Egypt - Public Finance

Public finance

Until 1952, budgets seemed to have been drafted as much to obscure as to reveal the country's finances. Muhammad Ali apparently felt no obligation to make public the condition of the treasury, and his private expenses were not separated from those of the government. The same arbitrariness was exercised by his successors, a practice that contributed to ruinous fiscal policy. A relatively sound fiscal system was first imposed on Egypt in the 1880s by Europeans whose primary motivation was to collect debts. Upon the termination of the British protectorate in 1922, Egyptian governments once more began to manipulate budgets so as to divert public funds to private pockets. The situation lasted until the Free Officers assumed power.

Among the charges that the new regime made against the monarchy were corruption and the abuse of public money. Gaining the confidence of the population entailed the sound management of public finance. Extensive budget data have subsequently been published, permitting public scrutiny.

Until 1980 the budgetary procedures involved a complex accounting system with several budgets and special funds. Budget formats took a long time to standardize, and the fiscal year was altered several times. In July 1980, budgetary procedures were simplified and the fiscal year was fixed between July 1 and June 30, instead of the previously used calendar year.

The new budget still contained a number of special-purpose funds, such as subsidies and support for the armed forces, which were outside the main budget. Public sector companies and authorities, such as that for the Suez Canal, had their separate budgets, although they were connected to the state budget through transfers to and from the latter. The primary agencies handling the budget were the Ministry of Finance and the National Investment Bank, founded in 1980. The ministry prepared the budgets and managed all transactions, except new investments, which were the responsibility of the investment bank.

The state budget included those of the central and local governments. The central government, however, exercised great control over the budget, as was apparent from the preponderance of its revenues and expenditures relative to those of the local government. Examination of the budget revealed a number of characteristics and trends. State revenues as a proportion of GDP tended to remain steady, staying around onethird . They consisted primarily of tax receipts. The largest revenue items were business, consumption, and import taxes (the latter two categories were also called indirect taxes). Personal and property taxes were minuscule by comparison. An IMF international tax comparison index ranked Egypt in 1978-80 as eleventh among forty-four developing countries in the ability to collect taxes.

In addition to generating revenues, taxes could be a vital instrument in redistributing income. The impact of taxes on income distribution was little studied in Egypt. Income taxes were progressive, but because collection was not systematic, it was difficult to judge their actual impact. Also, little was known about the equity effect of indirect taxes, which made up a large part of overall revenues. These taxes were usually regressive, but subsidies may have compensated for some of the unfavorable impact.

Another aspect of the revenues was the instability of foreign exchange income. For example, the contribution of petroleum--the major source of foreign currency in the state budget apart from foreign aid--dropped (at current prices) from nearly �E1.07 billion in 1983 to �E781 million in 1988. Translated into real prices, the drop would be more dramatic. Revenues from the import tax also were tied to the volume of foreign exchange, especially to that of remittances. Because this volume was not really known, however, the effect of its fluctuations could not be meaningfully estimated.

Entries for expenditures illustrated the results of the steps taken by the Mubarak government to trim spending. Wages, the predominant expenditure item, were nearly halved as a percentage of GDP in the period from 1979 to 1988. While this was positive for the state budget, it could also mean that the income of public employees declined relative to overall per capita income. The subsidy bill also fell from the levels of the 1970s and early 1980s. These two factors, among others, led to the decline of expenditures and gross deficit as a proportion of GDP. Expenditures had risen from 50 percent of GDP in 1979 to 70 percent in 1983, then dropped to 49 percent in 1988. Trends similar to those for expenditures also characterized the budget deficit.

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