MIDEAST MONEY-Egypt relies on c.bank to finance growing deficit

Egypts cash-strapped government has been borrowing from the central bank on a large scale over the last 12 months, an unusual measure that indicates it may be running out of options to finance its persistently high budget deficit.

The borrowing has helped the army-backed interim cabinet to keep the economy running during the delicate transition to democracy, but shows the sheer scale of the task the new government will face as it tries to resolve Egypts daunting financial problems.

"Central banks dont lend to the government on that kind of a scale, except when theres no choice," said an economist based outside of Egypt, who did not want to named because of the sensitivity of the issue.

A popular uprising last year hammered the economy by chasing away tourists and foreign investors and sparking a series of worker strikes for higher wages. Gross domestic product (GDP)growth slowed to around 2 percent in the 2011/12 financial year from 5 percent or more in previous years.

The military-backed government in June 2011 rejected a loan that the IMF had offered to help it over the crisis and instead turned to the local market to finance its deficit, now running at 8.2 percent of GDP.

This has pushed the lending ability of local banks to the limit and caused the governments cost of borrowing to soar. In June the interest rate on 364-day treasury bills surged to nearly 16 percent from only 10.44 percent immediately before the uprising that unseated Hosni Mubarak.

In October, Egypts then Finance Minister Hazem el-Beblawi warned that the local markets ability to lend to the government had almost reached its limit.

But in a draft budget published on Sunday, for the fiscal year that began this month, the government said it expects the budget deficit to grow by 12.5 percent to 135.0 billion Egyptian pounds ($22.26 billion).

A quarter of state expenditure would go to pay the interest on debt, which will rise 26 percent.

Information about direct government borrowing from the central bank appears on the banks website, which shows its "net claims on government" rising by 71.7 billion Egyptian pounds (