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Arab Republic of Egypt

Financial Statement Of

The Draft of the State General Budget

For The Fiscal Year 2007/2008

April 2007

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Contents The Financial Statement

For The Draft of the State General

Budget for the Fiscal Year 2007/2008 Page No. Introduction : …………………………………………………………...

1

Chapter One : Financial policies supportive to the state role during the period 2005/2007 through the following pillars …. First: The structural reforms of the state general

budget and its instruments …………………… 1. Tariff reforms and the development of customs

work process ……………………………………. 2. Income tax reforms ……………………………... 3. Stamp tax act amendments ……………………... 4. Reforms in the area of general sales tax ………... 5. Restructuring the state general budget …………. 6. Activation of treasury single account …………...

Second: Developing the system of supporting

national economy …………………………… 1. Subsidies for cost of living reduction …………... 2. Wages …………………………………………... 3. The state’s support to the pension and social

security systems ………………...………………. Third: Developments in the most important service

sectors …………………………………………. 1. Public spending on education …………………... 2. Public spending on health ………………………. 3. Public spending on housing …………………….. 4. Public spending on water and sanitation ………..

4 5 5 7 8 9 10 10

11

11 13 14

14

15 16 18 19

Chapter Two : Principles governing of the draft budget for the fiscal year 2007/2008 ………………………………………… First: Welfare of low income families and keeping on

with social dimension of the state general budget.

22

22

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Second: Encouraging investment and maximize the role

of the private sector ………………………….. Third: Development of public revenues and

expenditures through structural reforms of the state public budget …………….………………..

Fourth: Controlling budget deficit and public debt ……

29

32

37

Chapter Three : Basic features of estimates of the draft state general budget for the fiscal year 2007/2008 …………………. First: Overall core estimates of the draft state general

budget for fiscal year 2007/2008 ……….............. Second: Detailed estimates of public expenditure and

public revenue for the state general budget ……

1. Public expenditure items according to the economic and functional classification ……….

(A) Economic classification of public expenditures ………………………...………

- Wages and compensation of employees ... - Purchases of goods and services ………... - Interests …………………………………. - Subsidies, grants and social benefits …… - Other expenditures ……………………… - Purchase of non financial assets (Investments) ……………………………

(B) Functional classification of public expenditures ………………………………..

2. Public revenues …………………………………. - Taxes ……………………………………. - Grants …………………………………. - Other revenues …………………………..

44

45

49

51

51

51 52 54 55 59 60

62

64 65 70 71

Chapter Four : Basic financial balances of the draft state general budget for the fiscal year 2007/2008 …………………. First: Cash deficit, and the initial deficit in the draft

state general budget and its different concepts ….

75

75

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Second: Overall deficit and its financing procedures ….. Third: The future strategy of the proportional reduction

of the budget deficit and reduction of public debt ……………………………………………..

75

82

Chapter Five : Draft budget of the public treasury ……………...

85

Conclusion ……………………………………………... 89

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Index Of Tables and Figures

Page No. Table No. (1) Progress of subsidies appropriations …………………

12

Table No. (2) Progress of wages appropriations ………..…………...

13

Table No. (3) Progress of subsidies appropriation for pensions and social assistance ………………….…………….............

14

Figure No. (1) Progress of education appropriations ………….……..

15

Figure No. (2) Progress of health appropriations ………….…………

17

Figure No. (3) Progress of housing soft loans appropriations ……….

18

Figure No. (4) Progress of potable water and sanitation appropriations …………………………..

20

Table No. (4) Direct commodities subsidies …………………………

24

Table No. (5) Social dimension appropriations ……………………..

26

Table No. (6) Production process subsidies in the national economy

28

Figure No. (5) Progress of production process subsidies 2001/2002 – 2007/2008 ………………………………………………

29

Table No. (7) Investment plan for the year 2007/2008 ……………...

31

Table No. (8) The operational results of the economic authorities and their indicators for the fiscal year 2005/2006 ..

34

Figure No. (6) Progress of cash deficit and the overall deficit of the state budget as a proportion of GDP 2001/2002 – 2007/2008 …………………………………………….

38

Figure No. (7) The net volume of government borrowing as a proportion of GDP 2001/2002 – 2007/2008 …..

39

Figure No. (8) The initial deficit in the state general budget 2001/2002 – 2007/2008 ………………………

40

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Figure No. (9) Gross and net domestic and foreign public debt of the

state general budget entities as a proportion of GDP 2001/2002 – 2007/2008 …………………………………

41

Table No. (9)

Public spending ………………………………………... 45

Table No. (10) Operating expenses …………………………………….

46

Table No. (11) Public Resources ……………………………………….

48

Table No. (12) Components of expenditures and revenues …………..

50

Table No. (13) Purchase of goods and services (from 2006/2007 – 2007/2008) …………………………………………

53

Table No. (14) Public debt interests …………………………………

54

Table No. (15) Subsidies, grants and social benefits ………………….

56

Table No. (16) Ration commodities subsidies ………….……………...

57

Table No. (17) Other expenses …………………………………………

60

Table No. (18) Investments and its major components ………………

62

Table No. (19) Functional classification of the state activities ……….

63

Table No. (20) Expenses by functional classification for FY 2007/2008 ……………………………………

64

Table No. (21) Progress of tax proceeds ………………...…………….

65

Table No. (22) Components of tax revenues …………………………..

66

Table No. (23) General Taxes ………………………………………….

67

Table No. (24) Sales Tax ………………………………………………..

68

Table No. (25) Customs Taxes …………………………………………

69

Table No. (26) Other Tax Revenues …………………………………..

70

Table No. (27) Current and investment grants ………………………

71

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Table No. (28) Other revenues …………………………………………

72

Table No. (29) Net acquisition of financial assets …………………….

77

Table No. (30) Acquisition of financial assets ………………………...

78

Table No. (31) Proceeds from acquisition of financial assets ………...

80

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Mr. Prof. Dr./ President of the People's Assembly

Ladies and gentlemen, distinguished members of the assembly It is a great honor for me to be with you to extend for the third consecutive year the financial statement of the state budget, an event that allows me to exchange financial thought, and discuss in order to maximize our national economy ,encourage investment, and select the priorities in accordance with the requirements of development, all aiming at upgrading our nation and raising the standard of living of the citizens and increase their income. The State's general budget as the most important tools of fiscal policy-as you know– reflects the directives of the State economy, and more important at the current stage the fact that it comes as an expression of the government programs to achieve the presidential program \ "transit towards the future \" which concludes strategy aiming at:-

1. welfare of the low income families. 2. Employment growth and the reduction of unemployment with the effective participation of

the private sector. 3. Increase the national income and increase economic growth rates. 4. To encourage investment and to create the necessary tools to achieve investment targets. 5. Increasing exports and the creation of the factors that help to do that. 6. To achieve long-term financial balance either at home or abroad.

This is our strategy, we keep on it, and operate fiscal policy in the current phase of economic growth with all our energies and different tools to achieve it. Hence it is my pleasure to extend to you a draft state budget for fiscal year 2007/2008, Expression of the financial program for the first year of our new five-year (2007/2008 - 2011/2012)hoping to achieve its goals, and achieve an economic growth rate unprecedented. And at the beginning I wish to point out that the general budget for the financial year 2007/2008 involves the following points : - Firstly: The state budget for fiscal year 2007/2008 comes during a crucial turning in the history of

our nation to assure our determination to transit towards the future, This transit brings us with new important constitutional amendments that will have a significant impact on our political and economic situation in Egypt and this will affect accordingly our perspective of the state budget as an indicator internal balances and to the balance of payments and its components (export and import and capital flows and exchange rate) which is considered indicator of external balances taking into consideration also that we are now partners in achieving these balances to ensure sustainability for the interest of this nation.

Secondly: The state budget for fiscal year 2007/2008 synchronize Sixth Five-Year Plan 2007/2008 -

2011/2012,it is an ambitious budget and plan aiming at:- 1. Attention to human recourses development and reduce poverty and unemployment and to

address disparities in incomes. 2. Achieve higher rates of economic growth; accompanied by justness of distribution. 3. Private sector participation in development efforts in a more effective manner and induce

civil society and localities participation. 4. Decentralization of decision making and effectiveness of the role of localities.

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Mr. Prof. Dr. / President of the People's Assembly Ladies and gentlemen, distinguished members of the assembly Reform, development or modernization is not an end itself, it is a way to maximize our benefits; to assure that citizens are safe in their lives and satisfied about their living, and that the new generations and their aspirations are in the forefront of government policies and programs. Accordingly, and through the state budget, planned programs and implementation mechanism are in a cohesion to achieve the broad hopes of the masses, which are moving towards a reform strategy with modernization and development, supported by basic features:-

(A) Presidential Program and the operational programs of the government, are two sides of one coin and both are directed towards a new perceptive incorporating goals, visions and policies.

(B) Continuous economic reform policies aiming at sustainable development and further reform towards the future based on the pillars of production and investment through the private sector, creating a climate conducive to streamline the economic environment in which the private sector operates considering it as the primary source of employment and the key to job creation and growth.

(C) A well developed financial policy for effective tax and customs performance for the community, which interact with monetary policy at all economic hubs targeting a reduction in the budget deficit and achieving a more effective management of public debt and a developed management of cash flows without losing sight of the social dimensions development and deepness.

(D) Continuing opening the Egyptian economy to the global economy, something that is recognized by the international forums and advocated by the political leadership and full supported and encouraged by the government, through further liberalization of foreign trade and the gradual absorption of sound economic management standards set by the world in the process of achieving comprehensive economic development.

In light of the foregoing, I have the honor to introduce to you draft state budget for fiscal year 2007/2008 through the following major pillars:

Chapter I: Financial policies supportive of the role of the state during the period 2005-2007 through

the following pillars :

First: The structural reforms of the state public budget and its instruments. Second: developing the system of supporting national economy.

Third: developments in the most important service sectors.

Chapter II: Principles governing of the draft budget for the fiscal year 2007/2008:

First: Welfare of low income families and keeping on with social dimension of the state public

budget. Second: Encouraging investment and maximize the role of the private sector. Third: The development of public revenues and expenses through structural reforms of the state

public budget. Fourth: Controlling budget deficit and public debt.

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Chapter III: Basic features of estimates of the draft state general budget for fiscal year

2007/2008:-

First: Overall core estimates of the draft state general budget for fiscal year 2007/2008. second: Detailed estimates of public expenses and revenue for the state general budget:- 1- Public expenditure items according to the economic and functional classification. 2- Public revenues items. Chapter IV: Basic financial balances of the draft state general budget for the fiscal year

2007/2008: First: Cash deficit, and the initial deficit in the draft state general budget and its different concepts. Second: Overall deficit and its financing procedures. Third: The future strategy of the proportional reduction of the budget deficit and reduction of

public debt. Chapter V: Draft budget public the public treasury. Conclusion.

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Chapter one

ـــــFinancial Policies Supportive Of The Role Of The State In The Period 2005-2007

Mr. Prof. Dr. / President of the People's Assembly Ladies and gentlemen, distinguished members of the assembly

Economic and financial policies in all States depend on economic and financial actions over many years, And interact every year with the positive and negative outcomes arising from policies and procedures which have been taken place decades ago; But its impact continues over years of implementing the budget. Fiscal policy does not strengthen and does not root itself in economic reality, and its positive effects does not give fruits unless it becomes an extension of the policies that began years ago, , And unless there is harmony between these policies over the years. Financial procedures follow, financial instruments develop, all in one direction and one line mutually reinforcing, and the fruit comes not only through their instantaneous time application, but also through their interaction with each other and integration over the years. The government after long period of reconstruction in the 1980s and after regaining overall basic balances in the 1990s, decided to establish solid foundations for fiscal policy in the first decade of the twenty-first century. A new initiative has started with the beginning of the 2004/05 fiscal year after completing the basic elements of the Egyptian economy making Egypt@ capable of withstanding structural transformation, which began with the beginning of this fiscal year. I will briefly review the basic parameters of the financial and economic policies for the past two years, which represent an introduction of the principles of the state general budget for the fiscal year 2007/08, which depend on the results of the positive effects of these procedures and policies. The new policies are built on these policies to continue achieving basic financial and economic balance in the coming period. For this picture to be complete under the consideration of your good selves and to introduce to you the estimates of the draft state general budget for fiscal year 2007/2008, It is of paramount importance; To introduce the following background information on the procedures that have been made in the framework of fiscal policies in support of the state's role in servicing the community and developing the national economy. This chapter is divided into three parts briefly review the most important features of the period prior to next year's budget on the following points:- First: The structural reforms in the public budget and its instruments. Second: Developing a system to support the national economy. Third: Developments in the most important service sectors.

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First: The structural reforms of the state public budget and its instruments:- The state general budget represents the basic instrument for financial policy-making in any modern economy. The clarity of the state general budget of taxes and fees is reflected on the clarity of the features of fiscal policy, it affects the clarity of the general budget itself, its transparency and the community's ability to interact , influence and get influenced with it. The past three years substantial witnessed major amendments in the state general budget itself and its tax instruments which have led to the reformulation of the financial policies in Egypt aiming at greater transparency and clarity, and at changing the nature of the relationship between the Treasury and the citizen, either consumer citizen ,producer citizen, saver citizen or citizen who needs the support and backing to meet the requirements of a decent life for himself and his family. If the structural adjustments in the state general budget and its tools have affected the climate of economic life in Egypt, it would also affect the resources available to the state to meet its economic and social burdens of the community. I will review to your good selves the most significant developments that have occurred in some budget instruments, which deeply affected the economic life in Egypt starting from the customs amendments, Then income tax, stamp tax, the sales tax amendments, and finally structural adjustments in tabulating the state general budget and the automation of its components and the activation of the treasury single account. These amendments premise that there is a new economic philosophy formulated upon the rules of the world economy; Its success is assured in many States now enjoying high rates of investment, growth and employment. This approach has begun during the two fiscal years 2004/05, 2005/06, as well as the period of the fiscal year 2006/2007, and is represented as follows : - 1- Tariff reforms and the Customs work process developments: The modern economy thinking have recognized the importance of developing international trade movement as the primary impetus for expanding the horizons of economic growth and promoting sustainability considering it the fundamental criterion for raising the standard of living of peoples. In the framework of this thinking, it is difficult to impose restrictions on the movement of trade, whether these restrictions tariff or non-tariff, this has driven countries, developing or developed to try to overcome all the obstacles that impede the freedom and streamlining of international trade. One of the priorities was the trend towards the reform of tariff structures through a package of measures aimed at reducing the upper limit of tariff and reduce the number of categories and connect this reform with the society needs of manufacturing and export promotion while not imposing any burden other than customs duties. As a start two presidential law resolutions was issued, Law No. 300 and law No. 410 for the year 2004, which helped to reduce the average tariff from 14.6% to 8.9% as a weighted average tariff, as well as reducing the number of tariff categories from a 27 category to 6 categories, as well as classifying these categories into 6000 customs item rather than 13000 items, which helped to facilitate, seizure, and control of Customs transactions and prevention of differences in customs items identification and their unspecified financial burdens. Law No. 8 for the year 2005 also was issued amending some provisions of the customs exemptions law No. 186 for the year 1986 through adding new simplifications and facilities for investment projects. Then followed the issuance of Law No. 95 for the year 2005 amending some provisions of the Customs Act No. 66 for the year 1963 which helped to facilitate trade and create an appropriate climate for clients and employees. In addition, and in the framework of a structural governing development, for the first time in more than 40 years, the executive regulation of the Customs Act Ministerial Resolution No. 10 for the year 2006 was issued with a view to simplifying customs procedures.

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To complement this system Presidential Decree Law No. 39 for the year 2007 has been recently issued to complete tariff modifications. These modifications were based on an integrated and coherent ideology of tariff reform that takes into account the interests of producer and consumer at the same time. While the decrees No. 300, 410 for the year 2004 focus on encouraging producers and facilitate access to production requirements with the least possible burden in support of the productivity and international competitiveness of Egyptian products, The decision No. 39 for the year 2007 was targeted more to activate consumer choices and facilitate the opportunity to benefit from the positive effects resulting from the tariff amendments , Hence the foregoing resolution included tariff reduction of about 25% of the weighted average and 8.9% to 6.9% reductions of a number of final goods durables in addition to garments, fabrics and basic commodities and medical supplies, which primarily concern to the citizens. The recent amendments also aimed at addressing the distortions in the tariff which have been noticed during the practical application regarding the gradualism of tariff categories in a single industry. It is expected that these amendments will cost 1.4 billion pounds to be taken from customs proceeds and is expected to benefit both the consumer and producer. In general, the recent tariff amendments had targeted:- Achieving a balance between tax levied on finished goods, intermediate goods and raw materials to encourage national industries taking into account the social dimension and easing burdens on the citizens through the reduction of customs tariff categories on basic commodities which have priority for citizens , Such as meat, fish, cheese, lentils, wheat, maize, flour, oil and tea, medical supplies and medicines. The tariff amendments also targeted (either in 2004 or 2007) the deepness of the concept of protection for local industries and create a balance between the need for local industry to a minimum level of protection and the right of citizens to have access to high-quality goods at low prices. This is obvious from the reduction of tariff on garments from 40% to 30% and a consequent reduction of customs duties on garment industry inputs. Finally, It is to say that removing some of the distortions in the customs system to improve productivity and competitiveness in key economic sectors such as agriculture and industry will be reflected positively on the citizens and producers. Also tariff amendments aimed at preserving the environment and reducing pollution by promoting environmentally friendly goods, which would improve the standard of living of the citizen. With these amendments the 65% of the tariff structure is now ranging from 0% to 5%, and now 90% of the structure of the tariff rates ranging between 0% and 10%. looking at the lines of the new customs tariff, indicates the following:-

Number of tariff lines Customs Category Ratio

478 Exempted 8.5%

1485 2.0% 26%

1730 5.0% 30.5%

140 10.0% 35% In light of the foregoing tariff reductions, simplification and taking into account what has already been mentioned and the abolition of customs service charges that were imposed on imports as a result of the cancellation of this Ministerial Decree No. 1230 of 2004, there were also many steps that have been taken for developing customs system. These steps are as follow:-

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- Development of customs procedures : By abolishing observation fees of cargo transit system, and provide all customs spots with advanced detection X-RAY to facilitate the transit phase, as well as the preparation of a project document (full automation of customs process) and deepening of electronic payment system, and include database of all customs operations in the customs authority website in the internet.

- Combating customs fraud : through several measures, the most important of them is the

formation of committees to inspect stores and places selling foreign goods to ensure payment of taxes and customs duties.

2- Income tax reforms: The approval of the Security Council the Act No. 91 of 2005-Income Tax Act - a crucial step in the history of Egypt, where the government has engaged with the People's Assembly and Shura Council drafting of a new philosophy of modern economic management of our economy, moving from an era of state control over economic activity to the era of civil and economic community participation in steering the national economy and enhancing the supervisory role and facilitator of the state bodies and also represents the transition from the philosophy of the collection of resources which the state depend on to the philosophy of participation where the entire society bears the burden of generating the necessary economic resources for the performance of his development functions in the Economic and Social fields. The new income tax law led to:-

• Improving the investment climate to become more proficient at attracting investment, and stimulate turnover rate of economic performance and increase employment opportunities.

• redistribution of tax rates for normal persons with categories commensurate with the

gradual increase incomes. • Raising categories of tax exemptions for individuals income to be in favor of low-income

groups, and raising tax exemption limits for family burdens. • creating a climate of confidence between taxpayers and Tax authority through tax amnesty

for those who have unprecedented registration activity provided that they will rush to record their activity. This greatly helped to attract the informal sector to be integrated in the community activity, . In addition, it was allowed for conciliated with taxpayers in accordance with the legal rules which contributed significantly to the reduction of legal disputes.

• Reduce tax brackets from 42% and 32% to 20% with the abolition of tax exemptions which

distort the investment climate in Egypt.

• simplify tax calculation and management. New modern tax forms for tax returns were set up to vary according to activity and the types of entry and characterized by clarity, transparency. It is the right of taxpayers to submit his tax return to the tax authority who will accepted it at the responsibility of the tax payer. Audit and examination of the tax returns will be on the basis of samples of tax returns chosen according to objective criteria.

These new tax concepts have led to the achievement of positive results to the favor of society and can be summarized as follows : - - Income tax receipts increased by nearly 10% and expected to reach 60 billion pounds in the

fiscal year 2006/2007 compared with 54.7 billion pounds in the fiscal year 2005/06 representing an increase of 5.3 billion pounds or 9.7%.

- Tax returns increased to 2.4 in 2006 (the first year of implementing the new law), compared with 1.5 million tax return in 2005. Tax receipts increased to 4.2 billion pounds compared with 1.7 billion pounds in the corresponding period.

- Reduce tax fraud significantly through incentives but not punishments.

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- Broaden tax community base and inclusion of new segments of the informal sector to unify economic activity directives.

- Expanding large taxpayers center application, which includes files of large taxpayers both in income tax or sales tax in order to improve tax performance and reduce tax burden and the cost to taxpayers and provide integrated electronic services.

- Set up centers for middle taxpayers to meet their needs in terms of tax return introduction, or in terms of tax accounting.

Decree No. 154 for the year 2006 has been issued to merge General Tax Authority and sales tax Authority . This represents a creative and effective step towards the development and restructuring of the tax in order to serve economic activity and tax community and preparations are under way for a new organizational structure for the activation of this merger. Although the initial application of the new tax law has brought many positive results, both in changing the relationship between taxpayers and the public treasury or in contributing to the changing investment climate in the Egyptian economy, but it is only a start in a long way- that will involve the developing of tax administration itself – It has been started with integrating General Tax Authority and sales tax Authority , and in the near future it will move to develop methods of disputes settlement between taxpayers and Tax Authority and methods of tax appeal on the Tax Authority decisions, as well as methods of screening, monitoring and accounting in particular that we still did not pass the tools and mechanisms that will address the small and micro-out. Your Security Council had a key role in formulating and supporting these new directions, and the Council will continue to develop the first supporter to the development we aspire, Insha'Allah. 3 - Stamp Tax Act amendments: Egypt has known Stamp tax since it was part of the Roman Empire, and then came the stage of the tax reform in Egypt after the abolition of the foreign privileges. Tax Reform Commission was formed in 1937 which completed a number of tax laws of which Law No. 44 for the year 1939 which is considered The first single omnibus legislation with the provisions of the Stamp Tax in Egypt. It has been followed with many amendments, the most important of it was Act No. 224 for the year 1951 and then law No. 111 of 1980 as amended by Law No. 104 of 1987 doubling Stamp Tax categories on all tax bases except for a limited number of them, then amended by Law No. 224 for the year 1989 doubling Stamp Tax categories both in kind and the relative again then Act No. 2 of 1993 which provided tax increase in kind tax by the 50%. Since the Stamp Tax has one of the most important tax bases affecting the performance of various economic activities, and encouraging investment, therefore, the Ministry of Finance recently issued Act No. 143 for the year 2006 limiting this tax on 29 tax bases rather than over 50 tax bases in order to reduce deep bureaucratic interventions. The Act also amended important tax bases aiming at encouraging economic activity and promoting investment, especially those activities related to, banks, insurance and advertisement activities. Also taken into account in the new law-overcoming disputes and antagonism with the taxpayers - accepting reconciliation between taxpayers and tax Administration and thus allowing the right of taxpayers to accept the expiration of antagonism in all cases registered and presented to all courts at different levels in which the subject of the dispute is the difference in tax estimate if the tax where the dispute is about does not exceed five thousand pounds, The Act also allowed for termination of such disputes in return of the payment of a percentage of the tax and other payments due on the tax beyond the five thousand pounds. The Ministry of Finance issued the Ministerial Decree No. 525 for the year 2006 for the executive regulation of the Stamp Act No. 143 for the year 2006.

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The Ministerial Decree No. 568 for the year 2006 was issued providing the new tax forms of tax notices. They are new developed forms for the implementation of the stamp tax law and its executive regulation in line with modern requirements. It should be noted that the impact of the implementation of the new stamp tax though it might initially influence the tax receipts with interim tax cut, but that is acceptable to activate economic activity and increase the rate of its rotation, but with the launching of the activity and performance, this reduction in the expected tax receipts in the early stages will be compensated with greater future tax receipts. 4-Reforms in the area of general sales tax : The most important areas of reform made in the area of general sales tax are as follows:-

• Take the necessary steps to activate the presidential Decree No. 154 for the year 2006 to merge the two general tax and sales tax Authorities in one Authority called " Egyptian Tax Authority". This will be done through three stages ending in 08/01/2009.

• Completion of the preparation and updating of materials to serve registered taxpayers

including contracting / SME / returned tax returns / gold and silver formulation activities / Pharmacists services.

• Completion of the preparation and updating of manuals to serve registered taxpayers

including tourism services / capital goods/ invoices and books and records / table goods / tax terminology/ tax terminology in English language.

• Implementing the concept of strategic planning consisting of successive plans, starting with

identifying the basic elements of The Authority thought and strategies and the importance of The Authority message of maximizing the state sovereign income and collecting general sales tax owed with the lowest possible cost and in a fair way accompanied by developing the plan to suit the optimal implementation of budget programs and performance accounting and quality control.

The tax Authority issued several instructions explaining tax treatment in the following areas:-

• Identifying due tax category for food and medical Formulas considering them as food complementary or medicine.

• Tax exemption of amount of money paid to contractors to compensate them for higher prices of materials involved in construction contract pursuant to a decision of Mr. Prof. Dr. the Prime Minister in this regard.

- Twinning agreements have been signed to lay the foundations for Fraternal Union integration

between The Tax Authority and the various chambers- and solve their problems -such as "the Chamber of Chemical Industries/ garment manufacturing chamber/ leather industry chamber/ textile industry chamber/ software chambers/Productive Cooperative Union."

- The Tax authority established committees to agree on Itemization with participation of the

"Ministry of Tourism / Media Advisory Counsil/ General Authority for Investment/ Customs Authority/ Egyptian Federation of Building and Construction."

- Also meetings were held with various sectors representatives in order to solve problems related

to them such as chambers of commerce, associations and various professional unions. - GSTACS integrated tax system and The Tax Authority website in the internet have been

developed to link The Sales Tax Authority with the Ministry of Finance. - Work systems have been developed, using the latest technologies in the world of management

information technology and electronic payment.

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5- Restructuring the State General Budget : As a requirements for the completion of developing the State's general budget and what the Act No. 87 for the year 2005 targeted by amending some provisions of the State's general budget No. 53for the year 1973 and its executive regulations as amended by the ministerial decree No. 745 for the year 2005. The Ministry of Finance updated the method of the presentation of the state general budget to comply with the international concepts and norms, and government finance statistics to achieve the purposes of analysis and presentation of economic visions through the state general budget. In this respect, The State General Budget Laws have been issued for the two fiscal years 2005/06 and 2006/07 in line with this trend and the financial policies reflection which included in the financial and statistical statement of the State general budget for those two years. The modification of the State General budget classification aimed at clarifying the economic concepts of the state general budget to be accessible to the ordinary citizen, and to make him able to interact and express his opinion about it, and to be able to participate effectively- through your Security Council- in the formulation of the fiscal policy of the national economy considering him as a genuine partner in the development process. The new classification of the state general budget has allowed the automation of all budget inputs to be derived from Informative immutable programs. In the framework of information systems and modern technologies ,The automation of the state general budget centrally was completed to prelude to roll out the system in all units of the state as an integrated and sound basis for the preparation of the state genera budget, including the collection of all current and previous data to assist decision making as quickly as possible and in a very accurate manner. Also it is now being prepared for automating the final accounts in order to link it with the state general budget and its actual results. This automation will facilitate the introduction of integrated system for automating public revenue and expenditure – government wide utilizing and the development which occurred in the banking system and utilizing the modern electronic payment mechanisms ,Which will have the greatest effect in reducing the cost of managing costs of the public treasury by nearly three billion pounds annually. The public treasury used to bear this cost because the receipts and payments of the Treasury used to take long time in the banking system. The year 2007/2008 will witness the completion of the system where the automation of wages and pensions payments through automated teller machines nationwide will be completed, which would have a great impact in reducing the costs of those who are entitled to wages and pensions. 6- Activation of Treasury Single Account : The achievement of fiscal discipline is one of the core functions of the Ministry of Finance not only financial control of the uses and resources of the state general budget, but also financial control of all financial accounts which are reflected in one way or another on the cash flows and affect positively or negatively on government finance management and the treasury single account. Thus, the Ministry of Finance issued the Act No. 139 the year 2006 amending some provisions of the government accounting law No. 127 for the year 1981 which established the treasury single account at the Central Bank of Egypt as a positive effective step in the modernization and development of the financial policies, in the context of integration between financial and monetary policies. The concept of treasury single account requires that all government entities should withdraw their funds from the various banks and direct them to the treasury single account while maintaining the ownership of these funds to the entities whom these funds belong which have been transferred to accounts in their names at the Central Bank of Egypt. The entities will maintain the right to withdraw and deposit in these accounts, even they will have the right in coordination with the Ministry of Finance to receive a return on these funds.

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This is merely a consolidation of government finance at the Central Bank of Egypt, which allowed for a financial coverage for the public treasury to help reduce the need of borrowing, as long as these funds are not used by the entities who own these funds and thus help to reduce the burden of servicing the public debt. The treasury single account is an activation of good financial performance and is in practice in all developed and developing countries who enjoy modern financial regulations. This amendment has helped to create more effective management of the inflows and outflows of public funds and without any prejudice to the rights of the owners of these accounts. The activation of the treasury single account has led to a reduction in the amounts of public borrowing for the year 2006/2007, which will result in lower interest burdens on the public debt in 2007/08 thereby allowing more resources. Second: The development of the system supportive to the national economy There is no argument that economic subsidies through the state general budget is one of the most important tools that the developing countries use to deal with the imbalances that might result from market economies, either in the production process or in the efficiency of distribution of income between all classes of people. The governments in developing countries depend on subsidies as a tool to correct these distortions, or in directing economic activity to what is best for society, so successive governments in Egypt have been used the subsidies tool to address various challenges facing economic and social development. Proceeding from this; and believing that the government subsidies in all its forms is an essential tool for fiscal policy in Egypt which deserve modernization and development, not to curtail it, but to increase its effectiveness and efficiency in meeting the challenges of our society, and to increase its appropriations in the state budget with the growth of the national income and State revenues. In the following lines we will review the developments in cost of living and wages reduction that represent direct subsidies to economic activity in Egypt and support to pension and social security systems, they are all essential elements of the subsidies policy that the government intends to develop and increase their effectiveness and their ability to reach those who deserve them. 1- Subsidies for cost of living reduction:- The subsidies that the state general budget provide by in the framework of overall fiscal policy is one of the most important goals of the state in achieving the social dimension. The appropriations that have been included in the state general budget for this purpose has evolved from 1563.2 million pounds in 1980/81 to 3579.2 million pounds in 1990/91 and then to 5789.1 million pounds in the fiscal year 2001/2002, and reached 53776.6 million pounds in the fiscal year 2006/2007 budget and is estimated to rise to 55672.9 billion in the next fiscal year 2007/2008. Subsidies in all its forms represents a direct or indirect contribution for the reduction of the burden on citizens, particularly low-income people. Also it represents an addition to their income that should be taken into account when measuring the real income of citizens. Believing in the importance of providing subsidies, the recent years have witnessed significant progress of what the State is providing for this social purpose of. The subsidies appropriations are increasing year after year, as follows:-

- 19 -

Table No. (1) Progress of subsidies appropriations

(billion pounds)

Fiscal-year G.A.S.C subsidies

petroleum materials subsidies

Electricity subsidies

Housing subsidies

Exports Promotion subsidies

industrial zones and industrial training subsidies

Other Total

2001/2002 4.4 - - 0.4 0.2 0.0 0.8 5.8

2002/2003 5.2 - - 0.7 0.2 0.0 0.8 6.9

2003/2004 8.2 - - 0.8 0.6 0.0 0.7 10.3

2004/2005 11.2 - - 0.8 0.8 0.0 0.9 13.7

2005/2006 9.4 41.8 - 0.4 1.1 0.0 1.5 54.2

2006/2007 8.6 40.0 - 1.6 1.5 0.2 1.9 53.8

2007/2008 9.5 36.6 2.0 1.7 2.0 1.3 2.6 55.7

(-) Is not available because it was not included in the state budget. It is evident from the figures in table No. (1) that subsidizes of ration commodities which contribute directly of the family budget have doubled during the last the fiscal years mentioned above, indicating the State's commitment to support low-income people and to protect them from fluctuations of world prices and guarantee them a minimum of basic consumer goods. It should be noted that that petroleum materials subsidies was not included in the years before 2005/06, but estimates indicates that they have been doubling about four times during the past seven referred to. And with the evolution of world energy prices, the State has to bear the burden of new and increasingly burden to protect Egyptian society from these increases. The inclusion of energy subsidies (including the first year electricity subsidies) have put the issue on the new arena of the Egyptian economic policy which is the distribution of the amounts of subsidies among various strata of society since that economic studies have pointed out to the enjoyment of classes more affluent of an increasing proportion energy subsidies, which requires us to reconsider the allocation of theses subsidies so that the greatest part of it goes to low-income families . Thus the goal of fiscal policy in the coming period is to redistribute subsidies to shift them from high income classes to low income families without affecting the total amount of subsidies ( ration commodities and Energy). It is noted also the development of housing subsidies from 0.4 billion pounds in the form of housing subsidies loans in the 2001/2002 budget to 1.7 billion pounds in 2007/2008, the bulk of it is monetary support directly to youth housing and low-income families complemented by subsidies in the form of soft loans housing, this is reflected in an increase of housing subsidies of more than fourfold in seven years, reflecting the shift of the State's subsidies from consumer goods to standard of living subsidies. The availability of adequate housing will guarantee an in-kind shift in the life of the Egyptian citizen. Recent years have also witnessed the emergence of new types of subsidies and focusing on it as the export subsidy which started in 2001/2002 in a modest numbers (0.2 billion pounds), but this subsidy have doubled about ten fold to reach 2.0 billion in 2007/08 . Also the state budget included in-kind subsidies for the new industrial zones and industrial training, as shown in Table No. (1), which is a subsidy focusing on the production process, as will be detailed in chapter III, later on.

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2- Wages:- Wages represent the greatest denominator the state general budget. The aim of the fiscal policy is always to provide the necessary funds for the disbursement of wages and salaries of employees, either basic or variable. The appropriations for wages and salaries in the state general budget for the year 1980/1981 was about 1452.6 million pounds rose to 7118.4 million pounds in the 1990/91 budget, and then to 28066.5 million pounds in the 2000/01 fiscal year budget, then rose to 51430.5 million pounds in the 2006/07 fiscal year budget and then rise to 59573.8 million pounds in the next fiscal year 2007/2008. Observing that the State's keenness on increasing the employees income in order to accommodate any increase in burdens of living, the state since 1987/88 bears the so-called employees special allowances which is added to the basic salary every five years based . This consequently increase what the employees receive as bonuses and variable remuneration. The following table shows the development of wages appropriation during recent years:-

Table No. (2) Progress of wages appropriations

(billion pounds)

Fiscal-year Basic wages Variable

wages Insurance benefits

Other total

2001/2002 8.5 15.7 3.4 2.9 30.5

2002/2003 9.1 17.5 3.8 3.4 33.8

2003/2004 10.0 19.7 4.1 3.5 37.3

2004/2005 10.8 21.7 4.6 4.4 41.5

2005/2006 11.7 26.0 5.1 3.9 46.7

2006/2007 13.6 25.7 5.9 6.2 51.4

2007/2008 14.6 30.4 6.5 8.1 59.6 According to the foregoing situation and taking into account that the State had provided continuous increases the special allowances from the years 1987/88 through 2006/07 for about 250% of base salary, the amount of wages in the state general budget has doubled about 41 times what it was in the 1980/81 wages. It is observed that the policy of social allowance has changed since the beginning of the fiscal year 2005/06 where a phased social allowance development in the nature of social allowance had been set up involves an identification of a minimum for the allowance which permits a higher increase for the small income for the purpose of supporting low-income employees in the state and to minimize differences between high income and low income in the wage structure in the state general budget. This policy resulted in an increase for the small incomes in the state general budget with an average of 72% in recent years compared to 46% increase for the greater incomes. Although this interim policy aimed at causing a surge in small incomes but they now allow for the return to a policy aiming primarily at a balanced increase in the wage structure in the coming years, especially that the objective of the Presidential agenda aiming at basic salary increase for small incomes has achieved almost three quarters of its target before the passage of a half of the Presidential agenda.

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3- The state's support to the pension and social security systems:- Fiscal policy has always been directed to support and strengthen pensions systems in Egypt even though the insured contributions in these systems are not compatible with State keenness to provide adequate pensions enough to ensure a decent living for employees after retirement. Appropriations set up for this purpose in fiscal year 1980/81 amounted 464.0 million pounds rose in 1990/91 to 2844.2 million pounds then in 2000/01 amounted to 11398.0 million pounds. ,and rose to 24589.9 million pounds in the 2006/07 fiscal year budget and rise up to 29432.1 million pounds in the coming year 2007/2008 In the framework of completing these social systems, the state has sought to add special additional pensions, as well as the new structural development of the pension system to ensure that pension funds obtain cash dividend on those funds which are being used to finance the new State investment plan of. The amount that the state allocate to subsidies these funds has doubled significantly in addition to the state the state also provide social security and other social benefits to poor families, which highlights markedly in the following development:-

Table (No. 3) Progress of subsidies appropriations

for pensions and social assistance (billion pounds)

Financial years

Subsidies for pension funds and interest

on funds

Insurance benefits that

the public treasury bears

Security pensions

various of social

assistance Total

2001/2002 10.3 3.6 0.2 0.5 14.6 2002/2003 11.5 3.9 0.3 0.7 16.4 2003/2004 13.8 4.3 0.4 0.8 19.3 2004/2005 15.0 4.8 0.5 1.0 21.3 2005/2006 11.0 5.1 0.9 1.3 18.3 2006/2007 15.4 5.9 1.1 2.2 24.6 2007/2008 17.8 6.5 1.1 4.0 29.4 It is noted that the beginning of the 2005/06 have witnessed a significant increase in security pensions and various social assistance which the state aims , through them , targeting poor people and those who have no sponsor. This represents a structural shift in the social security system, which has begun to focus on coverage of no income people with social welfare to allow them a decent life and to develop their ability to generate new income and to shift them to a higher standards of living more appropriate to Egyptian citizen aspiration. Third: Developments in the most important service sectors The state general budget focus on finding adequate financial resources for the development of education, health, housing, infrastructure such as water and sewage. These four sectors have witnessed important developments over the past years where progress is measured not only through one year or two but over many years using the same logic which constitutes that addressing these the challenges of these sectors will not take a period of one year or two, but it will be a result of sustainable continuous development policies aimed at quantitative results previous years and will target qualitative results and coverage in the next stage. We present here the developments in some important service sectors including education, health, housing, portable water and sanitation :

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1- Public spending on education:- The fiscal policy is concerned through the state general budget of providing necessary appropriation for education, not only from the perspective that it is a right and a prerequisite for citizens, but also believing that education is the main and principle gateway of production and development. Appropriation that have been set up in the state general budget in 1980/81 amounted to 683.2 million pounds, rose up during ten years to reach 3826.6 million pounds in 1990/91 and then to 16189.5 million pounds in 2000/01. The State has intensified its efforts to provide the necessary funds for the educational process during the following years until they reached in the 2006/2007 fiscal year budget to about 27.4 billion pounds, rising to around 30.7 billion pounds in the next year 2007/2008. Figure (1) the illustrates the development of education appropriations in the state general budget in recent years:

Figure No. (1) Progress of education appropriations

1.7

1.61.6

1.72.3

21.6

8.05.0

5.3

5.9

6.3

6.5

7.1

14.2

13.3

14.516

17.518.7

21.020.8

20.6

22.724

25.627.4

30.7

0

5

10

15

20

25

30

35

2002

/2001

2003

/2002

2004

/2003

2005

/2004

2006

/2005

2007

/2006

2008

/2007 ة

وازنع مشروم

مجاالت وأنشطة متنوعة

Providing the appropriations referred to helped to achieve the following indicators in the five-year plan 2002/2003 - 2006/2007:

• Establish , furnish, replace and renovate 3320 schools containing 46700 classes. • Increase the number of students enrolled in educational stages from 16.2 million to 17.7

million student.

• Relative improvement in classes density from 41 to 39 students per class.

• Increase the ratio of female education pre-university from 47.4% in 2001/2002 to 48.5% in 2006/2007.

التعليم الجامعى التعليم قبل الجامعى االجمالى

- 23 -

• Establish three free universities in Cairo, Alexandria and Assiut.

• Increasing the numbers of students enrolled in the university education and higher and

middle institutes to an about 1 million students.

• Adult education rate rose from 55.6% to 71.4%.

• The illiteracy rate dropped from 30.6% to 25.2% in 2005/06 and is expected to fall below that, in the year 2006/2007.

• A study is now being conducted covering development requirements in the field of education

at all levels. The executive regulation for the general authority for assuring quality in the educational process has been approved. The preparation of special cadre for teachers has been completed and will shortly be presented to the People's Assembly and Shura Assembly.

2- Public spending on health:- The State, with all its agencies, are exiling their efforts to provide to citizens health services and their health care treatment requirements at public hospitals and health centers and units scattered throughout Egypt. The fiscal policy through the general budget is fully directed towards the provision of the necessary funds for this humanitarian goal. The appropriations allocated for this purpose in the state general budget in 1980/81 amounted to 245.1 million pounds and rose to 1358.3 million pounds in 1990/91 and then to 6327.4 million pounds in 2000/01. Believing, from the state side, that the provision of appropriations necessary for health care services for citizens has a great importance, the financial policy, through the general budget, included the provision of more funds for this purpose until they reached those amounts of appropriations in the state general budget for the fiscal year 2006/2007 of about 9.3 billion pounds, and would rise to around 10.6 billion pounds in the next year 2007/2008. In addition to about 3.6 billion pounds included in the specialized economic authorities budgets, example of this is the budget of the health insurance authority. Therefore, the total allocations for health care services amounted to about 14.2 billion pounds, as shown in the following figure of the development of health care appropriations in recent years:

- 24 -

Figure No. (2)

Progress of health appropriations

6.66.0

6.66.1

5.65.1

4.12.3 2.5 2.5

2.9 3.1 3.4 4.0

9.0

10.1

10.7

11.812.7

12.7 14.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2002

/2001

2003

/2002

2004

/2003

2005

/2004

2006

/2005

2007

/2006

2008

/2007زنةموا

وع شرم

6.4

7.6

8.1

9.09.7

9.4 10.6

2.6 2.5 2.6 2.8 3.0 3.33.6

خدمات المستشفيات خدمات صحة عامة اعتمادات الصحة بالهيئات االقتصادية اعتمادات الصحة بالموازنة العامة االجمالى

The appropriations. Implementation set up in the budgets of fiscal years referred to helped to achieve the following rates in the five-year plan 2002/2003 - 2006/2007:-

• Increase the number of beds in hospitals from 141 thousand beds to 188 thousand beds, which means an increase of 47 thousand hospital beds.

• Establishment of 130 general and central hospital, therefore, the number of these hospitals increased from 253 to 383 Hospital.

• Establish and operate 381 rural hospitals and 652 rural health units, so the total number will reach 931 rural hospitals and 4452 rural health centers.

• Increase the number of doctors by about 19 thousand doctors and increase the number of nursing groups by about 30 thousand nurse.

• Infant mortality rate decreased from 22 to 17 per thousand. • Increase the expected age life of males from 60 to 67 years and the expected age life for

females from 71.5 to 75 years and the overall rate to 70.2 years. • The number of per capita/ doctors retreated from 455 per capita/ doctors to 443 per capita/

doctors, and the number of per capita/ hospital beds retreated from 478 per capita/ hospital beds to 392 per capita / hospital beds.

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3- Public spending on housing:- The issue of housing and providing housing for citizens especially low-income people, and young graduates is one of the priorities issues of concern to the State. The emphasis in the last two decades of the 20th century was to support low-income housing for young people through the provision of soft loans with reasonable interest rates where the public treasury bear the cost of the difference between the interest rates on these loans. The magnitude of housing soft loans subsidized by the state amounted to about 450 million pounds in 1981/82. These soft loans increased year after year until they reached over the years from 1981/82 to 2006/07 to 17593 million pounds. The public Treasury bears interest rate differences of such soft loans as a support to provide adequate housing for the low-income people and young graduates. The following graph illustrates the amounts of housing soft loans provided by the State where the state general budget bears interest rate differences and their burden during the years from 2001/02 to 2007/08:

Figure No. (3)

Progress of housing soft loans appropriations

18.2

17.617.0

16.515.9

15.314.6

14.0

10

12

14

16

18

20

There are, however, new mechanisms that started to be implemented through real estate financing and through provision of required loans to the companies working in this field, and also through providing the private sector with free lands, utilities and services in order to establish adequate housing units for low-income families and young people.

تى 2001/20001 ح

من 981/1980

2002/2001

2003/2002

2004/2003

2005/2004

2006/2005

2007/2006

ة2008/2007وازنع مشروم

إجمالى تراآمى

- 26 -

In line with the general policy of the state, the government always interested in supporting low-income families and young people. Twenty thousand housing units were allocated for applicants, and there are 132 thousand units available for distribution. 117 million pounds were disbursed for 9 governorates to implement and complete housing projects for low-income families and also for the New Urban Communities Authority. The National project for Housing also involves Fifty thousand housing units, representing 10% of the total units on the project for five years. It was decided that the State bear the monthly rent or part of it, on a social case basis of citizens. In addition, the Ministry of Housing provides a ten thousand pound loan from the Ministry of Housing fund to be paid in a twenty years period at 6% interest rate. Also a number of 50 thousand new plot of lands will be offered under the project (build your house). The state subsidies these units with an amount of 15 thousand pounds to alleviate the burden on young people , low-income families and the most favored citizen. The new budget has allocated 1000 million pounds for this purpose other than the 1000 million pounds included in the 2006/07 budget. 4- Public spending on potable water and sanitation: The provision of potable water and sanitation is one of the major concerns of the state who work to provide appropriation for them. The strategy of developing potable water sector has focused on the completion of providing potable water to villages with no water supplied and other sub-villages, at the same time work on to minimize the loss of water through water supply networks and rationalize consumption of potable water and conducting the periodic maintenance of water supply networks. In the area of sanitation, attention focused on developing a medium-term plan to extend sanitation services to all villages and working on to lessen the pressure on sewage networks through periodic inspection of sources and places of pipes leak and change outdated pipes. The following figure illustrates the development of potable water appropriations of and sanitation in recent years:-

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Figure No. (4)

Progress of potable water and Sanitation appropriations

2.9

2.62.4

2.92.6

2.62.2

2.21.7

1.40.4

0.5

0.70.9

3.8

3.32.9

3.3

4.04.3

4.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

02/20

01لى فع

2003

/2002علىف

2004

/2003

لى فع

2005

/2004علىف

2006

/2005علىف

2007

/2006

نة وازم

2008

/2007زنةموا

وع شرم

20

الهيئة القومية لمياه الشرب والصرف الصحى الجهاز التنفيذى لمشروعات مياه الشرب والصرف الصحى بالقاهرة الكبرى واالسكندرية االجمالى

These appropriations allocated for water and sanitation in the 2006/07 fiscal year exclude two billion pounds, the government submitted to your honored Council to open special appropriation account for this purpose. Further to the allocations set up for the next fiscal year 2007/08 there is also three billion pounds, which may be funded from available self finance sources. The appropriations provided through the state general budget to meet potable water needs helped to achieve the following:

• Increase available potable water capacity from 17.63 million m 3 / day to 21.9 million m3/day.

• Increase average per capita potable water capacity available from 267.3 liters / day to 307

liters / day.

• Increase the lengths of potable water networks from 25.2 thousand km to 29.2 km. Also, in the framework of the implementation of the presidential agenda in the area of potable water, 15 projects with investments amounting to 600 million pounds has been implemented in new cities. The new year 2007/2008 year will bring water to 100% of villages.

- 28 -

Also the provision of such appropriations in the area of sanitation helped to achieve the following:

• Increase available disposal capacity from the 10.3 million m 3/day to 14.9 million m 3 / day. • Increase available purification plants capacity from 8.14 million m 3 / day to 12.5 million m

3/day. • increase the lengths of networks from 19.8 thousand km to 23.6 km.

In this framework of the presidential agenda, 30 investments project amounting to 1.6 billion pounds was completed, in addition to implementing investments with an amount of 200 million pounds in new cities and remote areas.

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Chapter Two

ــــPrinciples Governing The Budget Of Fiscal Year

2007/2008

Mr. Prof. Dr. / President of the People's Assembly Ladies and gentlemen, distinguished members of the Assembly The State general budget as the most important tool of fiscal policy continues to be the framework ruling financial, economic, and social ideology, and best expression of the State Economic policies , and honest translation of government programs and directives of the wise leadership. Accordingly, the state general budget must be based on a set of pillars, and starts towards the main objectives, and depends on the coordination and integration between financial and monetary policies and other policies, hoping to achieve the desired growth rates and control inflation rates and prices, driving production and encouraging investment, opening job opportunities and employment in various areas. Thus, a new approach we moving in its orbit based on association with rules of the developing global economy, and commitment to the requirements of achieving the desired growth rates achieved in those States which attract more investments; And achieve the aspirations of our citizens in the framework of justice and transparency. In this framework of ideology, the draft general budget for the financial year 2007/08 comes as an expression of the following governing principles:- First: Welfare of low-income people and preservation of social dimension of the state

general budget:- One of the strategies of the state and main goal of its objectives is the welfare of low-income families and ensure the delivery of necessary subsidies to them in various areas both in ration commodities subsidizes and petroleum materials subsidies or other assistance and subsidies to ensure the achievement of social dimensions in the areas of education, health, transport or other areas. This concern of social dimensions is attributed to the State's keenness on the redistribution of income in favor of the lower income and incapable groups in order to achieve social balance and maintain social safety and security to enable incapable groups to increase their incomes in an indirect manner. The appropriations that the state allocated in the draft general budget for the financial year 2007/08 to achieve social dimensions amounted to about 136.0 billion representing 56.3% of total expenditures in the State general budget which amounted to 241.6 billion pounds, representing an increase of 10.6% over the 2006/07 appropriations. However, the increase in subsidies appropriations both direct commodity and service subsidies (ration commodities-petroleum materials- public transport subsidies and other forms of direct subsidies), and health and education services subsidies do not constitute the whole system of subsidies in the state general budget . In the present time and for a number of years ahead exist a number of challenges that require us to redraft the philosophy of subsidies in the state general budget. This re-drafting has already started in the past years and more in shape this year.

- 30 -

The challenges facing the Egyptian economy in the future attribute mainly to the fact that all developing countries that are moving from the stage of sluggish growth depends primarily on government spending and public sector activity to the stage of rapid growth depends on private activity and foreign investment, are witnessing a change dynamic growth of income of the different classes of the society. The growth of government spending and public sector activity, with a limited role for the private sector and foreign investment usually has a homogeneous effects on the income of various classes of the society, and make them grow at rates largely homogeneous though low rates. The next stage when the national economy begins to rely on the private sector , foreign investment and exports in generation of growth rates, we find that the growth rates of income of various classes begin to vary at high rates in some cases, since growth was driven by the private sector (domestic and foreign) depends on the use of market mechanisms and dynamics of supply and demand factors in attracting production factors and their interaction and synthesis to activate the production process, and increase income generated. Here comes the source of the discrepancy in influencing the various strata of society, because all classes do not have the same efficiency in dealing with market mechanisms and supply and demand mechanisms to utilize it for developing their income and keep with the overall increase in national income. Neither all classes of the society are at the same degree of interaction with the markets nor they are at the same degree to absorb information that comes out from different variables interacting in the markets. Therefore, the phenomenon that usually accompany the current stage of the Egyptian economy is the disparity of income growth rates of different classes because the higher the income of particular social class the more tightly connected with market mechanisms and the more ability to interact with these mechanisms whenever they could employ these mechanisms to increase and develop . To the contrary the lower-income groups interact with market mechanisms in a weaker manner, where the circulation of information on markets and their variables is less prevalent, thus their ability to employ these information and mechanisms is less than other groups and thus benefit from the surge of development to increase their income are less than other groups. Here we notice the growing disparity between income of different classes in the stages of economies similar the stage through which our national economy is now on. It should be noted that this phenomenon is not exclusive for Egypt, but appeared to in all developing countries, which passed through the same stage- appeared in Malaysia, Thailand and Indonesia- These countries are still addressing the phenomenon of increasing disparity between incomes. The phenomenon appeared in Brazil which is working hard to reduce the differences between incomes without affecting market mechanisms that are the source of the large increase in national income. Therefore, we must realize that the next stage compels us to pay attention to the phenomenon of the widening gap between high-income and low-income people . Let us be clear, the stage through which our economy is passing through a natural stage where small, larger incomes and relatively large incomes grow, However, the growth rates of small incomes are generally lower than growth rates of larger incomes. This the state recognizes, through the state general, the importance of focusing on this important economic phenomenon that govern our economy. The attention of this phenomenon must be done through three major axes. The first axis depends on the continuity of traditional subsidies for goods and services of interest to the lowest strata of society, such as ration commodities and some petroleum products (butane) and subsidies to public transport, railways and other fundamentals of low-income people spending.

- 31 -

This axis complements the second axis, which aims at rationalizing subsidies towards those who deserve it, and to ensure that it does not go to the layers of society who are not in need of it - a new system has already begun of the Ministry of Social Solidarity-aiming at identifying low-income families, and deliver effective subsidies to them either monetary , in-kind subsidies or subsidies to services of education, health, housing and other basic services. Therefore, the government began last year a program to increase the number of families benefiting from social security pension to a million families, verifiable So far about 800 thousand families and we hope to reach three million families at the earliest. Therefore, an amount of 1.1 billion pounds has been allocated to meet this increase with an additional amounts to be allocated from the general reserve if the concerned entities exceeded that figure during the next year. Also the subsidized quantities of ration commodities such as bread, cooking oil, sugar, rice are being maintained, as well as maintaining subsidies for other purposes such as passenger transport, potable water and ration items. The following table shows the components of this commodities direct subsidies:-

Table No. (4) Direct commodities subsidies

(billion pounds) Statement 2006/2007

The draft budget 2007/2008

The budget

• Ration commodities subsidies: bread

subsidies(import-ed and local wheat, bakeries and maize)

sugar Cooking oil

net differences of revenues and expenses

Total subsidies of basic

commodities

Subsidies of additional commodities (cooking oil, sugar, rice, tea)

7260.1

700.9 856.5

(206.9)

8610.6

871.4

________

9482.0

9482.0

6300.5

741.9 862.1

(168.9)

7735.6

906.2

_________

8641.8

8641.8

- 32 -

• petroleum materials subsidies:

natural gas butane gas benzene kerosene solar diesel

electricity subsidies

7716.0 8546.0 3666.0 359.0

12120.0 4172.0

36579.0

2000.0

8439.6 8370.2 3624.4 497.3

15264.0 3804.5

40000.0

0.0 • passenger transport subsidy • pharmaceuticals and health insurance subsidies • potable water subsidies • low-income housing subsidies • soft loans interest subsidies • remaining subsidies elements

512.0

380.0

410.3

1000.0

747.6

719.4

441.0

380.0

87.6

1000.0

569.4

614.2 Total 51830.0 51734.0

The third axis depends on the development of subsidies of basic services such as education and health, as the government began to develop mechanisms that will improve services provided and ensure that subsidies will reach targeted groups. The amount of 1.6 billion pounds that have been appropriated for the preliminary phase of the special cadre for teachers is the first step towards improving educational services, and alleviating educational burdens on Egyptian Families. In addition to an increase of 11.8% in education appropriations for all stages in the current year budget 2007/2008. In the same way, appropriations allocated for health in the state general budget increased by 13.5% to ensure the provision of good health services to the largest number of citizens in addition to provisions allocated in the budgets of the economic authorities concerned with the health of citizens, further to the efforts undertaken by the Ministry of Health to enhance cost effectiveness in the health sector and control waste in various aspects of health care. The following table shows the various kinds of services subsidies and their development.

- 33 -

Table (No. 5) Social dimension appropriations

(billion pounds)

Statement The draft budget 2007/2008

The budget 2006/2007

• Education : Provide educational process requirements of basic education and pre-university education and university education as an assurance from the state that education is a community right and as a belief that education is the main gateway for production and development.

30688.8 27442.7

• Health : provide citizens with health services and treatment requirements in hospital and health units, taking into account the necessity of improving doctors and nurses conditions, in addition to allocating appropriations for health insurance of citizens in the Health Insurance Authority budget (3441.5 million pounds) aside from the inclusion of health insurance to students, and pharmaceuticals subsidies in subsidies appropriation (380 million pounds).

10601.9 9345.3

- 34 -

Statement The draft budget 2007/2008

The budget 2006/2007

• Subsidies : Subsidies for basic and additional ration commodities and petroleum material subsidies such as natural gas, butane , diesel , benzene and kerosene and electricity subsidies in the framework of the general policy to make energy subsidies visible in the general budget as well as the requirements of low-income housing subsidies and exports promotion subsidies, public transport and upper Egypt development subsidies.

55672.9 53776.6

• Support and strengthen the pension systems and social security : provision of the requirements of supporting and strengthening the pension systems and restructuring them include: - Impose interest on pensions funds money used to finance public investments. - Insurance benefits the Treasury bear in the pension system. - Contributions from the treasury to subsidize pension funds. - Social security pensions for poor families. - Child Pension. - Various Social assistance. • Youth, Culture and Religious Affairs services.

15818.0

6538.0

2000.0

1100.0

20.0

3956.1

29432.1

9635.0

24589.9

15436.6

5898.3

0.0

1100.0

20.0

2135.0

7815.3

General total

136030.7 122969.8

- 35 -

The items described above is the traditional aspects of subsidies spending - goods and services- however the stage in which the Egyptian economy entered requires reformulation of the subsidies system so that the gap between small incomes and large incomes can be addressed through enhancement of generating income capacity of small incomes. This can be achieved through the development of a new type of subsidies aiming at subsidizing production process rather than subsidizing consumption process, Consequently this will lead to strengthening national economy's ability to generate employment opportunities which will in turn generate incomes for low income families. Hence the subsidy policy has shifted from subsidizing low-income people to subsidizing their ability to generate income through export subsidies, which dates back to the national economy and the increase in production which will consequently result in national economic growth and production and employment increase through subsidies to industrial zones which will enhance competitiveness , and push production units to develop their productive capability which will increase worker productivity and consequently increase their daily income. Industrial zones subsidies also aims at facilitating investment process, and thus facilitating the process of creating job opportunities in the Egyptian economy. In the next year and for the first time a new subsidies for industrial training was introduced to meet the needs of the productive sector for skilled labor, and to strengthen the ability of local employment to rehabilitate and train to meet the new requirements of the national industry until developing basic and technical education system. Subsidizing upper Egypt with an amount of one billion pounds; of which an amount of 200 million pounds was included in next year budget in order to strengthen investment process in disadvantaged areas of the Egyptian country which are often concentrated with layers of society gaining less income on average. These subsidies aim at facilitating investment in upper Egypt through providing explicit cash subsidies in addition to the support that upper Egypt will enjoy through condensation of spending on infrastructure which support the production process. The following table shows the progress of production process subsidies:

Table (No. 6)

production process subsidies in the national economy

Million Pounds statement The draft budget

2007/2008 The budget

2006/2007 • Export promotion subsidies • Industrial Zones subsidies • industrial training subsidies • Upper Egypt development subsidies • Farmers subsidies

2000.0

800.0

500.0

200.0

342.6

1500.0

200.0

0.0

0.0

342.6

Total 3842.6 2042.6 The following figure illustrates the progress of the production process subsidies in the years from 2001/2002 until 2007/2008 :

- 36 -

Figure No. (5)

Progress of production process subsidies 2001 / 2002 - 2007/2008

222.0

834.41084.9

1500.0

2000.0

565.8

214.0

285.9

267.3 342.6342.6

167.935.4

0

500

1000

1500

2000

2500

2002

/200

1

2003

/200

2

2004

/200

3

2005

/200

4

2006

/200

5

2007

/200

6

2008

/200

7 زنةموا

ع روش

Second: Encouraging investment and maximizing the role of the private sector The social outlook of the State mentioned before is supplemented by an outlook and economic dimension which represents the cornerstone and the main pillar of development. The government has managed through intensive efforts to raise the rate of growth of gross domestic product from 4.2% in 2003/2004 to 5.3% in 2004/2005 and then to 6.9% in 2005/06, the highest rate in ten years and is expected to reach 7% by the end of fiscal year 2006/2007. No doubt we are all keen to increase this rate , consequently the real growth rate is expected to reach 7.5% in 2007/2008, and it is required to even increase it more in the years ahead until we can bring about the necessary upgrading of production and increase incomes. Since investment is the backbone of development, and production enhancement and export promotion are all targets that we should struggle to achieve, the sixth five-year plan and the state general budget as a fiscal program aim at achieving a greater rate of development so as to reach all of our ambitions and to upgrade this nation and increase national income through partnership between public investment and private investment.

م

دعم الصادرات دعم المزارعين دعم المناطق الصناعية

دعم التدريب الصناعى دعم تنمية الصعيد

800

200200

500

- 37 -

Accordingly, the economic indicators of the next five-year plan aim at: - Increase GDP at current prices and market prices from 730 billion ponds as expected in

2006/2007 to 846.8 billion pounds in the next fiscal year 2007/2008 and it is expected to reach 1479 billion in 2011/2012 to represent a real growth rate increasing up to 8% annually.

- Increase average real per capita income from 10039 pounds to 13456 pounds, representing an

annual growth rate of 5.5% to 6.5%. - Decrease the number of unemployed persons from two million people in 2006/2007 to about 1.4

million individuals at the end of the plan, which means the unemployment rate falling to 5.5% by the end of the plan.

- Development of export capacity with rate of more than 30% annually. - Doubling foreign investments inflows from 8 billion dollars expected in fiscal year 2006/2007 to

reach 15 billion dollars in 2011/2012 which means an annual growth rate of 15%. The total investments during the sixth five-year plan is estimated at 1295.0 billion, representing an estimated annual average of investments of 259.0 billion pounds, which requires an increase of investment rate from 20% to 24%. Thus, the plan and investment budget for the fiscal year 2007/08 as the first year of the sixth-five year plan includes public investments of 48.7 billion pounds, The plan also includes private investments, of about 131.3 billion pounds meaning a total targeted investment plan for the year 2007/2008 of about 180.0 billion pounds as follows :

- 38 -

Table (No. 7)

investment plan for the year 2007/2008

Entities

The draft budget 2007/2008

The budget 2006/2007

First : governmental investments : (A) service agencies • central administration • LOCALITIES • service authorities • Reserves

12738.5 1760.0 9873.7 1127.8

9257.5 2879.1 6997.4 1106.0

Total(a) 25500.0 2024.0 (B)economic authorities (C) other economic entities (D)public sector companies (non-administered by law 203 of 1991) (E) government projects funded from available self-finance sources

13266.1

376.1

4442.5

5134.7

5431.7

376.1

3686.2

Total government investments 48719.4 29734.0 Second : private investments : • Public Enterprise Sector (not treated with law no. 203 of 1991) • in-kind holding companies • private and cooperative sector

1500.3

14140.1

115640.2

4015.0

11300.0

89951.0

Total private investments 131280.6 105266.0 Total investment 180000.0 135000.0

Within this huge growth of the national economy and our essential reliance on the private sector to make this surge, the 2007/2008 budget depends on a new dimension to develop funds and rationalize spending. It is a dimension that does not depend on reducing public spending and does not depend on the introduction of new taxes to increase public revenues, but it is a dimension that depends on the development of the existing tax base in order for the same tax to yield greater tax proceeds. Subsidies provided for export ,industrial zones, training and Upper Egypt is in fact a subsidies to the sovereign resources-these amounts-help to create new incomes either through profit or through the income of workers in new projects . These incomes will contribute in increasing tax proceeds of the public budget. It will also contribute through doubling investments to increase production activity , which will further increase tax proceeds of both consumer taxes (sales tax and stamp duty) or (income tax).

- 39 -

The state general budget of 2007/08 relies on benefiting from the growing role of the private sector to bear part of the responsibility of providing infrastructure, whether social or economic. The Ministry of Finance Introduced -quoting from a number of successful experiences in developed and developing countries – the concept of the partnership between the private and public sector in the provision of infrastructure in Egypt. The partnership between public and private sectors depends on the involvement of the private sector in financing the required infrastructure - or the provision of public service that should be provided - and long-term contracts with the public sector - or government - Which leads to ensure low construction cost and increase efficiency-ensuring the sustainability of efficient maintenance and ensure low-cost service provision to the fullest extent through private sector competition in the offering to build the needed public utilities and to provide the services contracted. Starting from the first half of the next year, contracting with the private sector will commence to build 300 schools within the presidential program which provides 3000 school during the current presidential term. This will be followed by contracting to build 400 other schools subject to the availability of the required land in the governorates at a cost amounting to 1600 million pounds. The partnership program also aims to contract for the establishment of two power plants for potable water and one Power plant for sewage at an estimated cost of about eight billion pounds. The partnership between public and private sectors means that the private sector build the schools while the government will rent these school and pay an annual rental amount include the cost of maintenance in accordance with international standards and specifications that meet the needs of education in Egypt . The private sector will also provide potable water according to international specifications to be agreed upon and a cost determined in long-term contracts purchased by the government represented by the holding company for potable water and drainage to be resold with the appropriate social price while the general budget difference will bear the difference between the cost price and sales price, So subsidies does not affect the construction and investment quality , product quality or service quality or the maintenance required to preserve and maintain the asset which has been established. And thus the state public budget was able to add of nearly 10 billion pounds of the investment spending without showing that spending in the total deficit of the budget since the private sector is the side that will bear the investment and risk expenses. The state will bear only the expenses of rental service (such as schools) or the expense of subsidizing the sales price if different from the sales cost (such as potable water and sanitation). Thus, a new principle has been activated in the state general budget. This principle depends on the involvement of the private sector in generating resources through strengthening the investment process and involvement in investment spending through long term contracting. Third: Development of public revenues and expenditures through structural reforms in the

state general budget: This stage of economic reform, which started with the beginning of the fiscal year 2004/2005, is considered as a new phase in the reformulation of policies supporting the State general budget. 1- Generating an developing revenues:- The governing philosophy in generating additional resources for the state has changed from a standpoint of increasing tax burden on a limited tax base growing at low rates to the restructuring of tax tools in a way that maximizes tax revenues and assists on the growth of the different tax base rates which will bring additional revenues more flexible towards national income, and a greater capacity to cope with the change in prices in the national economy.

- 40 -

The beginning was a reduction and a restructure of customs tariff, which resulted in a decline in customs revenues in a first phase, but in a second stage the real impact was in the 2007/08 budget reflected in an increase in customs revenues depend on a significant increase in imports of capital and intermediate goods which is the backbone of the expected growth in the future national income. This has been followed by substantive amendments to the Income Tax Act and its philosophy which end up in drafting a new law that includes a reduction of the tax rate and raising the family exemption limits with the abolition of tax exemptions which has proved to be ineffective, resulting in an increase in tax proceeds , an increase of the number of taxpayers and an increase of economic activity. This has been followed with a subsequent amendments to the Stamp Tax depended on the cancellation of a number of crippling taxes to the production process and a reduction tax rates hampering investment in a number of vital areas such as insurance, media , banking services and other activities generating economic growth which will result in an investment increase in these areas and thus an increase in tax proceeds. These actions are just examples of a new policy adopted by the government depends on the restructuring of the budget measurements to face budget deficit without affecting the national economy's ability to raise growth rates. The 2007/2008 budget will witness more of these procedures, which depend on structural reforms in the mechanisms and tools of the state general budget to improve the its deficit position. The new real estate tax law for building is considered as one of the most important structural reforms that would correct this tool tax to result in a greater contribution from the high income groups to support the state general budget, and thus strengthen its capacity to reduce the differences between the different layers of society. These reforms depends on raising the tax exemption limits to ensure the protection of all properties of the low-income groups against tax burdens while reducing the rate of tax from 46% now to 10% and simplifying tax process and procedures so that the tax burden will be almost invisible for a broad base of real estate generating revenues supportive to the state general budget without exhausting the national economy or reducing its growth rates. In the same way the government intends to introduce fundamental amendments to the sales tax to unify tax rate and roll out the discount to all commodities and services inputs, which converts it to a value added tax coping with the successive developments in the national economy without affecting its ability to grow. Similarly, the actions taken by the government in the utilization of privatization proceeds in restructuring the debt of public enterprise sector companies and absorb bad debts in the banking system and restructuring some important economic authorities (such as railways), will result in an increase in surpluses generated by these activities and thereby increase transfers to the state general budget - For example – which is expected to increase surpluses transferred from the public enterprise sector from less than one billion pounds in the current year to about 2.5 billion pounds in 2007/2008. In this field the state organizational structure contains a number of (50) economic authorities , these authorities are still mostly not achieving the required financial balances. The following table shows the operational results of the economic authorities and their indicators for the fiscal year 2005/06.

- 41 -

Table No. (8)

The operational results of the economic authorities and their indicators for the fiscal year 2005/06

Pillion Pounds Suez Canal, petroleum two authorities

Statement Suez Canal Petroleum Total

The rest of the

economic authorities

Total

-Operational results * surplus before tax 18.6 18.8 37.4 2.5 39.9 * Deficit 0.0 0.0 0.0 3.1 3.1 * Net operational results

18.6 18.8 37.4 -0.6 36.8

* total property rights 5.2 11.2 16.4 49.5 65.9 * Net property rights 5.2 11.2 16.4 17.8 34.2 * invested fund 8.0 51.4 59.4 99.2 158.6 - Ratio of net operational results:

* total property rights%

357.7% 167.9% 228% -1.2% 55.8%

* Net property rights%

357.7% 167.9% 228% -3.4% 107.6%

Invested fund 232.5% 36.6% 63% -0.6% 23.2%

This was reflected on the operational results of these authorities and the accumulation of its forward deficit (except for Suez Canal and petroleum two authorities)until this deficit reached in 30/6/06 approximately 31.7 billion pounds as follows : - (million pound)

- Egyptian Railway Authority 14967 - Radio and Television Union 7041 - Agricultural development projects Authority 6032 - Cairo public transport Authority 2025 - Alexandria public transport Authority 528 - Port Said Port Authority 520 - Conference center Authority 236 - Therapeutic institution in Cairo 173 - Red Sea Ports Authority 129 - Egyptian agricultural Authority 25 - Survey Authority 19 - The Arbitration and Cotton Tests Authority 4 ________ Total 31699 _________ As shown in the draft budget presented above, the economic authorities surplus amounting to 31.9 billion pounds, mostly concentrated in petroleum and the Suez Canal two authorities as follows:- (Billion Pound) - Surplus of Petroleum authority 17.3 - surplus of Suez Canal Authority 13.2 - Surplus of the rest of the economic authorities 1.4 __________ Total 31.9 __________

- 42 -

The previous table confirms that the surpluses of other economic authorities except the Suez Canal and petroleum two authorities do not commensurate with the invested capital which amounts to 99.2 billion pounds according to the operation results of these authorities in the fiscal year 2005/06 which achieved negative net results, and even at the best is not expected to achieve more than 1.4% in the coming fiscal years which is a very weak percentage. In light of the foregoing, the Finance Ministry in cooperation with concerned authorities is in the process of conducting reform studies aiming at dressing the imbalances of the financing structures of the economic authorities. The requirements of this reform include addressing the shortcomings of the resources which do not cover the uses of those authorities, and do not provide the necessary funding to finance the investments of those authorities. The requirements of the reform also include addressing the possibility of adopting the concept of programming and performance budgets in the strategic authorities so as to reduce dependence on the state general budget, as happening now in the Railways Authority and other major authorities. The reform also involves the study of converting some economic authorities into holding companies leading to the development of the work process of such authorities and correct their financial and economic structures, as it happened in the potable water and sanitation authority, which eventually led to the performance of its activities and its work in accordance with market mechanisms and without prejudice the benefits that low-income people receive as subsidies from these authorities.

2- Rationalizing and controlling public spending : -

The new public finance methodology now indicates that that there is no room for any spending that is not its appropriate place, and also indicated that expenses should be useful and effective, and therefore achieving spending control and fiscal discipline of expenses will help to control the financial balance of the State general budget and reduce the deficit and control the public debt.

In the same pattern, part of the state general budget expenditure was restructured, resulted in a reduction of such expenditures without affecting national economy subsidies in the state general budget, this has been achieved for example through the activation of the Treasury single Account system, which led to reducing the public debt burden of more than three billion pounds without influencing the effective demand the public expenditure generate. It is important to activate the following actions :

• gradual easing of the pressure on the wages bill through restructuring and rehabilitating the government in accordance with the major needs and preparing the draft Civil Service Law and Promoting employees leave and link incentives and rewards with outstanding performance.

• restructuring subsidies , particularly petroleum materials subsidies and ration commodities

subsidizes and emphasizing on the prevention of intermediaries in the distribution of these subsidies and assuring the importance that subsidies will reach targeted groups.

• activate community participation in development process through the increase of private

investments and encourage these investments to increase growth rates , manpower employment and reduction of unemployment.

• Work on the developing new funding methods to participate in building schools, hospitals

and the develop the railway requirements and others, so as to alleviate the financial burden borne by the state general budget without affecting the services that the State provide.

The structural reforms in the state general budget depend on: Concern of decentralization and development, covering activation of localities and strengthening its operational responsibilities and oversight capabilities in order to deepen their role, having now been confirmed that centralization hamper implementation and progress.

- 43 -

The government is moving forward towards the adoption of decentralization in various areas and is working to maximize the role of the local administration as a movement that comes to serve the citizens in the different governorates. The state general budget allocates a great part of the appropriations to localities and this is clearly illustrated in the draft budget presented in front of you which includes the following major appropriations :

Parentage of localities

to the total appropriations %

Localities share Millions of pounds

The draft budget appropriations

Millions of pounds

Statement

44.5

26519

59574 Wages

25.5

4362

17093

Goods and services

6.9

1760

25500

Investments

From the foregoing it is clear that : - The localities workers wage bill constitute about 45% of the total appropriations of wages

allocated in the State general budget. These appropriations are allocated to about 58.5% of the total number of employees in the state.

- The localities share of the appropriations allocated for the commodity and service requirements constitutes about 25% of the appropriations allocated in the state general budget for this purpose.

The appropriations allocated for localities investments , even they constitute about 6.9% of the total amounts of public investment, but they reflects only investments implemented by localities themselves. As if to consider what is being implemented by other entities and authorities for the benefit of localities and in the territories of the governorates themselves such as potable water, sanitation, building schools and hospitals and others, the regional distribution of investments-as illustrated by the State general plan - confirms that the bulk of public investment is directed for the favor of the governorates and for fostering community and local development. It should be noted that the total amounts of the new borrowing in the draft general budget includes almost 42.7% of this borrowing allocated to address the shortcomings in local resources needed to cover local expenses. There is no doubt that the matter requires now to support the resources of different governorates and activate their role in community participation. Expenditures of localities is estimated in the draft budget at about 33.2 billion pounds, while the local resources are limited to about 3.3 billion pounds, meaning that there is a deficit of 29.9 billion pounds paid by the public treasury for localities to cover their expenses. It is required to redistribute state resources to add up to the communities services directly as long as these resources are generated mainly on the territories of these governorates. This restructuring no doubt will encourage localities to work on developing their resources and channel requirements to serve the basic needs of their citizens. This will be possible through the activation of real estate tax law which will leave to localities increasing proportion of the proceeds commensurate with the capacity of each governorate to generate these resources.

- 44 -

There is no doubt that the matter requires a study of the link between localities spending and the revenues they generate at the level of each governorate to allow greater flexibility for the governorates in their use of resources. This will be followed by regulating governorates dependence on the public treasury to cover their budget deficit and to ensure achievement of more fair distribution of funds among the Republic governorates, taking into consideration that some governorates suffer mainly from the limitation of their resources. The situation also calls for activating of the role of special funds and special accounts in the localities for both development accounts and housing accounts and others to finance public expenditure on the territory of each governorate through mechanisms supported by transparency to affectionate the concept of generality and coverage as a basic concept of the state general budget, which is consistent with the methodology of the introduction of the Treasury single account stipulated in law No. 139 of 2006. Fourth: Controlling the budget deficit and public debt:- The most important concept governing the formulation of the budget of 2007/2008 is the concept of working to reduce the budget deficit as a proportion of GDP and the consequent reduction in the ratio of public debt to GDP. There is no doubt that it was expected that the absolute amount of the budget deficit will increase in the coming period, but that the fiscal policies as described in this statement aim at maintaining the growth rate of the budget deficit below the growth rate of GDP so as to decrease the deficit to the total income in the Egyptian economy, which increases the ability of our economy to finance this deficit without causing any inflationary pressure which we cannot endure. By reviewing the progress of the proportion of the cash deficit and the overall deficit to the GDP, we find out that after a period of relative stability during the past two years 2004/05 and 2005/06, the fiscal year 2006/2007 will witness a significant decrease in the ratio of deficit to gross domestic product. If the source of this decline is the extraordinary revenue generated from the proceeds of the third mobile phone license, but the government has tried through policies outlined in this statement to preserve these gains by targeting cash deficit in the budget of 6.7% of GDP and overall deficit of 6.9%. This deficit is considered as the first phase of a policy to correct local financial imbalances followed by successive stages to end up with a general budget deficit that does not exceed 3% of gross domestic product. The following figure illustrates the progress of the cash deficit and overall deficit of the State general budget as a proportion of GDP.

- 45 -

Figure No (6)

Progress of cash deficit and the overall

Deficit of the state budget as a proportion of GDP

2001/2002 – 2007/2008

%10.4

%9.8%9.1%9.1 %9.4

%9.1%7.3

%6.7

%10.2%9.5 %9.6

%8.2%8.5

%6.9

%0.0

%2.0

%4.0

%6.0

%8.0

%10.0

%12.020

02/2

001

2003

/200

2

2004

/200

3

2005

/200

4

2006

/200

5

2007

/200

6

وعشرم

2008

/200

ة7ازنمو

العجز النقدى العجز الكلى

The government Fiscal policy also aims at the reduction of the amount of the general budget borrowing from the national economy, so as public borrowing do not represent a competition to private borrowing, and thus avoids impeding the investment process in the productive sector (whether private or public). The following figure illustrates the continuing decline in net volume of government borrowing to GDP, reflecting an increase of the national economy to absorb the deficit of the state general budget:

- 46 -

Figure No (7)

The net volume of government borrowing as a proportion of GDP

2008/2007-2002/2001

%10.0

%10.4

%9.4

%9.4

%8.1 %6.7

%6.8

%0.0

%2.0

%4.0

%6.0

%8.0

%10.0

%12.0

2002/2001

2003/2002

2004/2003

2005/2004

2006/2005

ع )توق( م

2007/2006

ة2008/2007وازنع مشروم

ى اتج المحل نسبة صافى االقتراض الى الن

In a summary, all these efforts are following up to what is called the initial deficit of the state general budget and the government is directed in that area to reduce the initial deficit of the budget and gradually convert it to a surplus in the next few years, which will ensure the tendency of public debt as a proportion of GDP to decline irreversibly. To clarify this policy it must be clarified that one of the characteristics of stable economies, which enjoy stable internal and external balances is that the overall growth rate (the real growth rate of gross domestic product plus the rate of price inflation) is usually higher than the nominal interest rate in the national economy if we take the difference between revenues and expenditure excluding interest expenses of public debt. This concept known as the economy balance or initial balance (either surplus or deficit) is an indication of the ability of the economy to meet the public debt burdens even this ability may increase or diminish over time. If the net initial balance of the state general budget-zero-meaning that expenditures and revenue are balancing(excluding interest expenses of public debt), it means that net general budget borrowing -equal total outstanding public debt interests – meaning that public debt in the following year will increase at a lower rate than the rate of GDP increase. This means that the ratio of public debt to gross domestic product will decline and continue to decline as long as there is a balance - or surplus in the initial balance of the general budget.

The government has targeted-since it began the current phase of the fiscal and economic reform -rapid reduction in the initial balance deficit of the State general budget.

- 47 -

The following figure illustrates the progress of the initial deficit over the first five actual years, as well as the expected of 2006/07 and the next year. It is noted that it is expected that the initial balance will end up in a surplus in 2006/07 as a result of the extraordinary revenues that occurred in this year, however the balance remains close to the balance of the next year (with a simple no more than 0.8% of GDP, indicating the imminent transformation of the Egyptian economy to a new phase of annual decline in the ratio of public debt to GDP:

Figure No (8)

The initial deficit in the state general budget 2008/2007-2002/2001

%2.2

%0.8

%0.2-

%4.4

%3.5

%3.1

%4.2

%1.0-

%0.0

%1.0

%2.0

%3.0

%4.0

%5.0

2002

/2001

2003

/2002

2004

/2003

2005

/2004

2006

/2005

2007

/2006

2008

/20ة07

ازن مووعمشر

نسبة العجز االولى الى الناتج المحلى

The developments of the initial deficit in the state general budget is reflected In the progress of the net public debt of the budget entities (which includes the total domestic public debt which the state general budget bear the service of it-the debt of the central administrative , the local administration and service authorities-minus total government deposits in the local banking system).

- 48 -

Figure No (9)

Gross and net domestic and foreign public debt of the State general budget entities as a proportion of GDP

2008/2007-2002/2001

%77.0%80.6

%93.3

%87.0%84.3

%78.8%70.6

%62.1

%62.8

%64.8

%60.3

%60.4

%58.4

%54.3

%8.8

%10.9

%11.2

%13.5

%15.4

%12.9 %10.6

%0.0

%10.0

%20.0

%30.0

%40.0

%50.0

%60.0

%70.0

%80.0

%90.0

%100.0

2001/06/30 2002/06/30 2003/06/30 2004/06/30 2005/06/30 2006/06/30 2006/12/31

إجمالى الدين المحلى صافى الدين المحلى الدين الخارجى

Thus, we find out that one of the most important concepts of formulating the State fiscal policy is this trend towards reducing the proportion of the overall deficit to GDP and reducing the ratio of the initial deficit (or in a later stage to increase the proportion of the initial surplus) to GDP, which will result in a reduction of the percentage of the net public debt (in any of its familiar concepts) to the gross domestic product, indicating that financial balances are gaining more strength over time and the stability of development policies in the Egyptian economy. If the state general budget is concerned with payable public debt of budget entities -as having an ability to directly influence the size of this debt – however other concepts of the public debt should not be ignored, which include government public debt (which includes economic authorities debt, and Investment Bank debt) payable to different creditors (including the banking system, insurance and pension funds and individuals). Also a broader concept of the public debt should not be ignored, which includes not only domestic public debt, but also the foreign public debt. If the core component of the public debt (either internal or external) is a the general budget debt, the policies that lead to its control will be reflected on the improvement the total public debt indicators in the national economy. Thus, the status of the domestic public debt and the foreign public debt and the value of each to GDP can be shown as follows, according to the debt position at the end of December 2006:-

- 49 -

Local public debt Billion pounds

Total Local Economic General government

Pension Investment BUDGET Public debt Authorities Total

Funds Bank Entities

Statement

311.726.0285.70.00.0285.7● borrowing from the banking system

58.151.96.20.00.06.2● borrowing from the National Investment Bank

257.20.0257.20.043.7213.5● borrowing from the pension funds 163.50.0163.50.0114.049.5● borrowing from others

790.577.9712.60.0157.7554.9Inter

Excludes interrelationships

6.20.06.20.06.20.0● Government borrowing from the National Investment Bank

213.50.0213.5213.50.00.0● Government borrowing from the pension funds

43.70.043.743.70.00.0● Investment Bank borrowing from pension funds

51.951.90.00.00.00.0● Economic authorities borrowing from the National Investment Bank

315.351.9263.4257.26.20.0Inter

475.226.0449.2-257.2151.5554.9Total domestic debt

0.0 Less Government deposits 131.615.0116.65.52.4108.7● The banking system deposits 27.60.027.60.00.027.6● Net balance of the frozen account

159.215.0144.25.52.4136.3Total

316.011.0305.0-262.7149.1418.6Net domestic public debt

730.0730.0730.0730.0730.0730.0Gross domestic product

65.1%3.6%61.5%-35.2%20.7%76.0%Total domestic debt (percent of GDP) 43.3%1.5%41.8%-36.0%20.4%57.4%Net local debt (percent of GDP)

- 50 -

Foreign Public Debt

Billion pounds Billion dollars Statement

- Foreign public debt government

64.111,.2 • External budget sector debt administered by the Ministry of Finance

42.07.4 • other government debts

106.118.6

2.0

.,4

- External public debt of the monetary authorities

11.5

2.0

- External public debt of banks

45.4

8.0 - External public debt of other sectors

165.029.0 The total external public debt 730.0128.0 Gross domestic product 22.6% 22.6% The proportion of the external public

debt to GDP

- 51 -

Chapter 3

ــــــــ

Basic Features Of The Draft State Budget Estimates For FY 2007/08

Mr. Prof. Dr. / President of Shura council Ladies and gentlemen, distinguished members of the Council Presented to you previously our strategy and financial policy in the current stage, and various tools through which we work to implement the new methodology undertaking the achievement of the presidential program for passage to the future. As the pillars and basic parameters of the draft state budget and the social and economic dimensions, to which we seek to achieve in an balanced framework, considering all citizen levels, especially the low-income, as we seek-At the same time-to push economic development efforts under a new financial reform methodology. Depending on the foregoing; I have the honor to present to you the draft state budget for FY 2007/08, with the commitment to consider three key parameters which are:- 1: To present The state budget clearly according to the economic and functional classification and in

accordance with international standards and in a framework of transparency and clarity. 2: The budget estimates consider the results of the actual implementation in the previous years -in

one hand – and considering the expected results of the implementation of this fiscal year's budget in light of the current variables and without prejudice to the approved limits of the budget, which was approved legislatively.

3: Financing the budget, and to deal with deficits occurs in the framework of achieving financial

balance of the State's general budget and through funding resources at the lowest possible cost, and under rational management of financial inflows and outflows of the Treasury Single Account.

In light of the foregoing, I have the honor to introduce to you draft state budget for F/Y 2007/2008, addressing the following:- (A) Total basic estimates of the draft state budget. (B) The detailed estimates of public expenditures and revenues for the State's public budget

including :-

1- Elements of public expenditures, according to the economic and functional classification. 2- Elements of public revenues.

- 52 -

First: The total basic estimates of the draft state budget for FY 2007/08:- The total volume of the draft state budget for FY 2007/08 is estimated at about LE 267.1 billion for both, uses and resources of the budget, including the available funding resources, as follows : - (A) Public spending:- The total volume of public expenditure in the draft budget for FY 2007/08 is estimated at about LE 267.1 billion, compared to actual expected equals LE 248.1 billion in FY 2006/07, an increase of LE 19.0 billion, a ratio of 7.7 percent , As follows : -

Table (No.9) Public Spending

(LE Billions)

We can extract the following from the overall picture for public expenditures presented:

Budget 2006/07 Change Growth rate The draft budget 2007/08

Description

)1(

Estimated )2(

Expected )3(

1-2

1-3

1÷2

%

1÷3

%

• Operating expenses: The wages,

goods and services requirements,

interest of domestic and external

loans, grants, subsidies, social

benefits and miscellaneous expenses,

as well as the purchase of non

financial assets "investments"

241.5 217.3 212.1 24.2 29.4 11.1 13.9

• acquisition of financial assets:

lending and treasury contribution to

the organizations & corporations,

banks and restructuring of the public

enterprise sector

13.4 19.2 17.4 - 5.8 - 4.0 - 30.2 - 23.0

• Repayment of loans: The payment

of installments, and domestic and

external loans amortization according

to the maturity dates specified

12.2 37.7 18.6 - 25.5 - 6.4 - 67.7 - 34.4

Total 267.1 274.2 248.1 - 7.1 19.0 - 2.6 7.7

- 53 -

1- Operating expenses: Operating expenses in the draft budget for FY 2007/08 is amounted at LE 241.5 billion, compared to LE 217.3 billion in FY 2006/07, with growth ratio of 11.1 percent. Comparing these estimates -on the other hand– to the expected spending in the current FY, which amounts at LE 212.1 billion, the increase in the draft budget estimates is LE 29.4 billion, with growth ratio of 13.9 percent. Operating expenses reflect the expenditures associated with the performance of entities direct activity of the state administrative system, local administration and public service authorities. These expenses are for wages and operating requirements of goods and services, as well as the interest of domestic and external loans and grants, subsidies and social benefits established by the State. It also includes the cost of investment composition of the non-financial assets. It is important to note that operating expenses is the key factor in calculating reliable public spending requirements and is comparable with operating resources to determine the cash deficit in the state budget. Distribution of operating expenses in the draft budget for FY 2007/08 as follows:-

Table (No. 10)

Operating expenses

The draft budget 2007/2008 Budget 2006/07

Description

Estimates

Relative importance

Expected

Relative importance

Change

Growth rate

Million pounds

%

Million pounds

% Million pounds

%

• Wages and salaries

59573.7 24.7 51270.4 24.2 8303.3 16.2

• Procurement of goods and services

17093.6 7.0 15367.6 7.2 1726.0 11.2

• Interest of domestic and external loans

51978.8 21.5 50447.6 23.8 1531.2 3.0

• Subsidies, grants and social benefits

64465.0 26.7 51843.9 24.4 12621.1 24.3

• Other expenses

22940.2 9.5 20933.5 9.9 2006.7 9.6

• The purchase of non- financial assets "investments"

25500.0 10.6 22240.0 10.5 3260.0 14.7

Total

241551.3 100.0 212103.0 100.0 29448.3 13.9

- 54 -

2- Acquisition of financial assets: The approbations allocated in the state budget for payments for acquisition of financial assets are estimated at LE 13.4 billion, compared to LE 19.2 billion in F/Y 2006/07 budget. These estimated payments in allocations are for the public treasury contributions in economic authorities, that have imbalance in their financial structures, as well as the public treasury contributions to restructuring fund of the public enterprise sector companies and completing implementation of reforming actions required. It should be noted that, through these allocations for acquisition of financial assets, the Treasury could support public banks through the provision of approbations required for public enterprise sector companies to pay their debts to the banks through the targeted presidential program, to strengthen the financial positions of public banks. Where, about LE 6.9 billion have been provided. Also in FY 2005/2006, about LE 9.2 billion pounds have been provided, a total of LE 16.1 billion pounds. 3- Loans repayment: Total estimated approbations in the draft state budget for FY 2007/08 for repaying or amortizing outstanding domestic and external loans, equals about LE 12.2 billion, compared to LE 37.7 billion, was estimated in the budget of FY 2006/07 .A great part of this debt was restructured and expected to repay only LE 18.6 billion in the current FY. Since the rationalization of the public debt and the application of an appropriate methodology for the management of financial flows and the use of adequate financing methods distributed to long-term financing in the public treasury bonds and short-term financing using treasury bills, as well as the public treasury adoption to finance all entities involved in the state budget, without intermediating the National Investment Bank, these actions have helped to mitigate the public debt service burdens, especially the paid installments. The assessed loans installments in the draft budget are as follows:-

Projected 2006/07

The draft budget 2007/08

Description

LE Million

LE Million

13762.77778.4Domestic loans Installments

4829.04386.6Foreign loans Installments 18591.712165.0Total

Generally , it should be noted that the repayment of loans and bonds amortization are not calculated among the components of the state budget deficit, but dealing with these paid liabilities by excluding them from funding resources or new borrowing, in order to determine the real net addition to the public debt. This loans and bonds repayment is a strength factor in the budget and represents a real decline of the public debt, domestic and external.

- 55 -

(B) Public resources: As the total volume of public resources estimated in the draft budget for FY 2007/08 at about LE 267.1 billion, compared to LE 274.2 billion in the FY 2006/07, declined by LE 7.1 billion, reaching 2.6 percent, compared to actual expected equals LE 248.1 billion in FY 2006/07, increased by LE 19.0 billion, up 7.7 percent. As follows:-

Table (No. 11) Public Resources

(LE Billions)

Budget 2006/07 Change Growth rate Description

The draft budget 2007/08

)1(

Estimated )2(

Expected )3(

1-2

1-3

1÷2

%

1÷3

%

• The public revenues : The tax

revenue from income taxes and

sales taxes, customs and other

sovereign resources, as well as

income from available grants to

cover current and investment

expenses, as well as other income

from profits and surpluses of

different services’ revenues

184.7 163.9 172.1 20.8 12.6 12.7 7.3

• Receipts from acquisition:

The proceeds from lending and

from sales of assets and liabilities

12.4 13.4 8.7 -1.0 3.7 -7.4 42.5

• Sources of Funding : The

borrowing and the issuance of

treasury bills and bonds

70.0 96.9 67.3 -26.9 2.7 -27.8

4.0

Public resources total

267.1 274.2 248.1 - 7.1 19.0 - 2.6 7.7

- 56 -

It is clear from the presented overall picture of public resources, that:- 1- Public revenues:- They are the revenues earned from the operating processes and performance of the direct and indirect activities of the entities involved in the state budget, mainly includes various types of tax revenues from income taxes, sales taxes and customs fees, also includes public revenue on domestic and external received grants, and also include other revenues, essentially from surpluses and interest received and revenues of performed services and so on. The estimated revenues in the draft budget are about LE 184.7 billion, compared to LE 163.9 billion in the budget of FY 2006/07, increased by LE 20.8 billion, up to 12.7 percent. The actual expected of LE 172.1 billion in FY 2006/07, an increase of LE 12.6 billion, 7.3 percent, due to the actual increase in 2006/07, which is estimated to increase from the proceeds of sale of the third mobile license, including more than LE 11 billion higher than the figure expected while preparing the budget in March 2006. 2- Receipts from acquisition and privatization:- These proceeds are estimated in the draft budget for FY 2007/08 at about LE 12.4 billion, including an estimated amount of LE 10.0 billion from privatization proceeds, compared to LE 13.4 billion in the FY 2006/07, including LE 10.0 billion from the privatization proceeds. Hence a reduction in these proceeds LE 1.0 billion, a reduction rate equals 7.4 percent, compared to actual expected LE 8.7 billion in FY 2006/07, indicating an increase in the draft budget for FY 2007/08 of LE 3.7 billion, an increase rate of 42.5 percent. 3- Borrowing and issuance of securities:- It is estimated that borrowing and issuance of securities in the presented draft budget will amount at about LE 70.0 billion, compared to LE 96.9 billion in the budget of FY 2006/07, a reduction of LE 26.9 billion, 27.8 percent, compared to LE 67.3 billion expected in FY 2006/07, an increase of LE 2.7 billion, 4 percent. This borrowing is a principal financing resource of the budget deficit, and covering the gap between public revenues and public spending, as well as covering the gap between the proceeds from the acquisition of financial assets (other than privatization proceeds) and payments in the acquisition of these financial assets (other than restructuring payments). It is notable that the basic decline in the total public resources results from the decline in the volume of funding from borrowing, it is close to LE 20 billion in 2006/07, compared to the actual planned for the same year - and it is due to the effectiveness of the Treasury Single Account and extraordinary revenues in FY 2006/07-and it is also notable that, the slight increase in borrowing in 2007/08 compared to 2006/07 because of the beginning of downsizing borrowing volume required to fund the budget. Reducing borrowing from 9.2 percent of GDP to 8.2 percent, will be reflected in the next year and the following years in reducing the volume of interest paid to public debt service.

Second: The detailed estimates of public expenditures and revenues of the state

budget:- Brought to you in the foregoing the basic estimates of the draft state budget for FY 2007/08. The total budget amounts at LE 267.1 billion, which identifies the main purposes of either public expenditures or public resources side.

- 57 -

However, the state budget should present its expenditures according to their economic and functional classification. These classifications should be presented as they are distributed in public spending chapters and their details within transparency and clarity, and revenues should be distributed according to their economic components, and also the tax revenues statement and non-tax revenue statement. Thus, after the presentation of these components we can determine the fiscal impact of the state budget, which reflects the budget’s cash deficit and determine the net effect of public spending on the national economy and its direct impact on production, and the creation of goods and services. Binding this to the realized surpluses, taxes and transfers to different public revenues, which necessarily shows the impact on the overall demand in the national economy. The following picture shows the components of public expenditure and public revenue and the relationship between them, reaching the budget cash deficit and its relation to GDP:-

Table (No. 12)

Components of expenditures and revenues (LE Millions)

It is notable that the cash deficit in the draft state budget for FY 2007/08 , which increased, compared to the expected in the FY 2006/07,and this is due to extraordinary factors, that have contributed to the increase in revenues in the current fiscal year from proceeds of the third mobile network, as well as the reduction in expenditures, especially in budget expenditures for oil subsidies .

2006/2007 The draft budget 2007/08 Description

Budget Expected For 2005/06

• Public expenditures : - Wages and salaries 59573.8 51430.5 51270.4 46719.1 - The purchase of goods and services

17093.6 15476.8 15367.6 14428.5

- Domestic and foreign interest

51978.7 50747.6 50447.6 36814.5

- Subsidies, grants and social benefits

64465.0 58444.5 51843.9 68896.8

- Other expenditures 22940.2 20935.5 20933.5 19739.9 - Purchase of non-financial assets "investments"

25500.0 20240.0 22240.0

21211.8

241551.3 217274.9 212103.0Total 207810.6• Public revenues : - Income tax, sales tax , customs and others - Available Grants - Other expenditures

120074.1

3165.8

61488.7

105644.7

3481.6

54780.0

108608.5

3657.3

59887.2

97778.5

2379.2

51108.3184728.6 163906.3 172153.0Total 151266.056822.7 53368.6 39950.0Cash deficit 56544.6846800 730000 730000GDP 617700

Percentage of expenditure to GDP 28.5% 29.8% 29.1% 33.6% Percentage of revenue to GDP 21.8% 22.5% 23.6 24.5% Percentage of Cash deficit to GDP 6.7% 7.3% 5.5% 9.1%

- 58 -

1- Public expenditures: Public expenditures are the related expenses to operating, are estimated in the draft general budget for FY 2007/08 at LE 241551.3 million, compared to LE 217274.9 million FY 2006/07, increased by LE 24276.4 million, up 11.2 percent. Compared to the expected LE 212103.0 million for FY 2006/07, an increase of LE 29448.3 million, by 13.9 percent. It is important to introduce to you the budget public expenditures, according to : • Economic Classification. • Functional classification. A- Economic classification of public expenditures:- According to the economic classification of budget public expenditures, the operating expenses are distributed to the following major chapters :- • Wages and salaries. • The purchase of goods and services. • Interest • Subsidies, grants and social benefits. • Other expenses. • The purchase of non-financial assets "investments" 1- Wages and compensation of employees: The first chapter in the draft budget for FY 2007/08 "wages and salaries" is estimated at LE 59573.8 million, compared to LE 51430.5 million in FY 2006/07, increased by LE 8143.3 million, 15.8 percent. It is notable that the appropriations for "wages and salaries" represents 24.7 percent of total operating expenses in the state budget, which amounts at LE 241551.3 million, representing 22.3 percent of the total public expenditure of the state budget, estimated at LE 267108.0 million . It is important to stress that the State's obligation to provide employees wages, rewards and incentives, focuses great interest in achieving the following social and economic aspects:

• Absorption of about 5.8 million employee and worker in the government sector, which provides security for approximately 23 million inhabitant, who represent these workers and their families.

• Continue granting social allowances to employees, which reached since 87/1988 until FY 2006/07, 250

percent of base salary. These allowances are being annexed to the base salary every five years, and till FY 2006/07 the approved allowances since FY 2001/02 were annexed, and they are estimated at 190 percent of base salary.

• There are consecutive increases in the volume of the wages allocations, which are borne by the state budget. Wages in the state budget in FY 1980/81 were about LE 1452.6 million, and reached in 1990/91 about LE 7118.4 million, and then in 2000/01 amounted at about LE 28066.5 million. Now it is estimated in the draft budget for FY 2007/08 at LE 59573.8 million.

- 59 -

• The assessed wages in the draft budget are distributed to its fundamental purposes as follows:

There is no doubt that the presented picture reflects the State’s growing concern to the employees and their families, and truly reflects that the labor force in Egypt is one of the key production elements. There is no doubt that the government’s efforts to develop the concept of public service will push this productive element toward greater progress and advancement. The draft budget also includes an amount of LE 1.6 billion for the application of the first stage of teachers’ cadre. 2- Purchase of goods and services:- The draft budget for FY 2007/08 earmarked LE 17093.6 million for the purchase of goods and services required to management of governmental workflow, compared to LE 15476.8 million in FY 2006/07, increased by LE 1616.8 million, 10.5 percent.

These allocations represent 7.1 percent of the total expenditure for the operating in state budget, which are estimated at LE 241551.3 million, the total appropriations for the basic requirements maintenance of schools, hospitals and other state bodies as well as periodic maintenance and necessary workflow requirements. The following table explains these allocations and their basic components in the draft state budget. Compared to FY 2006/07, as well as the expected to be implemented that year:-

Relative importance Value

% LE Million Wages Types

• Basic Salary 14620.8 24.5

• Rewards 19267.1 32.3

• Cash benefits 6986.3 11.7

• In-kind allowances 2019.9 3.4

• insurance benefits 6538.0 11.0

• non-cash benefits 1436.1 2.4

• Other kinds of wages 4505.6 7.6

• Special allowance allocations and

the application of the first stage of

teachers’ cadre and others

4200.0 7.1

100.0 59573.8 Total

- 60 -

Table (No. 13) Purchase of goods and services (from 2006/2007 - 2007/2008)

(LE Millions)

06/2007 Change

Description

The draft budget

2007/08

From the forgoing data in the draft budget, we can conclude the following:

• Ensuring the provision of necessary allocation for the maintenance as the major gateway to preserve capital assets.

• Ensuring that all expenses of special funds and special accounts are shown in the budget, which led to the inclusion of all expenses and revenues as a lump sum in the budgets of some entities, with the inclusion of the same amount in the revenue side. The reserves which included in the budget, according to the provisions of the state budget law, these reserves are within 5 percent of the total public uses without interest, they are distributed during the year according to the necessary requirements, which need supporting some of the items during the fiscal year, items such as increasing raw materials and the requirements of schools, hospitals and reconciliations of some arrears from previous years to settle financial disruptions.

)1(

Budget )2(

Expected )3( 1-2 1-3

• Raw materials, including foodstuff for school students, hospital patients and the cost of medicines, vaccines, serums and others

3151.9 2817.9 3017.9 334.0 134.0

• Water, lighting and operational electricity

2443.5

2074.2

2074.2

369.3 369.3

• Fuels, oils, operational powers and spare parts

1262.7

992.2

1034.7

270.5 228.0

• Other commodities 382.3

348.2

338.9

34.1 43.4

• Maintenance expenses for machinery, equipments, roads, bridges, means of irrigation and drainage , maintenance of buildings and others

2382.6

2033.9

2195.9

348.7 186.7

• expenses of schoolbooks printing and different publications, and the intellectual rights

1182.2 1162.4 1327.5 19.8 145.3) -(

• Transport and transportation costs, workers cash travel allowance

915.8

843.9

951.8

71.9 36.0) -(

• Rents, contributions, costs of miscellaneous services and others

2128.7

2006.1

2326.7

122.6 198.0) -(

• Lump sums in some entities budgets

1743.9 1888.0

2000.0

144.1) -( 256.1) -(

• Public reserves 1500.0 1310.0 100.0 190.0 1400.0Total 17093.6 15476.8 15367.6 1616.8 1726.0

- 61 -

3- Interests: The interest paid on the domestic and foreign loans in the draft state budget for FY 2007/08 are estimated at LE 51978.7 million compared to LE 50747.6 million in the FY 2006/07, increased by LE 1231.1 million, up 2.4 percent. The loans interest represents 21.5 percent of the lump sum allocated for operating expenses in the state budget amounting at LE 241551.3 million. The interest is distributed in the draft state budget as follows:

Table (No. 14) Public debt interests

(LE Millions) Change Budget 2006/07 The draft budget 2007/08 Description

2207.3

1628.3)-( 221.1

30650.0

15900.0 1322.4

30650.0

15900.0 1322.4

Local interest : • For the banking system and other dealers • Interest of investment loans • Miscellaneous domestic interest

800.1 47072.347872.4 Total 427.93464.63892.5Foreign Interest 3.1210.7213.8Expenses related to public

debt service 1231.150747.651978.7Aggregate

The interest mentioned above are inevitable and it is important to note that these interest, amount at about LE 52.0 billion, representing 6.1 percent of GDP. Focusing on this, is important to insure that in measuring of the budget cash deficit , we should note basically to the so-called primary deficit, it is the deficit before calculating loans interest, the cash deficit ratio to GDP in the draft budget equals 6.7 percent. While the primary deficit is only (excluding interest expense) 0.6 percent of GDP.

It should also be noted that the estimated dues interest are built on the basis of actual interest rates on bonds, bills and the current outstanding loans, observing specific assumptions of borrowing, which are expected in the coming period and the next FY 2007/08, taking into account the interest rate applicable and the expected in the national economy, and observing the stability in the foreign exchange market, and the CBE trend to a monetary policy supporting the economic development process. It should also be noted that these interest are calculated, taking into account excluding the impact of application of the Treasury Single Account, as this would save an amount of LE 2.7 billion in debt service burdens. It is not secret-on the other hand- that the State had established a mechanism for calculation of interest on credit balances of the entities in the Treasury Single Account, insuring the stability of their transactions and achievement of their objectives. It also should be noted that the interest on the investment loans are mostly directed to pension funds, and it amounts at LE 15.9 billion. the state is committed, to use a new methodology in dealing with these funds through performing pension funds rights from the interest earned from investing their funds by the state, rather than withhold of these interest and capitalizing them in the NIB.

- 62 -

So, the biggest part of the National Investment Bank liabilities toward insurance and pension funds has been already transferred to the Treasury within the same amount of the treasury credit balance to the National Investment Bank, so that the public treasury becomes responsible for the amounts before those funds. So, two treasury notes have already been issued for the benefit of the pension funds at the amount of LE 197.7 billion, with an interest rate, which is commensurate with the market rates and is higher than the actuarial rate of return calculated to estimate the safety of the actuarial of pension funds flows, and this procedure is to guarantee pension holders rights and preserve the funds. So, the cash payment of interest on the pension funds by the public treasury, which were transferred to the treasury through the two notes issued by the Public Treasury, greatly helped to provide cash flows and liquidity to the funds, and this enabled them to perform the full payment of outstanding pensions. 4- Subsidies, grants and social benefits:- The estimates of the fourth chapter "Subsidies, grants and social benefits" in the draft budget for the FY 2007/08 are at LE 64465.0 million, compared to LE 58444.5 million in the FY 2006/07 budget, increased by LE 6020.5 million, up 10.3 percent, compared to an amount of LE 51843.9 million expected to be implemented in FY 2006/07. The appropriations mentioned above reflect the State's interest in deepening social dimensions and an expression of the state budget’s social role to support low-income people, because these appropriations are added indirectly to the people’s income. These appropriations are distributed mainly to:- LE Millions • Subsidies allocated for goods and services 55672.9 • Grants and assistance and social benefits 3091.4 • Treasury contribution in pension funds 2000.0 • Appropriations and reserves for subsidies and assistance 3700.7

----------- Total 64465.0 The following table reflects the distribution of these appropriations to their main purposes:-

- 63 -

Table (No. 15) Subsidies, grants and social benefits

(LE Millions)

Analysis of the most important components of subsidies, grants and social benefits explains the following:-

Subsidies for supply commodities: - Supply Commodities subsidies are estimated in the draft budget of FY 2007/08 at about LE 9482.0 million, compared to LE 8641.8 million in the FY 2006/07, which is expected to reach LE 9818.0 million as a result of the decisions to subsidize bread price and the price differentials of grind.

2006/2007 Description

The draft budget

2007/2008 Budget Expected

A) Subsidies for goods and services: • Subsidies for supply Commodities • Subsidies for Petroleum materials • Electricity subsidies • Subsidies for promoting export • Farmers subsidies • Subsidies for Passenger transport • pharmaceuticals and health insurance subsidies • Industrial Zones subsidies • Upper Egypt development subsidies • low-income housing subsidies • Soft loans subsidies • Other subsidy elements

9482.0 36579.02000.02000.0342.6512.0380.0

800.0200.0

1000.0

747.6

1629.7

8641.8

40000.0 0.0

1500.0342.6441.0 380.0

200.00.0

1000.0

569.4701.8

9818.0

31257.0 0.0

1500.0342.6450.0 360.0

160.00.0

1000.0

569.4

1941.2

55672.9 53776.6Total 47398.2B) Grants, assistance and social benefits : • Social insurance pension • Child pension • Medical treatment of citizens at the State's expense • Treasury contribution to pension funds • Various grants and social assistance

1100.020.0

1300.0

2000.0

2222.0

1100.020.0

1000.0

0.0

1692.9

1100.020.0

1300.0

0.0

1779.2

6642.0 3812.9Total 4199.22150.1 855.0C) Lump sums

and reserves 246.5

Total 64465.0 58444.5 51843.9

- 64 -

It should be noted that Supply Commodities subsidies are distributed as the following: -

Table (No. 16)

Ration Commodities Subsidies

Description

•Basic Commodities

• Additional goods

• Total subsidies

• Bread subsidy: • Imported wheat • Local wheat

• Pastry

• Local maize

7260.1

4137.1

2757.1

199.6

166.3

0.0 0.0 0.0 0.0 0.0

7260.1

4137.1

2757.1

199.6

166.3

• Other commodities subsidies : • Sugar subsidy • Cooking oil

• Rice

• Tea

1557.4

700.9

856.5

0.0 0.0

871.4

270.0

157.6

443.3

0.5

2428.8

970.9

1014.1

443.3

0.5

Total 8817.5 871.4 9688.9 • Deduct product of revenues and expenses

(-)206.9 0.0 (-)206.9

Net subsidy 8610.6 871.4 9482.0 Petroleum materials Subsidy: Petroleum materials Subsidy estimates in the draft budget at about LE 36579 million, compared to LE 40000 million in the FY 2006/07, which is expected to decline because of the prices increase of some subsidized petroleum products.

- 65 -

The Petroleum materials Subsidy is distributed as follows :

Description LE Million

• Natural gas subsidy

• Butane subsidy

• Gasoline subsidy

- Benzene 80

- Benzene 90

- Benzene 92

- Benzene 95

• Kerosene subsidy

• Diesel subsidy

• Mazot subsidy

1156

1601 906 3

7716

8546

3666 359

12120

4172

Total 36579 It should be noted that, about LE 45.6 million will be transferred to the Treasury from the petroleum sector in the FY 2007/08. And if the estimated subsidy is deducted, which equals LE 36.3 billion, so the net transfer to the treasury from this vital sector will be about LE 9.0 billion. Electricity subsidy: In order to realize transparency and in accordance with the principle of inclusiveness in the state budget, and as the Cabinet decided to carry the Ministry of Finance prices differential of natural gas in electricity production. It has been included in the draft budget for the FY 2007/08 the amount of LE 2000 million for electricity subsidy. Subsidy for low-income people housing: According to the electoral presidential program, an amount of LE 5.0 billion should be provided to subsidize low-income people housing over 5 years, in order to implement this program, it is planned to include this subsidy starting from this year’s budget 2006/07, in line with the state’s financial policy in the area of supporting low-income people housing and efforts to provide adequate housing for the broad base of citizens by providing LE 15 thousand as an unpaid loan for each housing unit. So, an amount of one billion pound has been included in the draft budget 2007/2008 to subsidize low-income people housing, as it was estimated in the budget of FY 2006/07. Upper Egypt development subsidy: Within the framework of the State’s commitment to implement the presidential program, through supporting and subsidizing Upper Egypt development.

- 66 -

It has been earmarked in the state budget the provision of LE 200 million to subsidize development requirements in Upper Egypt, helping people in this dear part of our homeland and to create job opportunities. This is just a start, which will be followed by higher allocations to meet the needs of Upper Egypt. Interest of soft loans subsidy: It is the difference in interest rate of soft loans, borne by the State for financing the construction of public housing by the Ministry of Housing represented in the Housing, Building Cooperative Authority and Housing and Development Bank and Urban Communities Authority and others. The estimates to subsidize soft loans interest amounted at LE 747.6 million in the draft budget of FY 2007/08, increased by LE 178.2 million, 31.3 percent from the expected in FY 2006/07, which amounts at LE 569.4 million. Subsidy for Promoting exports: Under the state's continuous efforts to promote Egyptian exports and opening new markets in the global markets, as well as providing more job opportunities for young people, which helps them to have a decent life. The draft budget presented includes an amount of LE 2000 million earmarked for promoting exports subsidy, compared to LE 1500 million in FY 2006/2007, increased by LE 500 million, 33.3 percent. Medical treatment of citizens at the state’s expense: For this purpose, the draft budget of FY 2007/08 earmarked LE 1300.0 million, compared to LE 1000.0 million was estimated in FY 2006/07. These provisions include an amount of LE 300 million to repay debts from medical treatment at the state’s expense, arrears from previous years. Social security pension for poor families: The state is committed to provide social security pension for poor families, who have no income, and decided to raise contributions for poor families to LE 100 monthly for about million family, and increase this subsidy for school children. The draft budget earmarked, for this purpose, an amount of LE 1100 million. 5- Other expenditures: Other expenses estimates in the draft budget for FY 2007/08 equal LE 22940.2 million, compared to LE 20933.5 million in FY 2006/07, increased LE 2006.7 million, up 9.6 percent.

- 67 -

The other expenses basically are represented as follows: -

Table No. (17) Other expenses

Description

The draft budget

2007/08 Expected 2006/2007 Change

- Miscellaneous current expenditures from taxes, fees, compensation, contributions and current and allocative transfers

1467.1 1344.1 123.0

- Lump sums in some entities budgets

631.2 928.6 (-)297.4

- Transferred surpluses and reserves and others

1791.9 890.8

901.1 - Other provisions

19050.0 17770.0 1280.0

Total 22940.2 20933.5 2006.7 Generally, the other expenditures, which estimated at LE 22940.2 million, are representing 9.5 percent of operating expenses. It equals LE 241551.3 million and accounted for 8.6 percent of total public expenditure, LE 267108.0 million. It is notable that the increase in current expenses results mainly from considering the inclusion of expenses of special funds and the special accounts, as much as possible, within the budget expenses, and has the same amount in the revenue side. Similarly, is the transferred surpluses in some Services Authorities, with a special nature as the Egyptian Authority for Antiquities, they have revenue, so the freedom to use their funds for the purposes, for which it deems, should not be affected. 6- Purchase of non-financial assets "investments": The assessed estimates for purchase of non-financial assets "investments" amounts in the draft budget in FY 2007/08 at LE 25500.0 million, compared to LE 20240.0 million FY 2006/07, increased by LE 5260.0 million, up 26.0 percent.

- 68 -

Generally the appropriations for purchasing non-financial assets "investments" are distributed to the involved entities budgets, as follows: -

Draft budget 2007/08.

2006/07 budget

Description Value Relative importance

Value Relative importance

- Administrative System

LE million

12738.5

%

50.0%

LE million

9257.5

%

45.7%

- LOCAL System 1760.0 6.9% 2879.1 14.2%

- Services Authorities 9873.7 38.7% 6997.4 34.6%

- Reserves

1127.8 4.4% 1106.0 5.5%

Total 25500.0 100% 20240.0 100% The following table shows the distribution of investments on their key components:

- 69 -

Table (No. 18)

Investments and its major components

Description Draft 2007/08 Budget 2006/07

Fixed assets : buildings and constructions: - Constructions - Non-residential buildings - Residential buildings

Total • Machines, equipment and means of transport and transportation :- -Machinery and equipment - Means of transport - Means of transportation - Tools - Equipment

Total • Other fixed assets (animal wealth) • Total fixed asset = Natural assets = Interests prior to operating = Missions = Researches and studies = Advance payments = General reserves

9724.4

4514.1

134.9

-------------- 14373.4

--------------

6170.0

397.2

117.3

202.9

543.1 --------------

7430.5 --------------

20.0

21823.9 327.1 35.5 375.0

1810.7 0.0

1127.8

8179.5

3266.8

85.9

-------------- 11532.2

--------------

4594.0

198.1

64.0

108.9

517.2 --------------

5482.2 --------------

17.5

17031.9 134.3 52.0 441.4

1472.4 2.0

1106.0 Total 25500.0 20240.0

B- Functional classification of public expenditures: - Article 4 of Law No. 53 of 1973 on the state budget as amended by Law No. 87 of 2005, as approved by your deemed council – states that, the state budget should be prepared and implemented according to the economic classification of the state’s activities and the administrative classification of its entities and units, expenses also should be submitted and presented to the People’s Assembly according to the functional classification of the state’s activities.

- 70 -

According to the foregoing, the operating expenses in the draft state budget, which amounts at LE 241551.3 million, according to the economic classification, is distributed to the various chapters of wages, purchases of goods and services, interest, subsidies, grants and social benefits, and other expenses, the purchase of non-financial assets (investments). So, I have the honor to introduce to you operating expenses in the draft state budget, according to the functional classification of the different state activities, including public services, defense and national security, public order and public security affairs, economic affairs, environment protection, housing and utilities, health, youth, culture, religious affairs, education, and social protection. The following table shows the earmarked appropriations for the previous activities according to the functional classification of state activities as they are estimated in the draft budget for FY 2007/08, compared to its peer in FY 2006/07, both estimated and expected:

Table (No. 19)

Functional classification of the State activities (LE millions)

As shown in the following table, the expenses distribution by functional classification on the deferent chapters of the operating expenses, as well as on the functional classifications compared to previous years. The statistical statement, attached to this financial statement, explains the detailed allocations according to the functional classification of the State's public budget.

Draft budget 2007/08. 2006/07 Functional activities

Administrative System

Local Administration

Service Authorities

Total Budget Expected

1-Public Services 70541.3 7823.7 677.8 79042.8 73070.2 71570.1

2-Defense and National Security

19189.0 0.0 8.4 19197.4 17330.2 17330.2

3- Public Order and Public Security

10777.3 0.0 576.8 11354.1 9579.7 9579.7

4-Economic Affairs 5504.4 2349.5 8291.0 16144.9 11809.0 11549.4

5-Environmental protection 139.3 0.0 768.8 908.1 788.5 788.5

6- Housing, Utilities and New Urban Communities

3599.6 288.1 2306.1 6193.8 5740.4 6508.0

7- Medical Affairs 4482.1 3527.3 2592.5 10601.9 9345.3 9345.3

8- Youth, Culture and Religious Affairs

5916.4 521.5 3197.1 9635.0 7815.3 7815.3

9- Education 4813.6 18054.3 7820.9 30688.8 27442.7 27442.7

10- Social Protection 57105.8 605.2 73.5 57784.5 54353.6 50173.8

Total

182068.8 33169.6 26312.9 241551.3 217274.9 212103.0

- 71 -

Table (No. 20)

Expenses by functional classification for FY 2007/08

(LE millions)

Wages Procurement of goods and

Subsidies, Grants

and

Other

expenses Purchase of Draft total 2007/2006 Actual

Description Employee'

s compensat

ion

Services

Interests

social benefits

Non-financial

Assets 2007/08 Budget Expected 2005/06 2004/05 2003/04

- Total 59573.8 17093.6 51978.7 64465.0 22940.2 25500.0 241551.3 217274.9 212103.0 207810.6 161610.8 145987.9

= General public services

11724.2 5273.5 51749.4 2583.9 2025.7 5686.1 79042.8 73070.2 71570.1 54093.5 51042.9 45287.9

= Defense and National Security

27.8 15.8 0.0 0.3 19054.5 99.0 19197.4 17330.2 17330.2 15933.1 14804.4 14562.6

= Public Order and Public Security Affairs

8435.6 1180.6 0.0 194.1 553.8 990.0 11354.1 9579.7 9579.7 10523.4 8901.1 7590.3

= Economic Affairs

4646.8 1966.5 153.8 2283.3 464.7 6626.8 16144.9 11809.0 11549.4 11336.0 11754.2 11959.2

= Environmental Protection

230.1 569.3 0.0 0.3 0.4 108.0 908.1 788.5 788.5 412.2 493.2 440.4

= Housing and community Utilities

380.2 217.6 3.9 3.7 3.3 5585.1 6193.8 5740.4 6508.0 5613.8 6002.7 5881.6

= Health 4808.3 3027.7 14.9 1422.4 232.5 1096.1 10601.9 9345.3 9345.3 9664.9 7257.7 8073.5

= Youth, Culture and Religious Affairs

5226.4 1409.0 0.9 810.0 441.1 1747.6 9635.0 7815.3 7815.3 7635.0 7306.4 6647.6

= Education 23498.7 3394.4 55.3 148.7 163.8 3427.9 30688.8 27442.7 27442.7 25626.5 25817.6 22666.8

= Social protection 595.7 39.2 0.5 57018.3 0.4 133.4 57784.5 54353.6 50173.8 66972.2 28230.6 22878.0

2- Public revenues: Public revenues are estimated in the draft budget for the FY 2007/08 at LE 184728.6 million, compared to LE 163906.3 million FY 2006/07, increased by LE 20822.3 million, up 12.7 percent. Versus LE 172153.0 million expected in 2006/07, an increase of LE 12575.6 million, up 7.3 percent. The public revenues in the draft budget presented amount at LE 184728.6 million, it covers 76.5 percent of the public expenses required for operating, which equals LE 241551.3 million. So, there is a gap between the two sides of public revenues and public expenditures amounting at LE 56822.7 million pounds, which represents the cash deficit in the draft state budget, equals 6.7 percent of GDP. The public revenues consisted of the following three sections: - • Taxes. • Grants. • Other revenues.

- 72 -

1- Taxes: The taxes in all are income tax revenues received by the state, as laws and binding legislations define, such as general taxes, sales taxes, and customs duties and others. Such taxes estimates are amounted in the draft budget for FY 2007/08 at LE 120074.1 million, compared to LE 105644.7 million in FY 2006/07, increased by LE 14429.4 million, a ratio of 13.7 percent. However, compared to the expected to be collected in FY 2006/07, and taking into account the previous years actual, the tax revenue proceeds are expected to be in FY 2006/2007 within LE 108608.5 million, increasing to LE 120074.1 million in the draft budget for FY 2007/08, higher than the expected within LE 11465.6 million, up 10.6 percent.

The following table shows the developments in tax revenues during the previous five years in the presented draft budget, compared to its estimates for those years:-

Table (No. 21)

Progress of Tax Proceeds

Fiscal years Estimates Actual & Expected

2002/2003 68876.6 55736.3

2003/2004 74363.4 67147.4

2004/2005 79842.4 75759.2

2005/2006 81607.2 97778.5

2006/2007 105644.7 108608.5 (expected)

2007/2008 120074.1 (Draft budget) 120074.1 (expected) The increase mentioned above in taxes estimates in the draft budget, does not mean in any way imposing new taxes but, in fact, it dues to effectiveness of its performance development and the application of the new income tax with a new community commitment and the results of arrears collection, as well as, a great part associated to oil taxes and reflects the activity of the petroleum sector, and the role of the State Treasury's subsidy for petroleum materials, and in return to this subsidy, the public revenues are transferred to the treasury, and are already used to fund this subsidy. Also it is taken into account in these estimates, the implications results from consecutive amendments to the customs tariff, and the most recent Presidential Decree No. 39 of 2006, as well as the effects of the application of tax law No. 91 of 2005, and amendments to the Stamp Tax Law No. 143 of 2006, in addition to other certain amendments to law on tax sales, such as allowing the deduction of sales tax on capital goods, and tax amendments of carbonated drinks, and the effects of this deduction has been greatly compensated by expanding the base of the tax community and from the informal sector. Generally, tax revenues estimates in the draft budget for FY 2007/2008 consists of:-

- 73 -

Table (No. 22) Components of Tax Revenues

(LE millions)

2007/2008 2006/2007 2005/2006 Description

Draft budget Budget Expected Actual

- General income tax

and interest and

stamp taxes

64487.5 61649.1 59951.3 54744.9

- Sales Tax 35739.0 29028.5 30707.7 27456.9

- Taxes and customs

duties

13284.0 9601.0 11230.5 9555.2

- Other tax revenue 6563.6 5366.1 6719.0 6021.5

Total 120074.1 105644.7 108608.5 97778.5 Reviewing the components of tax revenues mentioned above we can conclude the following: - Income, profit and stamp taxes: General income, profit and stamp taxes are forming the key elements in tax revenues. Their estimations in the presented draft budget are LE 64487.5 million, this means that they represent 53.7 percent of tax revenue. Hence, it is important to explain the components of general tax, so that status becomes clear to you: -

- 74 -

Table (No. 23) General Taxes

2006/2007 2005/2006

Description 2007/2008

Draft budget Budget Expected Actual

- Oil taxes

23273.9 26813.0 21398.0 23619.8

- Suez Canal taxes 9119.0 8825.0 8403.0 7321.0

- Central Bank Taxes 4215.7 4318.1 4302.8 3841.8 - Taxes onother corporation profits

9334.0 7000.7 10131.0 7320.4

- Taxes on industrial and commercial activity

4656.0 4179.0 4014.1 3595.1

- Taxes on Payroll and workforce

6500.0 4674.4 5000.0 4205.7

- Stamp taxes 6748.0 5161.5 5989.5 4190.5

- Taxes on non-commercial professions

216.0 175.0 175.0 167.8

- Social Solidarity Taxes

205.0 174.0 172.0 158.5

- General tax on income

0.0 28.7 10.0 11.6

- Real estate-tax 9.2 6.2 6.2 6.4

- Other taxes

210.7 293.5 349.7 306.3

Total 64487.5 61649.1 59951.3 54744.9

The general taxes are estimated at LE 64487.5 million in the draft budget for FY 2007/2008, as it contributes with about 53.7 percent of tax revenues-as explained above- it contributes with 34.9 percent of the total revenues of LE 184728.6 million. And more importantly, the public taxes also cover about 26.7 percent of the total public expenditure, amounting at about LE 241551.3 million.

- 75 -

Sales tax: The sales taxes estimates in the draft budget for FY 2007/08 are amounted at LE 35739.0 million, compared to LE 29028.5 million in FY 2006/07, increased by LE 6710.5 million, up 23.1 percent. However, by measuring the draft budget estimates, and comparing it with the proceeds expected in FY 2006/2007, it was expected to reach LE 30707.7 million, so the increase becomes LE 5031.3 million, up 16.4 percent. The following table indicates to sales tax estimates, distributed to its various kinds:-

Table (No. 24) Sales Tax

(LE Millions)

The sales tax in its above introduced form, which is estimated at LE 35739.0 million, represents 29.8 percent of total tax revenues, estimated at LE 120074.1 million, and represents 19.3 percent of total public revenues, estimated at LE 184728.6 million. It is important to indicate that the sales tax contributes in converging about 14.8 percent of the total expenditure, which amounts at LE 241551.3 million. Taxes and customs fees:- Taxes and customs fees are estimated in the draft budget for FY 2007/08 at LE 13284.0 million, compared to LE 9601.0 million in FY 2006/07, increased by LE 3683.0 million, up 38.4 percent. However, by comparing this with the proceeds of these taxes and fees expected to be realized in FY 2006/07, which amount at LE 11230.5 million, an increase of LE 2053.5 billion, up 18.3 percent. Accordingly, taxes and customs fees in the draft budget are estimated at LE 13284.0 million, representing 11.1 percent of tax revenues in the draft budget, which is estimated at LE 120074.1 million, and they represent 7.2 percent of the total revenue projected for LE 184728.6 million. Generally, the contribution of taxes and customs fees are estimated at LE 13284.0 million, covering 5.5 percent of total public expenditure in the draft budget, which amounts at LE 241551.3 million. The following table shows the estimated taxes and customs fees in the draft budget, compared to the estimates and forecasts of FY 2006/2007 and the actual realized in FY 2005/2006:-

2006/2007 2006/2007 2006/2007 Description

The draft budget Budget Expected Actual

-Sales tax on domestic goods

- Sales tax on imported goods

- Sales tax on imported goods

- Sales tax on services

7244.2

13708.7

7372.5

7413.6

6489.9

10418.0

6114.2

6006.4

6413.5

11839.0

6400.9

6054.3

5550.0

9932.0

6487.1

5487.8

Total

35739.0 29028.5 30707.7 27456.9

- 76 -

Table (No. 25) Customs Taxes

(LE Millions)

However, when considering the customs tax, we should not pause at its financial impact on the State's resources or the budget deficit, but we should consider this tax as one of the most important fiscal policy instruments, used in the financial management of the national economy, and as an important instrument contributes in increasing production and supporting national industries, and realizing fair competitiveness protection. The customs tax is regarded as one of the main tools for expanding investment prospects and provides new job opportunities and promotes exports. Thus, the steps taken to reform the tax and customs tariff structure as from 2004 to date, it is to correct the use of the customs tax track through its sound economic concept. Other Tax revenues:- The tax revenues system, which is mainly concentrated in income tax, sales tax, customs tax, is supplemented by tax revenues in a number of other assessed taxes and fees. Other tax revenues in the draft budget for FY 2007/08 are estimated at about LE 6563.6 million, compared to LE 5366.1 million in FY 2006/07, increased by LE 1197.5 million, up 22.3 percent. Although it is expected that proceeds of other tax revenue should amount at LE 6719.0 million in FY 2006/2007, and there is a reduction in the draft budget, which is estimated at LE 155.4 million, 2.3 percent. This drop is due mainly to the reduction in resource development fees, as a result of the actual application of the new income taxes law, which canceld the ratio of 2 percent that were imposed on incomes higher than LE 18000 per annum of the net profits, which is subject to tax.

2006/2007 2006/2007 2006/2007 Description

The draft budget Budget Expected For

Value taxes : -

• Customs value taxes

• Taxes on imported tobacco

12768.2

400.0

9097.2

400.0

10732.6

395.9

9177.9

375.8

Total

- Others

13168.2

115.8

9497.2

103.8

11128.5

102.0

9553.7

1.5

Total 13284.0 9601.0 11230.5 9555.2

- 77 -

Other Tax Revenues are:-

Table (No. 26) Other Tax revenues

(LE Millions)

2- Grants:-

Grants are estimated in the draft budget for FY 2007/08 at LE 3165.8 million, divided into current grants and other capital and investment grants, compared to LE 3481.6 million in FY 2006/2007, it is expected to reach in FY 2006/2007 about LE 3657.3 million. The following table explains these grants estimates in the draft budget ,compared to the estimates and forecasts in FY 2006/07, and the actual in FY 2005/2006 :-

2006/2007 2005/2006 Description

2007/08 The draft budget Budget Expected Actual

• Resources

development fees

• Local administration tax revenue

• Crossing fees (SUMED)

• Royalties on Suez Canal

• Fees on ports and Lighthouses

• Fees on consular procedures

• Property transferring fees

• Administrative expenses for the

importation transactions

•Fees on work licenses

• Other tax revenues

1893.7

689.3

306.0

1293.8

702.0

710.0

405.2

230.5

75.0

258.1

1260.6

683.8

292.0

1160.0

639.1

660.0

350.0

204.1

80.0

36.5

2107.6

715.7

292.0

1160.0

639.1

660.0

390.8

207.2

80.0

466.6

2067.8

980.4

0.0

1018.1

605.6

538.8

327.6

217.6

75.5

190.1

Total 6563.6 5366.1 6719.0 6021.5

- 78 -

Table (No. 27) Current and Investment Grants

(LE Millions)

3- Other revenues: Other estimated revenues(other than tax revenue and grants) in the draft state budget for FY

2008/2007 amount at LE 61488.7 million, compared to LE 54780.0 million in FY 2006/07, increased by LE 6708.7 million, up 12.2 percent. However, by reviewing the actual proceeds during FY 2006/2007, especially, the proceeds of the third mobile license, and reviewing the forecasted proceeds from petroleum, it is expected that the proceeds of other revenues in FY 2006/2007 to reach LE 59887.2 million. Thus, the projected amount in the draft budget for the next FY will be LE 61488.7 million, is higher than the expected in the current FY, this increase equals LE 1601.5 billion, up 2.7 percent. And other revenues, which are amounting at LE 61488.7 million, however, represent a significant proportion of the volume of public revenues in the draft budget, which equals LE 184728.6 million. They accounted for 33.3 percent of these revenues, as it covers 25.5 percent of the total public expenditure, amounting at LE 241551.3 million. Other revenues, mainly concentrated in the public treasury as surpluses and profits of organizations and state-owned companies, such surpluses and profits amounted at LE 36332.6 million, compared to LE 35535.1 million assessed in the budget of FY 2006/07, although these surpluses and profits are expected to reach LE 26925.0 million. Because of some financial settlements with the petroleum sector to meet the reduction in petroleum materials subsidy, and hence the increase in the draft budget is expected to reach LE 9407.6 million, an increase of 34.9 percent.

2006/2007 2005/2006 2007/2008 Description The draft budget Budget Unexpected Actual

- Current grants: -

• Foreign grants earmarked to support the public budget • Domestic grants to various entities

1615.0

111.8

1613.0

111.8

1800.0

100.5

511.9

72.3

1726.8 1724.8 1900.5Total 584.2- Investment grants:

• Grants earmarked to fund investment projects.

• Domestic grants to fund investments in some entities

1009.6

429.4

1624.1

132.7

1624.1 1604.0

132.7 191.0

Total 1439.0 1756.8 1756.8 1795.0

TOTAL 3165.8 3481.6 3657.3 2379.2

- 79 -

These resources are mainly from the surpluses of oil and Suez Canal authorities and corporation profits. It should be noted that the profits of the public enterprise sector companies will rise in FY 2007/08 to LE 2500 million, compared to an expected figure in FY 2006/07, and does not exceed LE 500 million. This is due mainly to the financial reforms that have been activated in the financial statements of these companies, through the repayment of their debts, which amount at LE 16.1 billion over the last two fiscal years. These other resources include also what expected to return to the public treasury from the international third-generation mobile license and the revenues for the performed services and for government services and available self-resources to finance investments, as well as revenues from special funds and accounts. It is important to include special funds and accounts in the budget resources, in line with the principle of inclusiveness of the State's public budget. Generally, other revenues in the draft budget are as follows :

Table (No. 28) Other Revenues

(LE Millions)

2007/2008 2006/2007 2005/2006

Description The draft budget Budget Expected Actual

1-Surpluses and

profits:-

• Oil surplus

• Suez Canal surplus

• CBE surplus

• Surplus of economic

authorities

• Corporation profits

(public enterprise

sector and other

companies)

17293.0 18977.0 12158.0 12533.1

13178.0 11766.0 11766.0 10487.5

50.0 1000.0 0.0 0.0

1399.0 1181.6 600.0 475.7

4412.6 2610.5 2401.0 865.5

36332.6 35535.1 26925.0Total (1) 24361.8

- 80 -

2- Proceeds from the sale of goods and services : • Services revenues • For government services •Special funds and accounts revenues

• proceeds from commodity stocks

916.3

1640.4

6325.7

12.0

967.8

1484.9

6030.0

42.3

692.5

1896.4

5230.0

42.3

692.6

1393.1

5753.8

51.2

Total (2) 8894.4 8525.0 7861.2 7890.7

3-Received interest

4-Oil royalty

5- Available resources to finance investments 6-The third mobile license

7-Miscellaneous revenues from oil authority

8-Third mobile generation and international mobile license

9-Others

1636.6

1572.0

2577.9

0.0

0.0

5240.0

5235.2

1445.2

1020.0

1748.9

4700.0

0.0

0.0

1805.8

940.0

2708.0

1528.9

15280.0

750.0

0.0

3894.1

1313.1

3590.0

3705.3

0.0

6899.2

0.0

3348.2

Total 61488.7 54780.0 59887.2 51108.3

- 81 -

We can extract from the above mentioned data that: 1- The estimates of oil surplus in the presented draft budget amounts at LE 17293.0 million,

compared to LE 18977.0 million in FY 2006/2007, and it is expected to precede only LE 12158.0 million, as a result of some financial settlements and the reimbursement of treasury to subsidize petroleum materials. It should be noted that the net transferred to the public treasury from oil sector in the draft budget presented, is about LE 9.0 billion, after subtracting the assessed subsidy of petroleum materials.

2- The resources from special funds and accounts has been estimated with the consideration to

include, as great as possible, such revenues, with the same amount in the expenditures side, for transparency purposes, and to focus the work of such funds and accounts in the state budget and also the final accounts, and for the convenience of the authorities ,which have funds and special accounts –in spending process- without the need to refer to the Ministry of Finance, when expenses are more than estimated, as long as the corresponding increase in revenues is mainly included in the public budget.

3- The draft budget for FY 2007/2008 includes an amount of LE 5240.0 million as expected proceeds

from the third generation mobile and international phone.

- 82 -

Chapter Four ـــــ

Basic Financial Balances Of The Budget Of Fiscal Year 2007/2008

Mr. Prof Dr. / President of Shura council Ladies and gentlemen, distinguished members of the Council According to the above presented elements of expenditures and revenues for the draft state budget for FY 2007/2008,we can extract the following:

LE Millions • The total operating expenses in the state budget in the form of wages

and the purchase of goods and services, loans interest, subsidies, grants, social benefits, and other expenses, as well as the purchase of non-financial assets "investments".

241551.3

• The total available revenues for the State's budget are in tax revenues, available grants, other revenues from surpluses and profits and other resources as services revenues provided by the State.

184728.6

• As a result of the inability of available revenues to cover operating expenses and the cash deficits gap in the budget, which amounts at.

56822.7

First : cash deficit, the initial deficit in the draft budget and its different concepts: The cash deficit apparent in the draft state budget amounts at LE 56822.7 million, represents 6.7 percent of GDP target in FY 2007/2008- is a deficit, as we indicated- reflects deficiencies in the State revenues to cover public expenditure . It is mainly notable that the above mentioned cash deficit, a great part of it, is associated with the burden borne by the state within budget expenses as interests on domestic and foreign public debt. These interests amount in the draft budget at LE 51978.7 million. This means that the primary deficit in the draft budget is up to LE 4844.0 million, or 0.6 percent of GDP. This brings the primary deficit to LE 6790.4 million, by adding the impact of net acquisitions of financial assets amounting at LE 1946.4 million (acquisition of financial assets-and its receipts), so the primary deficit in its final form amounts at 0.8 percent of GDP) . So, we are facing tow phenomena, which require hard work: The first phenomenon : a cash deficit in the state budget, and even though it is a deficit, which is related to operational processes and the necessities, which the state is undertaking, especially wages, subsidies and expenses of education, health and public investments. However, it was necessary to find procedures to ensure reduction of this deficit, both in the expenditures side and the revenues side, as long as the last one is not growing to commensurate with the increase in expenses. The second phenomenon : The debt service burdens constitute pressure element on the state budget, we should work hard to promote reviewing this debt, and its management methods, review funding sources and the search for lower-cost and timely financing. Second: Overall deficit and its financing procedures : Measuring the budget deficit is not restricted in the above-mentioned definitions, both the overall deficit (deficit without debt interest) or cash deficit (the difference between budget expenditures and its available revenues). But there are other elements added in a later stage to the elements of expenditure and revenue’s elements and reach to the so-called overall budget deficit.

- 83 -

1- Net acquisition of financial assets: According to the international financial standards; The acquisition of financial assets (without the contributions of restructuring for the purpose of privatization) is the state's contributions in the organizations and corporation’s capital and others, as well as state lending to others. All this represents an additional burden to the cash deficit of the State's budget . On the other hand, what generated from the acquisition of financial assets and other receipts -excluding privatization proceeds- are excluded from the cash deficit. From the product of acquisition of financial assets and the proceeds resulting from these acquisitions, we can reach to what is called the net acquisition of financial assets. It is estimated in the draft budget for FY 2007/08 at LE 1946.4, compared to LE 8869.8 million in FY 2006/07, a reduction of LE 6923.4 million, a reduction of 78.1 percent. The main reason for this decline is due to reducing contributions burden of public treasury for the acquisition of financial assets, the state has borne burdens of corporation restructuring reform during the two former years, through repayment of their debts at about LE 16 billion to banks. Taking into account the requirements of completing the reform of the banking sector, through loans of the World Bank and African Development Bank, as it was presented to Your esteemed council. All elements of net acquisition of financial assets will be clear in the following table, which takes into account the exclusion of the processes associated with the privatization of assets, whether those resources resulting from privatization, which is one of the elements of funding in accordance with international concepts, and also what the State borne for corporations restructuring, which is also addressed in accordance with the same perspective.

- 84 -

Table (No. 29)

Net Acquisition of Financial Assets

(LE Millions)

Description

Product Excluded or added Net

• Acquisition of financial assets It is mainly in contributions in organizations, corporations, and available lending from some entities, with the

amount of LE

13391.7 )-(9000.0 4391.7

13391.7 million, and. If the treasury contribution in restructuring requirements is excluded,

which equals LE

9000 million, so this net acquisitions will be LE

4391.7 million.

• Receipts from acquisition of financial assets: Are mainly the collected installments from loans and proceeds from the sale of some financial assets and property rights which

amount at LE

12445.3 )-(10000.0

3.12445 million, and if we exclude the privatization proceeds, which is estimated to be

LE 10000 million, so the net proceeds will be LE

2445.3 million.

2445.3

946.4 1000.0The net acquisition of financial assets

1946.4

- 85 -

In reviewing each of the elements and components of the acquisition of financial assets and its proceeds we can extract the following : Acquisitions of financial assets : The estimated acquisition of financial assets in the draft budget for FY 08/2007 is about LE 13391.7 million, compared to LE 19237.1 million in FY 07/2006 , with a reduction amounts at LE 5845.4 million, a reduction ratio of 30.4 percentage. The major components of acquisition of financial assets are:

Table (No. 30) Acquisition of Financial Assets

(LE Millions)

Description The draft budget 2007/2008 Budget 2006/07 Change

Contributions to the economic authorities : • The National Authority For Railways

• Radio and Television Union

• Port Said Authority

• Red Sea Ports Authority

• Cairo Transport Authority • Alexandria Transport Authority • General Authority of Land Ports

• Rural electrification Authority

• Hydra-Power plants Ex. Authority

• Nuclear Power Plants Authority

• New and Renewable Energy Authority

1978.0

510.0

36.0

22.0

190.0

55.0

3.0

140.0

22.0

36.0

70.0

2200.0

510.0

40.0

24.0

210.0

60.0

3.3

150.0

25.0

40.0

0.0

131.3 98.0) -(

20.2

13.7 2.8 3.8

0.3)-(

10.0)-(

3.0) -(

4.0)-(

70.0

Total contributions in the economic authorities

3062.0 3262.3 200.3)-(

- 86 -

- Contributions in the Military Manufacturing Authority - Contributions in the Holding Companies. - Contributions in other entities - Contributions in International Organizations - Treasury contributions in Restructuring Fund - Lending to other entities - General Reserves

93.3

0.0

46.6

149.4

9000.0

40.4

1000.0

93.3

7000.0

46.6

78.6

7000.0

56.3

1700.0

0.0

7000.0) -( 0.0

70.8) -(

2000.0

15.9) -( 700.0) -(

Total 13391.7 19237.1 5845.4) -(

It is notable that, the treasury contributions to economic authorities equal LE 3067.0 million, they could be more than about LE 2.2 billion. But it was decided that, the National Investment Bank will convert the National Authority For Railway’s outstanding debt to a contribution in the Authority’s capital, which means that, there is no need for treasury contribution in the Authority’s outstanding installments and interest to the bank. However, the Treasury would contribute with an amount of LE 1978.0 million for the development of the Authority, and to complete the amount of LE 3022 million previously available in the budget of FY 2006/2007 . It should be noted that the draft budget presented to you includes the amount of LE 9000 million, as a treasury contribution to the restructuring financing fund, to be in line with the contents of the Prime Minister decisions; No.2076 of 2004, No. 1506 of 2005 . Proceeds from acquisition: The estimated proceeds of acquisition in the draft state budget for FY 2008/2007 are LE 12445.3 million, compared to LE 13367.3 million in FY 07/2006 , declined by LE 922.0 million, 6.9 percent.

- 87 -

Table (No. 31)

Proceeds from acquisition of Financial Assets (LE Millions)

Description

The draft budget

2007/2008

Budget 2006/2007 Change

- Receipts of Installments from lending:

• Receipts of foreign loans installments, relent by the treasury to different entities

• Receipts from other loans installments

2106.5

338.8

2157.0

210.3

50.5)-(

128.5

Total 2445.3 2367.3 78.0)-(- Proceeds from the sale of financial assets and property rights

- Privatization proceeds

0.0

10000.0

1000.0

10000.0

1000.0)-(

0.0

Total 12445.3 13367.3 922.0)-( In light of the foregoing, and the addition of net acquisition of financial assets into cash deficit of the State budget, we can reach a total deficit of the State budget, , which was estimated in the draft state budget for FY 2007/2008 at LE 58769.1 million, compared to LE 62238.4 million in FY 2006/2007, with a reduction amounts at LE 3469.3 million, a ratio of 5.6 percentage, which is would be clear from the following table, which shows that the overall deficit in the presented draft budget rates 6.9 percentage to GDP:

(LE Millions) 2006/2007

Description 2007/2008 draft budget

Budget Expected

• Operating expenses

• Available revenues

241551.3

184728.6

217274.9

163906.3

212103.0

172153.0

• Budget cash deficit

• Net acquisition of financial assets

56822.7

1946.4

53368.6

8869.8

39950.0

9208.3

• Overall deficit

• GDP

58769.1

846800

62238.4

730000.0

49158.3

730000.0• Cash deficit ratio to GDP

• Overall deficit ratio to GDP

%6.7

%6.9

7.3%

%8.5

5.5%

%6.7 Funding procedures for budget overall deficit: The gap between budget expenditures and resources, plus net acquisition of financial assets; equals the overall deficit in the state budget. This deficit requires searching for funding sources.

- 88 -

In this regard, we should differentiate between two important things: First: the total funding needed by the public budget is not restricted at the borders of the budget overall deficit, which is estimated at LE 58769.1 million in the draft budget, but it extends to searching for funding sources to cover the domestic and foreign loans installments, that amount in the presented draft budget at LE 12165.0 million. Second: Net borrowing, which represents a real increase in the domestic and foreign public debt, where both paid domestic and foreign installments should be excluded from the new funding requirements, as a reduction of public debt balances from previous years, moreover, the use of the net proceeds from the privatization in required funding, also reduces funding requirements and consequently of the net borrowing. Accordingly, the net borrowing required by the budget in the next FY 2007/08 will be LE 57769.1 million, compared to LE 59238.4 million in FY 2006/2007, with a reduction of LE 1469.3 million, and if added to the net borrowing mentioned above(the amount of LE 57769.1 million)net proceeds from privatization (in the amount of 1000 million pounds). We can deduce the overall deficit funding, which amounts at LE 25769.1 million. This will be clear from the following data:

(LE Millions)

Description The draft budget 2007/2008 Budget 2006/07

- Overall budget deficit

- Plus payment of domestic and foreign loans premiums

58769.1

12165.0

62238.4

37657.3

- Total funding

70934.1 99895.7

-Excluding the decline in public debt with the amount of premium paid

- Less net proceeds of privatization

12165.0) -(

1000.0) -(

37657.3) -(

3000.0) -(

Net borrowing 57769.1 59238.4

- 89 -

It has been taken into account in the draft budget, that the provision of the necessary funding sources to cover the budget overall deficit or to pay outstanding installments loans from the following funding sources: -

(LE Millions)

Third: the future strategy of proportional reduction of the budget deficit and reduction of the public debt: There is no doubt that shortcomings in public revenues to meet the public expenditure requirements leads to budget deficit, which would necessarily entail an increase in the volume of public debt and consequently in its service burdens, and finally in public budget expenditures. From the previous presentation of the draft budget, we can extract that the cash deficit equals 6.7 percent of GDP, and the overall deficit amounts at 6.9 percent of GDP. It is also clear to you that the net increase in the volume of loans, which means increasing of public debt, needs about LE 57.8 billion (LE 57769.1 million).

Description The draft budget 2007/2008 Budget 2006/07

- Funding through issuing notes and

bills

62734.0 96704.2

- Loans from external sources 7200.1 191.5

- Borrowing from other sources 0.0 1.0

- Net proceeds from the

privatization

1000.0 3000.0

Total funding sources 70934.1 99895.7

So, intensive efforts and systematic strategy for declining this deficit and thereby declining public debt, are required. Hence, the Ministry of Finance’s fiscal policy aimed at a gradual reduction in the cash deficit and its ratio to GDP, so that the deficit ratio will range between 3 and 4 percent of GDP over five years. The key equation to achieve this objective reflects the following perception of budget revenues and expenditures over the coming years until 2011/2012:-

(LE Millions)

Ratio to GDP

Deficit

The growth rate of the previous

year %

Expenditure

Fiscal years

Expenditure GDP Cash

Deficit

The growth rate of the previous

year %

Revenues Revenue

2007/2008 241551 11.2 184729 12.7 568224 846800 28.5 21.8 6.7

2008/2009 266190 10.2 213096 15.4 53094 931480 28.6 22.9 5.7

2009/2010 290680 9.2 242520 13.8 48160 1024628 28.4 23.7 4.7

2010/2011 314515 8.2 272815 12.5 41700 1127090 27.9 24.2 3.7

2011/2012 337160 7.2 303689 11.3 33475 1239799 27.2 24.5 2.7

- 90 -

This strategy is according to a methodology, which is based on the following: - First: The Public Spending Side: A proportional reduction in growth rate of spending by 1 percent is needed annually, and this requires the rationalization of public expenditure and comprehensive review of its components … In this regard, there are basic procedures, which could be carried out concentrated in:

1. Gradual alleviation of governmental wage bill pressure, through governmental restructuring and its rehabilitation, to accommodate with major requirements. Encourage employees leaves and to bind incentives and bonus with performance excellences. further to -which is more important – control the growth of governmental body, which currently reaches at 5.8 million civil servants. And move forward towards employment through expanding private investments and projects of the Social Development Fund and other strategic prospects of development.

2. Restructuring subsidies, especially petroleum materials and supply commodities subsidies,

and ensuring on prevention of mediations in distribution of these subsidies and also ensuring that subsidy will reach only those, who really deserve it. Perhaps starting the automation of ration cards, which is being gradually effective, may help in this area.

3. Future effectiveness of pension systems to be able to achieve social efficiency to pension

beneficiaries, by binding appropriate pensions contributions to pensions, which should be enough for the beneficiaries and their families, without any prejudice to the current applied pension system, but ensuring state responsibility to maintain the pension funds and support their resources.

4. Auditing financing structures for some of the major economic authorities, such as the

National Authority for Railways and Public Transport Authorities, and finding a mechanism to promote their resources, and binding between the service cost and the appropriate profit for those authorities, with the search for funding sources and partnerships to ensure the provision of necessary assets to those authorities, while minimizing the burdens borne by the state budget in this regard .

5. Effectiveness of state public investment, to focus on the state requirements and to target

increasing private investment, encourage and increase the participation of the private sector in providing infrastructure to ensure community participation in development, increase growth rates, creating job opportunities and reducing unemployment. This work is completed through searching for new funding methods to participate in building schools, hospitals, highways, water and sanitation plants and others, to lighten the financial burden on the public treasury and reduce the public debt.

Second : The Public Revenues Side: A proportional improvement in public resources should be processed... though it seems to be relatively less than the annual increase rates, in the previous table, but its ratio to GDP should be increasing year after year, at rates which commensurate with the annual growth rates and even preceded with the necessary procedures including:

1. A comprehensive auditing of public sales tax law, No. 11 of 1991 and its amendments, in order to ensure that this tax consistent with the volume of real consumption in the society, which requires work to transform this tax to VAT. As well as auditing tax rates and consolidating its categories to commensurate with the corresponding rates in other countries.

2. Review legislations related to real estate taxes and survey buildings and establishments

already excised, and prepare a comprehensive real estate taxes legislation, to ensure tax repayment of the real estate owners, gradually and in a balanced manner, without any prejudice to low-income classes.

- 91 -

3. Developing procedures to collect income, profits, and professional taxes, extending

community tax base, involving informal sector, effectiveness of tax returns in accordance with the new models associated with the implementation of new income tax law No. 91 of 2005 and focus on firmness in the collection of tax arrears and outstanding taxes, taking into account tax exemption limits organized by the law and reduce tax disputes. In addition to the abolishment of tax exemptions, and limit them in the applicable exemptions before the new law enforcement till its basic period end.

Third: Public debt management and cash-flow management: The Ministry of Finance is working in effectiveness of the public debt and cash-flow management, and in this area, the Ministry of Finance is aiming at: 1- Application of Treasury Single Account through the proposed amendments to government

accounting law in accordance with the draft law currently presented to your respectable council, to ensure promoting all government funds in the banking system to support government accounts, according to a mechanism, which will greatly reduce the volume of the public debt and reduce treasury financing needs.

2- Searching for low-cost funding sources, away from high-cost sources, including investment

funding, assists in this area, the rely on funding system through treasury bills and bonds in accordance with the reference interest rates associated with cash parameters, which will be coordinated with the Central Bank of Egypt and determine the return on these securities according to supply and demand requirements, and absorb domestic liquidity surplus in the market, to ensure upgrading efficiency of government borrowing to finance state budget deficit.

3- Binding external funding with an integrated package of grants, loans and other international

financial institutions, dealing with Egypt.

- 92 -

Chapter Five

ـــــ

Public Treasury Draft Budget In accordance with the provisions of the State's public budget Law No. 53 of 1973 and its amendments approved by the People’s Assembly, the public treasury draft budget is prepared in accordance with international standards and it presents the following: • Cash deficit/surplus. • Overall deficit/surplus. • Overall deficit funding sources. • Funding the deficit in budget entities, involved in the state public budget, and these entities’

surpluses are transferred to the state budget. The following tables shows: 1- Overall picture of public treasury budget, which it reflects, cash deficit, overall deficit, funding

sources, and the deficit which will be funded from public treasury. 2- The general results of the State's public budget as they are highlighted by public treasury budget.

- 93 -

Public Treasury Budget

The Overall Picture of the State's General Budget

(LE millions) Draft budget for FY 2007/2008

Description The Administrative

Central Local administration Service Authorities Total

FY 2006/2007 developed

budget

* Expenditures : - Wage & Salaries - The purchase of goods and services -Interest - Subsidies, grants and social benefits -Other expenses -The purchase of non financial assets (investments)

25073.5

8383.0

51699.5

61465.8

21580.7

13866.3

26519.4

4362.0

227.9

241.8

58.5

1760.0

7980.9

4348.6

51.3

2757.4

1301.0

9873.7

59573.8

17093.6

51978.7

64465.0

22940.2

25500.0

51430.5

15476.8

50747.6

58444.5

20935.5

20240.0

Total expenditures 182068.8 33169.6 26312.9 241551.3 217274.9* Revenues: - Tax - Grants - Other revenues

118773.7

2412.6

51521.2

689.3

6.0

2636.4

611.1

747.2

7331.1

120074.1

3165.8

61488.7

105644.7

3481.6

54780.0

Total Revenues 172707.5 3331.7 8689.4 184728.6 163906.3* Cash Deficit 9361.3 29837.9 17623.5 56822.7 53368.6

*Net acquisition of financial assets - Acquisition of domestic and external financial assets (excluding the restructuring fund) - Proceeds from acquisition (excluding privatization)

4337.1

2259.3

0.0

185.8

54.6

0.2

4391.7

2445.3

12237.1

3367.3

Net acquisitions 2077.8 185.8- 54.4 1946.4 8869.8* Overall deficit 11439.1 29652.1 17677.9 58769.1 62238.4

- 94 -

* Overall deficit funding Sources: =borrowing and issuance of domestic securities: - Securities Issuance other than shares to fund the budget deficit

- Borrowing from other sources

16110.4

0.0

29812.3

0.0

16811.3

0.0

62734.0

0.0

96703.2

1.0

Total borrowing and issuance of domestic securities

16110.4 29812.3 16811.3 62734.0 96704.2

= borrowing and the issuance of foreign securities : -To fund investments - To fund capital liabilities

405.2

5700.0

36.0

0.0

1058.9

0.0

1500.1

5700.0

191.5

0.0

Total borrowing and issuance of foreign securities

6105.2 36.0 1058.9 7200.1 191.5

22215.6 29848.3 17870.2 69934.1 96895.7

11776.5 196.2 192.3 12165.0 37657.3

10439.1

29652.1

17677.9

57769.1

59238.4

- Total borrowing and issuance of securities

- Less repayment of domestic and foreign loans

- Net borrowing and issuance

of securities - Plus net proceeds from the

privatization

1000.0

0.0

0.0

1000.0

3000.0

Net funding sources 11439.1 29652.1 17677.9 58769.1 62238.4

- 95 -

Public Treasury Budget General Results of

The State's General Budget

(LE millions)

Results Resources Uses

Budget The draft budget Budget The draft

budget Budget The draft budget

2006/2007 2007/2008

Description

2006/2007 2007/2008

Description

2006/2007 2007/2008

Description

53368.656822.7. Cash deficit 163906.3184728.6 . Total Revenues

217274.9241551.3 . Total Expenditures

8869.81946.4. Net acquisition of financial assets 3367.3 2445.3

. Proceeds from lending and asset sales

12237.14391.7

.Acquisition of foreign and domestic financial assets

(excluding privatization proceeds)

(excluding contribution in Treasury restructuring)

ــــــــــــــ ــــــــــــــ ــــــــــــــ

62238.4 58769.1. Overall deficit 167273.6187173. 9 229512.0 245943.0

. Total expenditures and acquisition of financial assets

59238.457769.1. Net borrowing 96895.769934.1. Borrowing and issuance of securities

37657.312165.0

. Repayment of domestic and foreign loans

3000.01000.0. Net proceeds from privatization

10000.010000.0.Privatization proceeds 7000.09000.0

. Treasury contribution in restructure funding

274169.3267108.0Total 274169.3267108.0Total

- 96 -

Conclusion Mr. Prof. Dr. / President of Shura Council Ladies and gentlemen, distinguished members of the Council In presentation of the draft budget, I was keen to assure that, the implementation of financial policies are proceeding in balanced steps. the government is very careful in considering social dimensions, as continuous policy and also moving at the same time towards the economic dimensions to realize sustainable development based on pillars of production and investment and create the appropriate environment to stimulate the national economy. Also, in the draft state budget, closure, openness, transparency, and realism are the main points of the government dialogue with the distinguished representatives of the people’s Assembly, we can clearly conduct the following:

• Assessment of uses appropriations in the budget under an effective and guiding spending framework, without extravagance or stinting, including investment appropriations, and to ensure the limits allocated without excesses.

• Assessment of targeted public resources under a framework of tax community ability, and

considering state’s orientation towards the implementation of an integrated system, that takes into account the legislation in the areas of general income taxes, sails taxes, customs taxes and fees, stamp taxes and others, approved by the Council. This constitutes an effective moving of the national economy within the framework of tax justice.

• Implementation of active fiscal policy through the management of public financial flows of

state treasury in a sound and scientific methodology, to control and decline the public debt service burdens, as part of the planning, that balances between providing the necessary funding from real savings, and the necessary financial control policies to reduce this debt, and binding it to GDP.

• The rights and ownership of state institutions should achieve fruitful results, however, these

institutions and public properties should be managed for the benefit of public treasury, and adequate return on capital of those institutions should be realized, without neglecting the state’s social role.

• In general, the draft state budget for FY 2007/2008 starts the first five-year plan 2007/2008 -

2011/2012, which constitutes the core of a medium-term plan. We are keen and very hard in reducing deficit in

• state budget, to the least that could be, without prejudice to our community needs, and without prejudice to the public treasury collecting rights, and this approach has -without doubt- its dimensions, first, to reduce and control inflation, second, to increase NP, third, to increase income rates, fourth, to create job opportunities and other targeted positive indicators.

- 97 -

In this scope, I could not ignore to refer to permanent and continuous coordination between the financial and monetary policies pursuant to the provision of Article (15) of the state budget, to achieve the discipline required in the economic performance and stability of the exchange rate, to maintain the purchase power of Egyptian pound, and inflation control, promoting export rates, and improving the balances of commercial transactions, and generally, enhancing development levels. I am convinced that the government’s trends towards reform and development is deepening within the framework of consultation and constructive dialogue with your Council and its specialized committees, and will help us all to achieve Egypt’s development and realize welfare for people of our precious Egypt.