Fiscal deficits in Egypt: is it a macroeconomic or politico-institutional problem?

This paper aims at finding and analyzing the key determinants of Egypt’s fiscal deficits for the period of 1985-2013. It hypothesizes that the political and institutional factors are more important than macroeconomic variables to explain the fiscal deficits of the country in question. In carrying out the research, the paper employs ARDL technique. Findings of the study include that the growth in interest payments, public wage, and subsidy bills are the key sources of fiscal deficits in Egypt. They separately outweigh most of the gains with tax revenues. The reason for this kind of results is found to be largely due to adverse political and institutional factors prevailing in the country. In order to estimate the individual influences of the factors, we use Variance Decomposition Method. Policy implications of the research suggest that to control the future risks of fiscal deficits in Egypt, it is necessary to restrict the growth of subsidy bill and interest payments. However, more efforts are needed to reform the entire tax revenue system and its collection procedures. In addition, policy makers should adopt massive and appropriate political and institutional reform measures.