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How can government maintain target budget deficit and fund new social spending increase?  
 
 

Egypt’s new fiscal year will begin on July 1, days after President Abdel Fattah al-Sisi’s announced a LE75-billion social spending increase as part of a wider social protection scheme intended to absorb the expected impact of ongoing austerity measures.

“Is what we are providing to each family enough?” Sisi asked in the June 21 speech. “It is what is obtainable. This is what the state can offer to citizens to ease the impact of economic reforms. The LE75 billion social package was made obtainable because of the economic reform path that we began.”

Most of the new social package will go to food subsidies through a LE38 billion allocation that allows the government to more than double each individual’s food subsidy ration from LE21 to LE50 per month. With this additional earmark, the food subsidy bill in the state budget for the coming fiscal year is set to increase to LE85 billion compared to the LE47.6 billion estimated at the end of the current fiscal year.

Egypt’s current food subsidy scheme, which went into effect in mid 2014, benefits around 82 million people of Egypt’s 93 million population. Under the scheme, each person is allotted five loaves of bread per day and has access through a smart card system to basic supply commodities, such as cooking oil, sugar and rice.

The remaining portion of the announced social spending package allocates approximately LE23.5 billion to an increase in pensions and around LE13.5 billion to boost cash transfers and disburse bonuses for civil servants and other government workers, according to a June 22 statement by the Finance Ministry.

On June 19, Parliament approved a 15-percent increase in pensions, whose minimum threshold would be LE150 per person, as well a 7-percent salary bonus for civil servants and a 10-percent salary bonus for other public employees and workers.

Moving into the second year of a three-year US$12 billion economic program agreed upon with the International Monetary Fund, Egypt is preparing additional energy subsidy cuts and is aiming to raise additional revenue through privatization and taxes, in an effort to liberalize the economy and grapple with the country’s ballooning fiscal deficit.

In its agreement with the IMF, Egypt pledged to “develop by June 2017 a road map for pension reforms, including a plan to address the implicit liabilities of the budget sector to the Social Insurance Fund.” It is unclear, however, whether the planned increase in the pension expenditure constitutes part of this pledge.

The hike in social spending that Sisi announced exceeds the agreed upon increase in social protection schemes in the IMF program that has proven politically sensitive. The agreement set a target of LE87.1 billion (2.1 percent of GDP saved from cutting other subsidies) in additional spending on social protection schemes for 2016/17 and 2017/18, the first two fiscal years in the program.* The social “pillar” aims to alleviate the program’s “contractionary impact and potentially negative social implications,” according to the IMF documents concerning the loan to Egypt.

The economic measures implemented in line with the program — liberalizing the foreign currency exchange rate, a move that caused the Egyptian pound to depreciate by half its value to the US dollar; raising interest rates and thereby prompting a hike in allocations to debt servicing in the state budget; cutting energy subsidies and introducing a value added tax and higher customs on some imported goods — ultimately caused inflation to rise to historic levels in recent months, climbing above the 30-percent benchmark and straining Egypt’s purchasing power. Food prices soared the most in this period, exceeding a 44 percent annual increase in April, according to Consumer Price Index figures included in a May Central Agency for Public Mobilization and Statistics report.

Limited resources

The government plans to maintain the original deficit target of 9.1 percent of GDP for FY2017/18, according to the June 22 statement released by Finance Minister Amr al-Garhy. However, the announced social package was not initially incorporated into the state budget that was sent to Parliament several weeks ago, a document in which the deficit target was set at 9 percent of GDP.  This fact is most obvious in the food subsidy bill, which was initially pegged at LE63 billion for FY2017/18. To maintain the deficit target amid the increase, the government must either turn to new revenue sources that were not calculated when the initial deficit target was determined or introduce additional spending cuts.  

Parliament passed the state budget one day after Sisi’s announcement. The budget, which is yet to be ratified by Sisi, should be published in the Egyptian Gazette in the coming few days. It is unclear, however, how the deficit target will be maintained and how the new social spending package will be funded.

Mohamed Abdel Fattah, the head of the budget sector at the Finance Ministry declined to comment on the source of funding of the social package in an interview with Mada Masr. “It is accounted for,” he said.

However, Yasser Omar, the deputy head of Parliament’s Budget and Planning Committee, told Mada Masr that the new package will be partially funded by the contingency clause in the state budget and expected revenue from special funds, which has been partially linked to the state budget.

There was LE21.63 billion allocated for subsidies in the contingency clause in the budget that the Cabinet sent to Parliament earlier this month. However, confirmation of the final allocation is pending publication of the budget in the Egyptian Gazette.

On June 20, Parliament passed a law allocating some of the revenue generated from special funds, which consist of non-taxed sources of revenue that are channeled directly to government bodies and give them autonomy over their finances, to the state budget. The budget will now receive a maximum of 15 percent of the revenues of special funds worth more than LE100 million and a minimum of 1 percent from special funds worth LE5 million to LE20 million, according to a Finance Ministry statement released on 23 June.

Sisi’s social protection scheme also includes tax breaks that will raise the minimum income tax threshold and impose a three-year freeze on agricultural land taxes, among other measures. Raising the income tax threshold is expected to decrease forecasted tax revenues by around LE7 billion to LE8 billion.

Further cuts

The devaluation of the Egyptian pound to LE18 per US dollar and surge in inflation has caused the budget to increase beyond the original estimates published in the IMF loan agreement documents.

Due to a weaker pound and higher international oil prices, the lion’s share of the inflated allocations went to the fuel subsidy bill, which is estimated to reach LE101 billion by the end of FY2016/17, compared to the originally planned LE35 billion. As a result, FY2017/18 estimates for fuel subsidies increased to LE110 billion, as opposed to the original target of LE36.5 billion. This shift has prompted analysts to expect at least one significant hike in fuel prices in the coming months.

Electricity prices will increase at the beginning of July, albeit not for the lower consumption brackets, Electricity Minister Mohamed Shaker announced on 19 June.

“Every step we take forward [on the economic reform path],” Sisi said in his June 21 speech, “improves our ability to alleviate the strain on people’s livelihoods.”

However, with the need to fund this nominal increase in social spending, the government and IMF are set to turn to other measures that will ultimately increase the strain on Egyptians.

Translation by Waad Ahmed

*Correction: This paragraph was amended to reflect that the figure LE87.1 billion reflects the total targeted additional social spending for both fiscal years 2016/17 and 2017/18, rather than the target for FY 2017/18.

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Osman El Sharnoubi