domestic borrowing, would help bridge the gap.
Many countries, both developed and developing, have been grappling with persistent budget deficits, fueling debates over their nature and impact on national economies. Some levels of deficit are deemed acceptable, while others, when recurrent, become a chronic ailment. In recent years, economists have paid increasing attention to budget deficits, treating them as key indicators of financial performance, especially for nations with a history of repeated shortfalls—Egypt among them.
In Egypt, the chronic budget deficit results from a complex mix of factors, primarily the failure to balance state expenditure with public revenues. The government typically finances the shortfall through banking channels, such as the Central Bank, and non-banking sources like treasury bills, privatisation proceeds, and other financial resources. External borrowing, often through the World Bank, also plays a role. However, Egypt’s most pressing challenge remains rising prices and increasing domestic debt, a process known as inflationary deficit financing.
Abdullah Abdel-Latif, a researcher at the Ministry of Finance, argues in a specialised study on Egypt’s budget deficit that domestic financing via treasury bills and government bonds is acceptable under certain conditions. First, there must be an active financial market; second, investors must have confidence in these instruments; and third, interest rates on these instruments should exceed prevailing inflation rates. In Egypt’s case, this approach appears viable, particularly as inflation rates have recently declined—a rare positive amid the broader economic crisis.
Meanwhile, Du Ngoc, an expert on Asian economies at the Kansai Institute for Social and Economic Research in Vietnam, notes that many developing Asian countries have benefited from persistent budget deficits by directing funds into infrastructure investment. This strategy has fueled economic growth, thanks to efficient debt management and increased government spending to stimulate demand, in line with Keynesian economic principles. However, for this model to succeed, governments must maintain deficits at the lowest possible level relative to GDP growth, just as the so-called ‘Asian Tigers’ did when implementing these policies.
| Country | Spending | Fiscal Balance | ||||||
|---|---|---|---|---|---|---|---|---|
| 1990 | 1995 | 2000 | 2006 | 1990 | 1995 | 2000 | 2006 | |
| China | 18.5 | 12.2 | 16.3 | 19.2 | -2.8 | -1.8 | -2.8 | -0.7 |
| Indonesia | 19.6 | 14.7 | 15.8 | 20.1 | -0.9 | 3.0 | -1.1 | -1.0 |
| Malaysia | 27.7 | 22.1 | 22.9 | 24.9 | -2.9 | 0.8 | -5.5 | -3.3 |
| Thailand | 13.9 | 15.4 | 17.3 | 16.4 | 4.8 | 3.0 | -2.2 | 1.1 |
| India | 18.5 | 15.0 | 15.5 | 14.1 | -7.8 | -5.1 | -5.7 | -3.7 |
| Singapore | 21.3 | 16.1 | 18.8 | 15.8 | 18.8 | 14.5 | 10.0 | 7.0 |
Source: Asian Development Bank- Value in Billion US$
Domestically, debates over Egypt’s 2009/2010 public budget have settled following various conflicting viewpoints, culminating in parliamentary approval. Expected revenues are set at EGP 225 billion, down from EGP 290 billion the previous year, while projected expenditure stands at EGP 326.7 billion, compared to EGP 341 billion previously. This results in a proposed budget deficit of EGP 100.1 billion, equivalent to 8.5% of GDP—raising alarm bells, as most economists argue deficits should not exceed 8%.
According to the latest Ministry of Finance report on public debt, net domestic debt has reached EGP 461.9 billion, accounting for 44.4% of GDP. Meanwhile, total external debt stood at $32.1 billion as of December 2008, representing 17% of GDP. The real concern regarding public debt—whether domestic or external—lies in two key factors: the repayment period, which can range from a few months to over a decade, and interest rates, which vary depending on negotiations with lenders.
Managing the upcoming financial year will be a significant test for the government. A half-percentage-point increase beyond the ‘safe limit’ for deficits is not the end of the world, especially given the global crisis that has devastated many developing economies. The real challenge lies in deficit management.
The government must reconsider public spending and revenue streams—not necessarily through austerity, but by ensuring more effective spending. Increasing revenues must also be handled carefully to avoid deterring investment. Tax and customs system reforms, greater private sector involvement in service provision, and leveraging Egypt’s relatively stable economic position to attract foreign investment through policy improvements are all crucial steps.
While the current deficit may not be ‘safe’ in theory, it is far from catastrophic in the present global climate. More importantly, it remains manageable, particularly with recent signs of economic growth in the third quarter of the financial year exceeding expectations—offering a glimmer of hope amid an otherwise bleak outlook.
This article is originally published by AlBorsa in Arabic and later AI-translated by South Push.