By Patrick Werr

CAIRO, July 2 (Reuters) - Egypt expects to finance its mounting budget deficit through domestic borrowing rather than issuing foreign bonds, Finance Minister Youssef Boutros-Ghali said on Thursday.

Boutros-Ghali was speaking after signing an agreement to expand the tax base by boosting collection from small and medium sized firms, although he said the revenues from this plan would be modest.

Egypt's budget for 2009/10, starting from July 1, forecasts a deficit of 98.9 billion Egyptian pounds ($17.7 billion), equivalent to about 8.4 percent of forecast gross domestic product. The deficit was expected to be 6.9 percent in 2008/09.

When asked if the state would sell foreign bonds to finance the deficit rather than fund it domestically, the minister said: 'No. At present the (foreign bond) market is not suitable.'

Egypt's total domestic debt at the end of March was 745.03 billion pounds and foreign debt stood at $30.88 billion, putting total debt at the equivalent of almost 90 percent of gross domestic product, according to central bank figures.

Standard Chartered wrote in a note published before the minister's comments: 'In Egypt, with a projected fall in revenues of 17 percent and limited access to international capital markets, the widening in the budget deficit will, to a certain extent, have to be financed by increased domestic borrowing.'

Total debt has dropped from the equivalent of 125 percent of GDP in 2004, the year Prime Minister Ahmed Nazif and his economically reform-minded cabinet took office.

'We do not believe that the government's fiscal sustainability will be undermined by the higher deficit,' Beltone Financial wrote in a note on the budget.

Beltone said this was because 'debt to GDP ratios are declining and ... growth in tax bases and revenue-side reforms should help increase revenues, when the effect of the global crisis runs its course.'

Boutros-Ghali said the new agreement to expand the tax base, signed with the Federation of Egyptian Chambers of Commerce and Industry, had simplified tax collection for businesses with turnovers of less than 1 million pounds to encourage them to pay taxes and bring them out of the informal economy.

'Small enterprises until now have not had a system for dealing with taxes,' he said. 'I'm hoping 3 million more taxpayers will be included.'

Since 2004, the cabinet has launched a range of initiatives, including cutting income and other taxes, in a bid to boost tax collection and encourage businesses to invest.

($1 = 5.5911 Egyptian pounds)