Patrick Werr: Why Egypt must move quickly to tackle its deficit

Egypt has only a small window of opportunity after Sunday's parliamentary election to push through politically unpopular economic measures to help it reach the 7 per cent growth it says is needed to reduce unemployment.

By borrowing to finance a large budget deficit, the government risks crowding out lending to private business.

Officials favour early action to reduce the gap, hoping any discontent will cool before next year's presidential contest - Hosni Mubarak's current six-year term runs to September.

Neither vote is likely to weaken the ruling National Democratic Party's grip on power, but the government remains sensitive to the timing of austerity measures that might cause public wrath to erupt in the run-up to the presidential poll. "Memory is short," said one government official. "If we do it now, they will have forgotten."

Among deficit-cutting steps on hold are a real estate tax, a value added tax (VAT) and more effective targeting of subsidies to the poorest that would hike the price many consumers pay for subsidised petrol and cooking gas.

Many Egyptians are deeply suspicious of any economic reforms, viewing them as designed to make the rich richer at the expense of the poor, analysts say. That may be one reason why cost-cutting measures have been deferred until the parliamentary election is out of the way. "Any increase in prices now, given the current inflation and unemployment rates, would reflect badly on the (ruling] party in the parliamentary election, even if the government does forge the vote," said political analyst Nabil Abdel Fattah.

The government insists voting is free and fair. But Abdel Fattah, who works at the al-Ahram Centre For Political and Strategic Studies, said: "It would be hard for it to convince the people that a big number of people voted for the national party after it raised prices."

The government claims it sells petrol and butane cooking gas not just below their international price, but below their production cost. As a result, subsidies, mainly for energy, eat up about 25 per cent of the state budget.The burden has been starving infrastructure, education and other programmes needed to boost economic growth and has helped inflate the budget deficit, which was a hefty 8.1 per cent of gross domestic product in the year to the end of June.

The government has financed the deficit mainly by selling domestic treasury bills and bonds. Analysts say that by doing so, it has crowded private borrowers out of the market.

"If you look out two to three years, you have got to start seeing that deficit start being cut," said Oliver Bell, of Pictet Asset Management.

"You have got to see the subsidies tackled, and these are not politically easy things to do, so you want a stronger government."