Public finance policy concerns decisions regarding the revenue, expendi-ture, and debt operations of the government. The importance of public finance in the Egyptian economy arises from the overwhelming role of the government in the economic system.
The government’s fiscal and regulatory actions permeated the entire economy in 1960–2000. The state’s domination of the economic system is reflected in the proportion of GDP originating in the public sector; this increased from an estimated 13 percent in 1952 to about 40 percent in 1973 (the eve of the infitah), to 50 percent in 1981, before dropping to 34 percent in 1990. As late as 2000 it was still 30 percent. Government expenditure reached nearly 60 percent of GDP in 1982, and even in 2000 was nearly 30 percent of GDP. Moreover, government interventions in some sectors (especially in agriculture) remained so widespread that they virtually determined the level and composition of output, even though formally these sectors remained in the hands of private decision-makers.
Chapter 1 described how the role of the government increased, espe-cially after 1961. In order to attain its goals, the government made a major effort to mobilize resources. Current government revenue, including receipts of the social security system, were raised and remained high com-pared with that of other countries of similar per capita income, structure, and degree of openness of the economy. However, because of claims on the expenditure side, savings generated by the public sector were inade-quate, dropping from 8 percent of GDP in 1967 to 11 percent in 1975, though by 1978 they recovered to about 3 percent. The main reasons for the decline were the vastly increased allocations for defense after the war of 1967 and the rapid growth of subsidies after 1973.
With the public sector occupying a dominant role in the economy, the government’s budget and fiscal policy was one of the most important tools of resource allocation and economic management. A further implication of Egypt’s being a government-controlled economy was that monetary policy lost much of its traditional role, thus automatically increasing the role of fiscal policy.
The nonfinancial public sector comprises four major bodies: the central government, local and regional government, public enterprises, and a number of extra-budgetary entities.
a The central government includes the central administration and public service authorities. The central administration consists of the presidency, ministries, and the legislature. The public service authori-ties, as distinct from the public economic authoriauthori-ties, are essentially nonprofit public agencies such as universities, research institutes, and hospitals. Their operations are integrated into the government budget.
b Local and regional government is organized into 26 governorates and the city of Luxor. Although local and regional government is adminis-tratively separate, it has very limited financial autonomy; its budget is part of the consolidated government budget and is approved by the national legislature as part of the state budget. Local government pos-sesses jurisdiction over some types of tax and non-tax revenues, but depends on central government transfers for financing the bulk of its expenditures.
c Public enterprises are grouped into economic authorities and public companies. The public economic authorities consist of about 60 fully owned public companies, such as the Egyptian General Petroleum Company (EGPC), the Suez Canal Authority (SCA), various public utilities, and the General Authority for Supply Commodities (GASC).
In 1990 they accounted for about 23 percent of GDP and 3 percent of the labor force. Their operating budgets are not included in the government budget, but cash transfers to and from the government, such as tax payments and subsidies, are incorporated into the consoli-dated budget. With the notable exception of the EGPC and the SCA, most of the economic authorities operate at a loss. Investment expen-ditures of the economic authorities and the associated financing are also part of the consolidated budget. Financing for the economic authorities comes from internal generation (especially investment self-financing), foreign economic assistance transferred from the government, and loans from the National Investment Bank.
The public companies are public enterprises engaged in a variety of processing, manufacturing, or service functions. They constitute a major presence in the economy; in 1990, on the eve of the structural reform program under which most of these companies were sched-uled for privatization, their net value-added was 12 percent of GDP, they employed over 6 percent of the labor force, and their tax and profit transfers amounted to 14 percent of central government revenue. From 1990 their investment budget was removed from the government budget.
d The main extra-budgetary entities are the social insurance funds, the National Investment Bank (NIB), and the Social Fund for
Development (SFD). Their operations are not consolidated into the government budget.
1 The social insurance system is operated by two funds: the National Organization for Insurance and Pensions, which covers govern-ment workers; and the General Authority for Social Insurance, which covers public and private enterprise workers, farmers, and the self-employed. The cash surpluses of the social security funds are invested with the NIB.
2 The National Investment Bank was established in 1980 and is responsible for financing projects included in the government’s investment program. It is financed primarily by the surpluses of the social insurance funds, but also from postal savings and the sale of investment certificates.
3 The Social Fund for Development was set up in 1992 to provide a safety net, initially for workers affected by the 1991 stabilization program, and to develop programs aimed at poverty alleviation. It is funded mainly from foreign aid.
Overall fiscal developments
Until the late 1970s, two major themes ran through Egyptian public finances. First, Egypt had been in a state of war for a quarter-century after 1948; this meant heavy expenditures on defense. Second, with the adoption of the National Charter in 1962, Egypt began the largest-scale experiment in “Arab Socialism.” The main objective of this eco-nomic policy was greater equity in the distribution of income and in consumption capability, which was to be largely effected through fiscal measures. Another important goal was increased production. With the economy dominated by the government, this meant an increase in public investment.
The relative importance of these factors differed over time. In 1960, defense expenditures accounted for about 5 percent of GDP at market prices; by 1970 they had increased to 16 percent, and by 1978 they had dropped to about 9 percent.1With defense and administration costs con-suming so much of the revenues, public investment outlays had largely to adapt themselves to the available resources. The impact of defense spend-ing on the resource allocation process can be seen by the gyrations in the rate of public investment (which represented about 80 percent of total investment). In 1960, public investment was about 11 percent of GDP, in 1964 it rose to 19 percent, in 1970 it declined to 12 percent, but increased thereafter to 27 percent in 1978.
In order to achieve greater equity in consumption, many commodities considered essential were subsidized. These cost-of-living subsidies became an important item in the budget after the sharp rise in international
wheat prices in 1973; total subsidies rose from less than 2 percent of GDP in 1971 to about 5 percent in 1973 and 10 percent in 1978. Thus, if during the 1960s and early 1970s defense needs had competed with investment for resources, after 1973 an aggressive new claimant appeared on the scene.
From 1965 until about 1990, resource allocation could be represented as what Sciolli (1976: 2) called the “three-cornered hat” with defense, investment, and welfare representing the three corners. These corners altered somewhat in recent years in response to changes in the inter-national environment and to new directions in economic strategy. The most important of the changes was the decline in the relative importance of defense spending following the settlement with Israel, and an easing up of the government’s investment expenditures following the emphasis on the private sector to furnish the impetus for growth. An increasing role in expenditure came to be occupied by debt-servicing and payment for administration, especially salaries and benefits.
Throughout 1965–2000, the overall balance of the budget remained in deficit, the shortfall at times exceeding 25 percent of GDP at current market prices.2 Moreover, the deficit as a proportion of GDP fluctuated widely around an average of about 13 percent, varying between 28.6 percent in 1975 and 1.2 percent in 1995. Over the entire period, the ratio of total revenue to GDP at market prices averaged 28 percent, that of total expenditures to GDP about 41 percent. The overall deficit improved between 1965 and 2000, but the evolution did not follow a consistent path. The development of revenues, expenditures, and the overall budget deficit are shown in Figure 6.1.
Percentage of GDP 1965 1967 1969 1971 1973 1975 1977 1979 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Percentage of GDP
Total revenue/GDP (%) Total expenditure/GDP (%) Overall deficit/GDP (%) [right axis]
Figure 6.1 Revenue, expenditure, and budget deficit, 1965–2000 (percent of GDP) (source: MOF; World Bank LDB).
It is more useful to look at the period in two parts. The first, 1965–91 (i.e. before the stabilization program) was dominated by three features:
• an increase in total government expenditure as a proportion of GDP,
• a high level of overall budget deficit, and
• considerable fluctuations in revenues and expenditures.
The second sub-period, 1992–2000, is distinguished from the first because it witnessed a sharp decline in the budget deficit in the 1990s (although the precise extent of the reduction is not clear). This change resulted from the implementation of the stabilization and structural adjustment program discussed in Chapter 3.
The overall budget deficit averaged 13 percent of GDP over the entire period, with averages of 16 percent and 3 percent in the two sub-periods.
Between 1965 and 2000, total expenditure as a percentage of GDP aver-aged 41 percent, but the figure for the first sub-period was 45 percent while for the second it was 29 percent. The corresponding performance for revenues was 28 percent of GDP for the entire period, 29 percent in the first part, and 26 percent in the second. A summary of fiscal operations for selected years is shown in Table 6.1 and displayed graphically in Figure 6.1.
The year 1991 saw a number of developments that had substantial repercussions on public finances. With the 1991 budget, the authorities intensified their efforts to control the fiscal deficit and to improve the structure of revenue. The budget also included a one-time exceptional expenditure (equivalent to about 6 percent of GDP) to recapitalize the publicly owned commercial banks. Three other measures also played an important role in influencing the fiscal outcome: a substantial deprecia-tion of the exchange rate, the freeing of interest rates, and the debt rearrangements with the Paris Club. The exchange rate depreciation increased the revenues of the EGPC and the SCA in terms of domestic currency and thereby boosted the amounts transferred to the budget. It also increased the domestic currency value of imports and thus increased collections from customs duties. On the expenditure side, the Paris Club agreement substantially lowered the debt service obligations. Reductions in food subsidies, begun in 1987, accelerated in 1991 with the removal of subsidies on fish, tea, and rice.3 The budget outturn in 1992 was even better, because it was the first full year to benefit from the reforms.
During 1992–2000 total expenditure was kept under stricter control than in the preceding period, although the precise extent of the reduc-tion is moot because of ambiguities in the treatment of some items. It appears that the reduction can almost entirely be explained by lower capital expenditure. Current expenditure, as a proportion of GDP, con-tinued to increase because of higher domestic interest payments and a rising civil service wage bill. The latter was occasioned by the employment of additional numbers – between 1991 and 2000 the share of government
Table 6.1Summary of fiscal performance, selected years, 1965–2000 (LE million at current prices) 19651970197519811985199019952000 Total revenue5987501,5247,36311,31221,87655,71979,416 Taxes3175249484,0155,92311,74234,27952,200 Transferred profits84401541,6971,9442,30416,26629,371 Other non-tax revenue113941203457961,5962,1383,970 Investment self-financing40362109642,0124,8292,7947,186 Total expenditure9069562,6289,89218,47636,39358,25691,689 Current expenditure6126041,7656,12511,90022,44647,63268,585 Of which: subsidies––6222,1662,7494,6593,8185,401 Investment expenditure2943528633,7676,54414,25111,29924,074 Increase in arrears–––899––– Overall deficit3082061,3881,6307,16514,5172,53712,273 Financing (net) External financing81152106121,5303,2482782,568 Domestic financing2272211,1781,0185,63511,2692,81514,841 Of which: from banking system72807312322,7647,6961,1176,566 Overall deficit as percent of GDP (market prices)13.166.7328.559.3922.0415.101.24 Source: Ikram (1980); World Bank LDB; IMF, Government Financial Statistics.
employment in the civilian labor force rose from 22.7 percent to 26.9 percent.
Over the period 1965–2000, about 12 percent of the deficit was financed from external sources, the rest from domestic. This figure con-ceals wide fluctuations: between 1965 and 1991 (before the stabilization program) external financing covered, on average, 22 percent of the deficit, and in some years exceeded 150 percent. During 1992–2000 the pattern of financing changed considerably, with domestic sources financ-ing 115 percent of the deficit.4 The larger domestic financing of the deficit led to a rise in the public domestic debt, which increased from 52 percent of GDP in 1990 to 60 percent in 2000 (see Figure 6.2).
The principal sources of domestic finance were the banking system, which financed about a quarter of the deficit over the entire period (about one-third in 1965–91) and accounted for almost 40 percent of domestic financing, and the social security funds (see Figure 6.3). The bank financing of the deficit had significant consequences for the growth of the money supply and inflation – the latter averaged about 10 percent a year in 1965–2000 and was close to 17 percent annually in 1965–90. The growth of money supply at a rate faster than the demand for money con-tributes to increases in the rate of inflation which, in turn, influences the level of expenditures in the next fiscal period, thus sowing the seeds of further deficits. From this perspective, the fall in bank financing to 15 percent of domestic financing in 1992–2000 strengthened the govern-ment’s anti-inflationary stance.
The high level of deficit and the instability in the budget resulted from a basic structural weakness. Budgetary revenues were very susceptible to exogenous influences while budgetary expenditures responded more to domestic inflation. Thus revenues and expenditures were liable to fluctu-ate widely, with very little correspondence between the movements of the
200 150 100 50 0
50
100
Percentage of deficit
1965 1967 1969 1971 1973 1975 1977 1979 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 External financing/deficit (%)
Domestic financing/deficit (%)
Figure 6.2 External and domestic financing of fiscal deficit, 1965–2000 (percent of deficit) (source: MOF; World Bank LDB).
two series. Over 1965–2000 as a whole, the coefficient of variation of revenue as a proportion of GDP was 15.8 percent, while that for expendi-ture as a proportion of GDP was 24.7 percent, indicating that the latter showed more variability in relation to its mean. However, at times the vari-ability could go the other way; for example, for 1976–86, the coefficient of variation for expenditure/GDP was 10 percent while that for revenue/GDP was nearly 15 percent. The differential fluctuation between revenues and expenditures, both in amplitude and timing, was a major issue for policymakers throughout 1965–2000.
The external influences impacting on budgetary receipts were fluctua-tions in the international price of oil (and hence in the revenues of the EGPC), and in the levels of economic activity in the industrialized coun-tries (and therefore in international trade and earnings from the Suez Canal). The high volatility of the revenue series in 1976–86 can thus easily be explained. This period witnessed a steep rise in oil revenues as the oil fields that Egypt had recovered after the Arab–Israel war attained full pro-duction and benefited from the oil price hike of 1973, another sharp increase in oil prices (in 1979), a slowing down of the international economy towards the end of 1981 with a consequent decline in oil prices and in Suez Canal traffic, and then a sharp drop in oil prices in 1986.
The expenditure side was also affected by exogenous influences, principally the price of wheat. These changes were passed on to the budget in the form of variations in the subsidy bill, because the selling price of subsidized commodities remained more stable than the procure-ment price. Added to this was the budget’s response to the domestic rate of inflation. Current expenditure largely became hostage to cost-push factors, to the open-ended nature of consumer subsidies, and to guaran-teed employment in the public sector for all persons discharged by the
Percentage of deficit
200 150 100 50 0
50
100
Bank financing of deficit (%)
1965 1967 1969 1971 1973 1975 1977 1979 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Figure 6.3 Bank financing of budget deficit, 1965–2000 (percent of deficit)
(source: IMF, Government Finance Statistics; World Bank LDB).
armed forces and all university graduates. Given the determination of the authorities to protect the standard of living, the domestic rate of inflation introduced a substantial degree of rigidity into the expenditure side of the budget. This severely cramped the government’s room for maneuver.
Some studies – e.g. Ahmed (1984: 13–14) – showed that more than half of total government expenditure might be regarded as “autonomous,” in the sense that the degree of discretionary influence over it was very small, and highly sensitive to domestic inflation. Moreover, control over expenditure was diffused as a large block of public outlays (for example, by the National Investment Bank and the Ministry of Defense) was outside the discretionary control of the Ministry of Finance. These structural differ-ences translated into very different movements of the two sides of the budget.
Revenue issues
Until the early 1980s, Egypt’s efforts at resource mobilization did not compare badly with other countries at comparable levels of per capita income, structure of production, and openness of economy. Examinations using comparable methodology by Chelliah (1971), Tait et al. (1979), and Ahmed (1984) of the tax performance of 45 developing countries between 1969–80 showed Egypt to be occupying 3rd to 11th places, except for the period 1972–76 when it fell to 30th place.5However, expenditures grew even faster. In 1965–2000, revenues on average accounted for 29 percent of GDP, while expenditures averaged 41 percent. Expenditures continually outpaced revenues; it was said that Egypt’s fiscal problem was that of “earning in Centigrade but spending in Fahrenheit.”
The composition of revenues was dominated by taxes and from profits transferred by a small number of public organizations, such as the Suez Canal Authority and the Egyptian General Petroleum Company. Other contributors to revenue were relatively minor (see Figure 6.4). Indirect taxes, such as import duties and the sales tax, remained much more important than direct taxes, such as income tax.6 This is not surprising.
The tax system developed in an uncoordinated manner over the years with revenue mobilization as its principal motivation; considerations of equity, transparency, and efficiency in administration came a distant second.
Over the period 1965–2000, the relative contribution of individual taxes to the total changed. The most important feature was the fall in the share of taxes on international trade (principally customs duties on imports) as a consequence of gradually lowering import tariffs. While this meant that additional revenues had to be sought from other sources, it did push matters in the direction of greater international competition and in helping the country to reap more of the benefits of trade. However, the overall structure of tax revenue remained skewed towards the external
sector (depending heavily on customs duties, consumption duties on imports, taxes from the EGPC and the SCA), which even in the final five years of the period accounted on average for about 40 percent of total tax receipts. There was some increase in the contribution of taxes on goods and services and in revenues from the tax on business profits, but the share of taxes on personal incomes showed virtually no variation.
The fluctuations in the fiscal contribution of petroleum and the Suez Canal were caused by two interrelated factors: changes in the inter-national price of oil, and the state of economic activity in the industrial-ized countries. These fluctuations could be quite abrupt. International crude oil prices peaked in 1981 at $33.60 a barrel (weighted by the price and share of each of Egypt’s oilfields in exports) before collapsing to
$14.29 per barrel in 1987. These price variations largely reflected changes
$14.29 per barrel in 1987. These price variations largely reflected changes