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Egypt to use Gulf billions to spur economy

Wednesday, 21 Aug 2013 | 1:25 AM ET
Plumes of smoke rise from a damaged petrol station during a violent crackdown by Egyptian security forces on a pro-Morsi sit-in demonstration at the Rabaa al-Adweya Mosque in the Nasr City district on Aug. 14, 2013, in Cairo.
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Plumes of smoke rise from a damaged petrol station during a violent crackdown by Egyptian security forces on a pro-Morsi sit-in demonstration at the Rabaa al-Adweya Mosque in the Nasr City district on Aug. 14, 2013, in Cairo.

Egypt plans to avoid raising taxes or cutting spending but instead use billions of dollars in aid pledged by Gulf Arab states to spur the economy through new investments, Finance Minister Ahmed Galal said on Tuesday.

After Islamist President Mohamed Mursi was deposed by the army last month, Saudi Arabia, Kuwait and the United Arab Emirates promised Egypt a total of $12 billion in loans, grants and fuel shipments. Of that, $5 billion has already arrived.

The army-backed interim government, keen to improve conditions for a deeply polarized population battered by more than two years of political and economic turmoil, is under intense pressure to avoid unpopular austerity measures.

(Read more: Egypt's cabinet to debate fate of Muslim Brotherhood)

"The best way to deal with that is by bringing in funds from outside the country, by seeking support, by counting on friends who can provide us with some injection of funds from outside," he told a news conference.

"By doing that, you are not raising taxes and pushing the economy into contraction or reducing expenditure and tightening the belt," said Galal, who was appointed shortly after the army ousted Mursi on July 3.

Nonetheless, it also hopes to cut energy subsidies by an annual 3.5 billion Egyptian pounds ($500 million) after it begins giving smart cards to vehicle owners next month, and would like to target more such cuts, Galal said.

(Read more: Rising oil prices: Is it really all about Egypt?)

In the year to June 30, Egypt ran a budget deficit equivalent to just under 14 percent of gross domestic product, Galal said. The 2012/13 budget, when it was announced last year, projected a deficit of only 7.9 percent of GDP, down from 8.2 percent in 2011/12.

He expects to release the final figures for last year's budget within days.

Infrastrucutre projects

The aid pledges by Gulf states should allow Egypt to cut its deficit both directly and by lowering its cost of finance, which has been pushed up by large-scale state borrowing from local banks since the uprising that toppled Hosni Mubarak in 2011 plunged its finances into chaos.

Galal said the Gulf money had helped reduce Egypt's financing needs from outside donors to $5 billion this fiscal year from the $19 billion that had been projected six months ago.

It has reduced pressure to pursue the $4.8 billion loan that Mursi's government had been seeking from the International Monetary Fund. "So far it doesn't look like we have to, but we don't exclude it," he said.

(Read more: Egypt rounds up Brotherhood supporters after day of carnage)

Rather than increase wages and other current expenditures, the government plans to spur the economy through investments, especially by completing ongoing projects and infrastructure such as water, sanitation, roads and bridges, he said.

It will concentrate on projects that are labour intensive and benefit the poor. It will also try to pay arrears.

"Contractors are owed money, and because of this they don't pay other people, and it becomes a chain," Galal said. "At the end of the day the economy slows down."

"This will help economic growth in the future while helping the relatively poor," Galal said.

(Read more: Scenes from the turmoil in Egypt)

Galal said Egypt would begin issuing smart cards to vehicle owners in September to ration fuel products and to curb leakage through theft and smuggling. Diesel and gasoline, alongside fuel oil and cooking gas, account for 20 percent of state spending.

The previous government had already issued cards to tanker trucks and gasoline stations to monitor fuel deliveries.

Though card holders will initially be able to buy as much fuel as they want, the state expects a reduction in theft will save it about 3.5 billion pounds a year. It also expects to use data gathered from the cards to track consumption and user needs, helping it pinpoint ways to cut subsidy costs further.

"Eventually you want the major users to be the ones to be charged higher energy prices, meaning in a way that corresponds to international prices," Galal said.

The current interim government, which expects to remain in power only until elections early next year, is unlikely to raise fuel prices, but rather lay the groundwork for a government with a popular mandate to do so.