The Egyptian government’s tactic to avoid major austerity measures and instead try to stimulate the economy by pumping in new funds may be popular among Egyptians but risks delaying the country’s economic recovery.
Egypt’s new minister of finance, the sixth since Mubarak stepped down in early 2011, said “one of the important tools to deal with the budget deficit is stimulating the economy”.
“We will seek to pump more new funds into the economy and not follow austerity measures,” Ahmed Galal told Reuters.
“We do not want to lower spending in a way that will slow a revival of the economy,” he said, adding that improving security was also key to a better business climate.
But there’s a difference between a “stimulus programme” (technically defined as substantial reductions in debt-financed government spending) and spending until you have no money left.
The government is counting on increased tax revenues to cut the 11% deficit, yet does not want to increase taxes sharply, Mr Galal told Reuters. And that’s even if taxes are increased at all, he said.
We can only assume that the government plans to overhaul the tax collection system so that those who do owe taxes do not fall through loopholes. But the government has not specified how it will reform one of the most bureaucratic systems in the country.
Mr Galal made the usual vague references about the need to implement reforms without providing any details. That’s probably because reforms usually mean cuts and that would undermine his stimulus speech.
Of course, anything that adds to the burden on the poor risks provoking a backlash and further destabilising a society where heightened discontent regularly boils over into protests.
But its hard to imagine how Egypt can spend its way out of the economic malaise when energy subsidy expenditure and debt service payments swallow around half of the budget. That has only forced the government to make short-term deals with the Gulf for energy imports, with worries about the next energy bill hovering in the background.
Egypt’s stimulus rhetoric also implies that the bloated public sector, where the government employs at least 6 million on meagre salaries, will not be touched. The country has long used salaries as a way to keep people content and off the streets, but it has left Egypt with a severely under-performing public sector workforce and a drowned-out private sector.
Plus, talk of “stimulus” is nothing new.
Mubarak refused to make the cuts that were needed to rein in the subsidy system and right-side the budget, and instead spent money on still unfinished mega-cities that were meant to ease population pressures in the capital.
Morsi and his aides also talked about “stimulating the economy” so it’s not like this idea is confined to our new cabinet.
Abdallah Shehatta, who was an economic advisor to Mohammed Morsi, said the key was to “invest more in order to convince people of any type of reform.
“We need a stimulus package that is at least 1% of gross domestic product with spending on key sectors such as construction and infrastructure,” he told me in an interview last year.
Like Mr Galal, Mr Shehatta also seemed to disregard the impact of an IMF loan agreement on shoring up new investments.
Instead, in Egypt, where most Egypians are already tired of hardship, the word stimulus has become another way of appeasing people in the short-term and not commit to any of the drastic economic reforms that will surely be passed onto the next government.
The cabinet won’t be in power longer than seven months and without the support of the Muslim Brotherhood, major measures to rein in the deficit are unlikely to gain consensus and succeed.
If the government wants foreign investors to take the country seriously, Egypt has to change its attitude about reforms and bite the bullet.
Stimulus alone will not lead Egypt out of recovery and neither will austerity. The country needs a very specific plan to trim excess expenditures and raise revenues through taxes.
As the US’s stimulus package and Europe’s austerity programme have shown, economics is not a precise science and countries cannot solve their problems by applying a one-size fits all remedy.
If tomorrow, Egypt began a system of cash transfers to the poorest so they could fulfil their fuel and bread needs, but simultaneously raised fuel prices and removed subsidies for the wealthiest, the country would be far better off than today.
A dose of austerity with some stimulus is better than no austerity at all.