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Looking at Egypt's first budget following last year's IMF loan agreement
By Sherine Abdel-Razek
The cabinet economy group met last week to discuss Egypt’s 2017-2018 budget, referring it to parliament for further discussion.
The new budget is the first since Egypt signed a loan agreement with the IMF that was conditional on a number of reforms being adopted. A new value-added tax (VAT) has replaced the sales tax, customs duties have been raised, oil subsidies slashed and the foreign-exchange market liberated resulting in the Egyptian pound losing almost half its value.
Five months after the deal was approved, its repercussions are burdening Egyptians with an unprecedented inflationary wave. The new budget and the plans behind it thus come at a critical time.
Last month, hundreds of people took to the streets in several governorates to protest against a plan to streamline the bread subsidy system that they feared would result in reducing the number of subsidised bread loaves available daily.
According to the budget unveiled this week, government revenues are expected to be LE818 billion, while total expenditures are put at LE1.2 trillion, putting the deficit at 9.1 per cent of GDP compared to an expected deficit of 10.5 to 10.7 per cent in the current year.
The government said it was targeting a growth rate of 4.6 per cent compared to the expected 3.5 to 3.6 per cent for the current year.
The salaries and wages allocations in the new budget are less than five per cent higher than in the current year. “The growth rate in salaries is marginal, especially when compared to the spiralling increases in prices,” said Alia Al-Mahdi, a professor of economics at Cairo University.
The rate was seven per cent in the current year’s budget. Meanwhile, the inflation rate reached 31 per cent in February, its highest level in 30 years, and it is expected to hover at around 20 per cent until the end of 2017.
Al-Mahdi, however, pointed out that increasing salaries at a higher rate during recent years had been one of the culprits in pushing up prices as it had created more demand for goods and fed inflationary pressures. “The limited increase in salaries in the new budget is justified,” she said.
The salaries figure comes in line with the recommendations of the IMF, as according to the agreement increases in the public-sector wage bill must be contained below the projected level of inflation in order to generate fiscal savings equivalent to 0.9 per cent of GDP.
But Omar Al-Shenety, managing director of Multiples Group, an investment group, noted that if salaries increased this would not necessarily push up prices as inflation in Egypt was driven by a lack of supply and not increased demand, so it would be present even if more money was available to consumers.
Al-Shenety said that in the light of such high inflation figures and on the back of the introduced reforms, the government’s growth target of 4.6 per cent for the new year was “far-fetched”.
“Two-thirds of GDP is linked to consumption. The high inflation rate limits consumption and thus limits the GDP growth rate,” he said.
As for subsidies and social welfare, Prime Minister Sherif Ismail has promised to allocate more money to these in addition to meeting constitutional requirements allocating eight per cent of total state expenditures to health and education.
Deputy Finance Minister Mohamed Maait also said recently that there would be increased spending on health due to the roll out of Egypt’s Universal Healthcare Act. Social welfare programmes, including the Takaful and Karama programmes, would cost the state around LE200 billion, he said.
The IMF agreement, according to a blog written by Chris Jarvis, head of the IMF mission to Egypt, states that the government should adopt different programmes to help the most vulnerable groups from the repercussions of the reforms.
These include upping food subsidies by raising the value of the subsidies offered through food smart cards from LE15 to 21 per person, expanding the Takaful and Karama social umbrella to reach 1.7 million households and 7.3 million beneficiaries, and offering services to the most vulnerable categories like more free school meals and new gas connections for poorer districts.
“Such policies target only a limited number of the poor, while the government’s reform programme is adding to their numbers daily. These are not sustainable poverty alleviating policies,” Heba Al-Leithi, a Cairo University statistics professor who works on poverty issues, told Al-Ahram Weekly earlier this year.
INTEREST RATES: But the most controversial figure in the new budget is interest rate payments. These have jumped to LE380 billion, 30 per cent higher than in 2016/2017. They now represent a third of total expenses, compared to a quarter last year.
“This is due to the increase in the dollar exchange rate and the increase in local interest rates following the floatation of the pound,” according to Al-Mahdi. Egypt increased key interest rates by three per cent following the floatation to reach 14.75 per cent for the overnight deposit rate and 15.75 per cent for the lending rate.
Egypt’s local debt is almost equivalent to 94 per cent of GDP, and foreign debt, now standing at $67 billion, represents almost 35 per cent of GDP, which means total indebtedness is more than 130 per cent of GDP.
Since December 2015, Egypt has agreed to acquire a $3 billion loan from the World Bank, a $1 billion loan from the African Development Bank and a $12 billion bailout from the IMF, together with the $4 billion worth of Eurobonds it issued last year.
Amr Al-Garhi, the minister of finance, has hinted that the government might resort to the international markets once again through a new Eurobond issue by the end of 2017. Due to the low creditworthiness of its economy, Egypt has to pay relatively high interest rates on its debt, according to Al-Shenety, reaching 17-18 per cent on treasury bills and six to seven per cent on Eurobonds.
“The government is betting that when the economic situation gets better we will pay lower interest rates, which is the case in other countries,” he said. However, both Al-Mahdi and Al-Shenety expressed concerns that Egypt would not be able to repay its debts on schedule.
“This is a disastrous situation. The problem is that soon the grace periods of the loans will end, and we will start repaying the value of the loans themselves on instalments that will not be less than the value of the interest payments,” Al-Mahdi said.
Meanwhile, a Pharos Securities commentary expects external debt ratios to improve in the short term due to the exchange rate stabilisation, bringing the external debt to GDP ratio down. The accumulation of external debt will be gradually outpaced by more sustainable foreign currency inflows, backed by the implementation of the economic reform programme, it said.
The new budget will also see the government realising a primary surplus of LE11 billion for the first time. This is realised when revenues exceed expenses excluding interest payments. “This is a positive thing, as it is the first step to improving the finances of the country,” Al-Shenety said, but he questioned its sustainability.
“Achieving a surplus is based on certain assumptions: that the exchange rate remains stable around the designated exchange rate of LE16 and that the oil prices stabilises at $55 per barrel. Any fluctuation in such rates would swallow the surplus,” he explained.
Total spending on subsidies under the new budget should come in at LE385 billion, up from LE285 billion in the current fiscal year. This includes LE140-150 billion in oil subsidies, up from LE102 billion in 2016-2017. The government slashed fuel subsidies in November in a step towards abandoning them by 2018-2019.
As for revenues, the government projects tax revenues of LE604 billion in the new budget, 31 per cent higher than the current year, though it does not reveal the breakdown of this figure.
The VAT implemented since August last year at a rate of 13 per cent will be increased to 14 per cent starting in July. According to an official document quoted by Reuters, the government aims to increase VAT revenues to LE51 billion in 2017-2018 and LE66 billion the following year.
A new stamp duty on stock exchange transactions and the purchases of treasury bonds and bills will come into effect in May. The Finance Ministry is targeting revenues of LE1-1.5 billion in the first year of the new tax.
© Al Ahram Weekly 2017
