Financial Management 2 Assig .

1 ( Enter the site of "The Ministry of Finance" and "The central Bank" to read the
budget
2 ( What is the Budget deficit ?
On the basis of preliminary data, the 2006/07 central government deficit is estimated
at 7.5 percent of GD, belo! the " percent average of recent years, largely d#e to
str#ct#ral improvements incl#ding ongoing reforms in the ta$ area, f#el price
ad%#stments, !age restraint and !indfall receipts from a telecom license sale.
&$cl#ding !indfall receipts and one'off ban( restr#ct#ring costs, the #nderlying
b#dget sector deficit fell to ).5 percent of GD, an ad%#stment in 2006/07 of close to 2
percent of GD from the previo#s year*s #nderlying deficit, !ith a broadly similar
ad%#stment for the general government +!hich incl#des social sec#rity f#nds and the
,ational -nvestment .an(, ,-./. 0ombined !ith privati1ation receipts and the dra!'
do!n of idle cash balances follo!ing the consolidation of most government acco#nts
into a 2reas#ry 3ingle 4cco#nt +234/, b#dget borro!ing re5#irements fell
dramatically, contrib#ting to the decline in 2'bill yields.
3 ( What is the Monetary policy versus Fiscal policy ?
Monetary policy
Monetary policy was tightened once spillover effects of administered price increases
became visible in late 2006. olicy interest rates !ere raised t!ice. 2he nominal
e$change rate appreciated by 6.6 percent against the 7.3. dollar in the year to end'
8#ne, !ith greater fle$ibility since then. -n con%#nction !ith the partial sterili1ation of
e$ternal inflo!s, broad money gro!th !as (ept in the 69'65 percent range #ntil 4pril
2007, b#t s#bse5#ently s#rged to 6) percent as less of the inflo!s !ere sterili1ed and
money mar(et f#nds deposited the proceeds from mat#ring central ban( certificates of
deposit !ith commercial ban(s .
Reducing the budget deficit is key to raising national saving and supporting
monetary policy in containing inflation and speculative inflows. -t is also (ey to
red#cing the high level of net p#blic debt +net domestic general government pl#s
p#blic and p#blicly g#aranteed e$ternal debt amo#nt to abo#t 70 percent of GD/.
2he mission !elcomes the government*s plan to red#ce the deficit grad#ally to 9
percent of GD by 2060/66, !hich !o#ld p#t p#blic debt on a firmly declining path.
-n line !ith this strategy, the 2007/0) central government b#dget aims to contain the
deficit at 7 percent of GD. :ith one'off reven#es e$pected at 0.6 percentage points
of GD, and one'off investments in the rail!ay at 0.2 percent of GD, achieving this
target re5#ires an additional ad%#stment effort of 6.6 percent of GD over last year*s
#nderlying deficit.
Fiscal policy
Achieving the short and medium-term fiscal targets will require policy measures
s#ch as contin#ed retrenchment in the !age bill, reform of the sales and property
ta$es, improvements in the efficiency of cash management and p#blic spending, and
f#rther red#ctions in f#el s#bsidies. &arly action in these areas is needed to deliver
the 2007/0) b#dget target and to enhance the credibility of the reform program,
thereby contrib#ting to a strong and s!ift investor response. 2he planned phase'o#t
of gas and electricity s#bsidies for energy intensive ind#stries, if implemented
!itho#t delay, !ill contrib#te si1ably to!ard meeting the medi#m'term targets. 4t
the same time, efforts sho#ld contin#e to strengthen social safety nets to protect the
poorest segments of society. 2he favorable e$ternal environment and contin#ed
strong gro!th provide an opport#nity to accelerate fiscal consolidation beyond the
pace c#rrently envisaged by the government.
The monetary and exchange rate framework should continue to be strengthened in
order to remain effective in containing inflation and smoothing volatility.
The authorities declared monetary and echange rate policy framework is a
managed float and gradual move to inflation targeting. 2he greater e$change rate
fle$ibility evident in recent !ee(s is beginning to p#t in place a cr#cial element for
the s#ccess of this approach. 4llo!ing the demand and s#pply of foreign e$change to
play the main role in determining the e$change rate is essential to ma(e monetary
policy more effective. -n this approach, the 0.& sho#ld aim at smoothing volatility
arising from one'off flo!s. Greater fle$ibility co#ld help red#ce short'term portfolio
inflo!s by enco#raging investors to internali1e e$change rate ris(, thereby red#cing
the need for f#rther reserve b#ild'#p and costly sterili1ation, !hich has severely
red#ced the 0.&*s ta$ and dividend payments to the b#dget. 4ny short'term
appreciation against the 7.3. dollar is #nli(ely to s#bstantially affect non'
hydrocarbon merchandise e$ports and to#rism, given the s#bstantial depreciation of
the &gyptian po#nd in recent years vis';'vis the e#ro.