Egypt faces hard economic challenges

Regardless of who is elected, one of the toughest challenges the new president of Egypt will face is to secure the hefty $22.5 billion needed to finance the deficit of the recently released state budget for the fiscal year 2012-2013. Given the sorry state of the post-Mubarak economy and the deep financial woes of the past 16 months – compounded by the political unrest and uncertainty likely to persist even after the inauguration – this will be a daunting task.

On June 4, the government finally submitted its new FY 2012-2013 budget to Parliament for ratification – two months past the April 1 deadline. The interim Cabinet had endorsed the budget on May 17 and presented it to the ruling Supreme Council of the Armed Forces for approval. As in the recent past, most expenditures (78 percent of the new budget) will finance three major items: salaries for an estimated 6 million state employees, subsidies for energy and basic foodstuffs, and service payments for domestic and foreign debt – which is fast approaching the size of Egypt’s economy. This time, however, finding the resources to bridge the financing gap of the new budget will prove much more challenging.

Post-revolution fiscal troubles started with the present FY 2011-2012 budget – the first one put together after Mubarak was overthrown. Its estimated funding gap was $23 billion – about 10 percent of Egypt’s gross domestic product – and was mostly financed through two main sources: domestic borrowing and Egypt’s foreign exchange reserves.

Neither of these is likely to be available to finance next year’s deficit. Official foreign reserves have been depleting at an average rate of $1.4 billion a month and are now down to less than 40 percent of their January 2011 level. At $15.2 billion, this is barely enough to cover three months’ worth of imports.