In a video <a href="https://www.youtube.com/watch?v=lvo2XXwIPCk">interview</a> with Al-Masry Al-Youm in March 2022, Minister of Finance Mohamed Maait said that Egypt has two budgets: the general state budget, which he administers, and the budget of economic bodies, which, he explained, was bigger than the state budget.&nbsp;
Maait&rsquo;s statement came in response to a question about a puzzling feature of the Egyptian economy: How is it that the state invests in capital-intensive projects from while suffering&nbsp; a chronic fiscal deficit, which should ostensibly deter such investments?&nbsp;
The minister&rsquo;s answer was puzzling. in the general state budget.
<h3 style="text-align: justify;">The 1979 Coup</h3>
To understand this fiscal dichotomy, , when Egypt began the transition to a free market economy after a brief experiment with state capitalism in the 1960s. In his work on the fiscal crisis of the 1970s, economic researcher Samer Suleiman drew attention to a paradox of that era:, reaching 62% of GDP in 1981, up from 48% of GDP in 1974.&nbsp;
According to Suleiman, this is attributable to rent revenues from three sources: oil, prices af during the 1973 war; the Suez Canal, which was reopened and reinvigorated s; and the growing international aid flowing into Egypt to encourage its economic shift and overtures of peace with Israel.
<img src="https://api-aps.aucegypt.edu/uploads/tinymce/1695334353imageهيئة_المجتمعات_العمرانية_الجديدة.jpg" alt="" width="800" height="450">With the establishment of the Urban Communities Authority, huge land assets and the proceeds from their sale were removed from the budget
At the same time, the state was increasing economic resources and government investments off the general budget.&nbsp;
Suleiman&rsquo;s explanation was that after the 1977 protests, the regime was keenly attuned to the danger of being fully subject to the strict oversight of international financial institutions seeking to impose economic structural reforms on Egypt without regard for political and social conditions. To maintain a freer hand, the authorities therefore had to remove some economic resources from the budget.
In fact, this trend originates in theallowed the president to allocate certain resources to special funds chosen by him for special uses, thus excluding them from the general budget. This simple exception, however, morphed into a major fiscal dichotomy with the promulgation of the <a href="https://manshurat.org/node/11826">1979 law on economic authorities</a>, which carved economic bodies out of the public budget, save for certain surpluses that were channeled into the public treasury and loans and contributions made available to them from the public treasury.
Since then, oil and Suez Canal = have kept off budget. In addition, like economic bodies, state-owned companies have been dropped from the public budget,
In 1979, the <a href="https://manshurat.org/node/251">New Urban Communities Authority</a> was established and designated an economic body, = meant that enormous land assets and revenues from their sale were dropped from the budget. A few years later, pursuant to the enactment of the law on the public business sector in 1991, soined the train and left the public budget behind as weltate-owned companies jl.&nbsp;
<h3 style="text-align: justify;">The Emergence of the Third Sector</h3>
These developments coincided with the creation of the economic arms of the armed forces, from economic activity since 1967. In 1979, t, the National Service Projects Organization was established, followed by the <a href="https://manshurat.org/node/12910">Armed Forces Land Projects Authority</a> in 1981.
Military economic bodies were given concessions and privileges that allowed them to grow into autonomous enterprises. For example, armed forces&rsquo; activities were given broad financial exemptions pursuant to <a href="https://manshurat.org/node/40578">Law 204/1957</a>. Article 8 of the <a href="https://manshurat.org/node/11849">1998 tenders law</a> also allowed the Ministries of Defense and Military Production to contract by direct agreement when necessary, with due regard for exemptions provided for in Law 204/1957 and its amendments. Over the following years and a series of laws, the armed forces were given ample opportunities to take control of and monetize state lands.
Like the armed forces, the security services were allowed to establish companies with the aim of self-financing. In this case, the companies were treated as wholly private-sector ventures, unconnected in any way to state finances, as political economy researcher Yezid Sayigh points out. The businesses run by these institutions nevertheless enjoyed an exceptional status in economic terms; they remained essentially state-owned projects, but they were not included in the general budget.
<img style="display: block; margin-left: auto; margin-right: auto;" src="https://api-aps.aucegypt.edu/uploads/tinymce/1695334767image1.PNG" alt="" width="800" height="356">
Part of the National Service Agency's projects as they appear on its website
In this context, we should also note the establishment of the National Investment Bank attached to the Ministry of Planning in 1980. The bank was created to finance government investments, flying in the face of the supposed shift to the private sector under &ldquo;the economic opening.&rdquo;
<h3 style="text-align: justify;">Parallel public finances</h3>
The 30 years of Mubarak&rsquo;s rule many economic transformations, but none of them affected the two core elements of the two-track fiscal system: the exclusion of special funds, economic bodies, and public business sector companies from the state budget, and the growing economic activity of state institutions, which was not accounted for in the state budget.&nbsp;
Amid the shifting political landscape between 2011 and 2014, the parallel nature of Egyptian public finances began to be debated, ultimately leading to the inclusion of Article 120 in the 2014 constitution, which required all government revenues and expenses to be included in the public budget. But state policies since 2014 have continued along the same parallel paths, and even reinforced the old system. Article 3 of the new <a href="https://manshurat.org/content/sdr-qnwn-lmly-lm-lmwhd">unified public finance law</a> issued in February 2022 ignores the constitutional provision, preserving existing exceptions for economic bodies in addition to explicitly excluding &ldquo;economic units&rdquo; from the budget, defining such units as &ldquo;companies of which the state owns 51%.&rdquo;
At the same time, the armed forces and security services have stepped up their economic activity, leading Yezid Sayigh tPresident Abdel Fattah El-Sisi has revived state capitalism in Egypt, demonstrated by the military&rsquo;s leading role in real estate development and the establishment of industrial complexes and extractive industries, the crowding out of the private sector, and the use of private investment to recapitalize the public sector. In contrast, economic analyst Amr Adly argues that the private sector has not been crowded out&mdash;meaning that this is not state capitalism&mdash;but rather, the <a href="https://carnegie-mec.org/2023/05/08/crowding-egypt-s-private-sector-in-not-out-pub-89640">private sector has been crowded in</a> to sectors that do not increase exports or reduce imports.
<h3 style="text-align: justify;">Look for the Politics</h3>
These developments can be understood neither as the construction of state capitalism nor the encouragement of free market capitalism. Perhaps the most accurate reading of what has happened in Egypt, not only in recent years but since the transformations of 1979, is that third sector capitalism has supplanted both state capitalism and free market capitalism.
The third sector is made up of government-owned businesses and economic enterprises that legally speaking are private ventures. It straddles the public and private sectors, belonging to neither one. Businesses in the third sector do not compete against private firms in the free market on a level playing field, and while they are owned by the state, they are not included in the public budget, their surpluses are not all channeled to the state treasury, and they are not subject to the rules of government administration and contracting.
The third sector represents the convergence of both the economic and political interests of the ruling authorities in Egypt in various eras. It allows the upper echelons of the state bureaucracy, or a segment of it, to continue its management of economic activity. In addition to serving its own economic interests, this helps to reproduce a neopatrimonial system in which the state trades political for economic interests, creating a clientelist private sector closely tied to the state&rsquo;s economic activity, its economic orientations (given its control of the banking sector), and its tremendous investments in infrastructure and real estate. The third sector is thus buttressed by a clientelist bureaucratic alliance that guards and perpetuates this system.
<h3 style="text-align: justify;">Restructuring in What Sense?</h3>
The problem with the third sector, as Samer Suleiman observed, is not only that it allows for networks of corruption, although this is indeed a serious problem with potentially exorbitant costs. More serious is its structural impact on public finances and the local economy.
In fiscal terms, the exclusion of these resources from public finances serves to increase the budget deficit, which inevitably leads to more borrowing and the sale of more assets to finance the deficit. These tools do less to address the fiscal crisis than to reproduce and deepen it in a way that threatens the cohesion of the entire national economy.
In economic terms, the growth of the third sector and its clientelist bureaucratic components mobilizes economic activity in sectors that do not generate actual added value or sustainable jobs. At the same, these sectors are not subject to any kind of effective central planning, as is the case with the public sector.
Finally, the bloat of the sector gives rise to parallel public finances outside legitimate political structures, first and foremost the parliament, which constitutes a major obstacle to democratization and also fosters the spread of systematic financial corruption.
Restructuring the third sector to realize the principle of budget uniformity as provided for in the constitution is thus necessary to reform public finances and address the many structural macroeconomic problems in Egypt. But restructuring need not necessarily entail the privatization of public assets or government companies, whether public business sector firms or companies owned by state institutions operating as private firms, especially when privatization takes the form of a sale to a strategic investor rather than a public offering on the stock exchange. This form of restructuring or dismantling may do more damage to public finances than keeping these enterprises off budget. The initial, rapid injection of cash to the treasury may temporarily reinvigorate it, but the economy will be under chronic pressure as profits in hard currency continue to be transferred abroad, leading to the depletion of important economic resources over the long term.
Alternatively, or at least in parallel with planned privatization, the third sector can be reorganized under public ownership, attached to the state budget, and made subject to its rules of disclosure, transparency, and accountability, coming under the oversight of a strong parliament that can monitor and prioritize public investment and its tools. Of course, this would require institutional reforms, which could have a long-term positive impact no less important than the short-term fiscal improvement.
<hr>
References
Achcar, G. (2017). Can the people bring down the regime with the state still standing? (Hal Yastati&lsquo; al-Sha&lsquo;b Isqat al-Nizam wa-l-Dawla La Tazal Qa&rsquo;ima?). Bidayat, 16. <a href="https://bidayatmag.com/node/814">https://bidayatmag.com/node/814</a> [in Arabic]
Sayigh, Y. (2019). Owners of the republic: An anatomy of Egypt&rsquo;s military economy. Carnegie Middle East Center.
Suleiman, S. (2013). Strong regime, weak state: The financial crisis and political change in the Mubarak era (al-Nizam al-Qawi wa-l-Dawla al-Da&lsquo;ifa: al-Azma al-Maliya wa-l-Taghyir al-Siyasi fi &lsquo;Ahd Mubarak). General Authority for Cultural Palaces. [in Arabic]&nbsp;

آراء

Commentaries

السياسة النقدية

Read Also