Growing Egyptian deficit is necessary

Reforming a country’s economy is understandably easier during economic good times. Egypt’s government began a massive economic modernisation programme when Prime Minister Ahmed Nazif was appointed in 2004. The economy enjoyed annual growth of more than 7 per cent in fiscal years 2006-07 and 2007-08.

Nazif’s cabinet initially denied that the global financial crisis would significantly affect Egypt’s economic growth, but since the beginning of 2009, the reformist government has revised its growth estimates.

In March, Egypt’s Finance Minister Youssef Boutros-Ghali said he expected the country’s gross domestic product (GDP) growth would slow to 4-4.5 per cent this year. Analysts are even less optimistic. EFG-Hermes, Egypt’s largest investment bank, is forecasting growth of just 1.4 per cent in 2009-10.

The sectors that are the main foreign currency earners have suffered a steep decline in revenues. The value of foreign direct investment fell to $4bn between July and December 2008, from $7.7bn over the same period one year earlier.

Egyptian workers’ remittances from overseas - the second-largest source of foreign currency after tourism - have fallen as declining oil prices affect growth and income levels in the GCC, the source of 50 per cent of remittances.

The government has responded with the announcement of a $5.4bn financial stimulus package to be spent on infrastructure projects and export subsidies. This will increase Egypt’s budget deficit, which the government has been trying to reduce since 2004, to 8.4 per cent of GDP.

The government has little choice but to take this risk to ensure Egypt’s economy does not slide into reverse after several successive years of impressive growth.