Despite the strain that the COVID-19 pandemic has placed on Egypt’s economy, the Cabinet appears set to keep social spending level in the budget for the new fiscal year.
The first snapshot of the state budget for the FY 2020/21, which is set to begin July 1, came on April 20, when Finance Minister Mohamed Maiet submitted several preliminary documents to Parliament. Key areas in the budget which are classified as social spending — from salaries and subsidies to healthcare and education — had taken a dip or shown weak growth. However, the picture that came with those documents remains a bit blurry, as the budget was prepared between November 2019 and February 2020, before the effects of the pandemic had become acute. And when the minister submitted the budgetary documents, he did not preclude adjustments.
However, the picture from the documents Maiet submitted to Parliament in April is clear enough to suggest that the government will be adopting an “austerity framework” when it comes to social spending, according to Heba al-Laithy, the Central Agency for Public Mobilization and Statistics’ lead researcher on the 2019 Household Income, Expenditure and Consumption Survey. For Laithy, this can be most clearly seen in the weak or negative growth of allocations for food subsidies and cash payments.
In its first session of the week on Sunday, Parliament settled accounts for FY 18/19 and will hold breakout sessions for the next year’s budget throughout the week. As Planning Minister Hala al-Saeed told the assembled house that the government was revising the projected growth rate to as low as 2 percent, MPs seek to maintain the course set out by Maiet, clamoring for an austerity plan.
The government has already cut subsidies, raised taxes and curbed public salaries as conditions for securing the US$12 billion loan program from the International Monetary Fund in 2016. Discussions for the FY 20/21 budget come as the government starts talks to secure a new loan from the international lender. Faced with an unprecedented global downturn and calls from some to revise economic orthodoxy, the government has nonetheless prioritized the same austerity measures that have dominated the last several years and chosen to prop up spending in constitutionally mandated areas through sleights of hand.
If the government is not allocating money toward social spending at a time of economic hardship for many, what are its priorities?
Cutting subsidies appears to be priority number one.
Subsidies are set to fall slightly in the FY 20/21, coming in at LE326.3 billion or approximately US$21 billion. Nonetheless, it’s a significant drop from predictions made in the 19/20 FY budget, which had projected subsidies to rise by 10 percent, up to LE360 billion, in the next fiscal year.
However, there are several key areas where there will be “negative growth” on social spending. The chart below compares the growth rate of subsidy items versus the annual rate of inflation. In its projections, the Finance Ministry has estimated an average inflation rate of 9 percent in FY 20/21.
Any increase in spending that does not keep pace with the average 9 percent inflation rate is considered “negative growth”, as the rate of inflation will offset additional spending.
Accordingly, spending on health insurance, medicine and health care for those who cannot afford these services, as well as spending on cash subsidies, will fall in the coming budget, while spending on export subsidies and social housing will increase.
Fuel and food subsidies, meanwhile, will drop in both real and nominal terms, with the former falling by 46 percent to LE28.2 billion and the latter dropping 5 percent to 84.4 billion. Electricity subsidies will be completely scrapped.
While the drop in fuel subsidies could be attributed to a fall in global oil prices, the drop in food subsidies is a conscious government decision. Over the past few years, many citizens have been removed from the food subsidy system as the government enacts tougher eligibility criteria.
“Now is absolutely not the right time to cut beneficiaries out of food subsidies,” says Salma Hussein, a senior researcher at the Egyptian Initiative for Personal Rights.
“Many people will partially or completely lose their income because of the crisis triggered by the coronavirus,” the researcher says. “The solution here is to use the existing food subsidy mechanism, even for those who aren’t eligible for the program. In times like these, we need to aim to also provide subsidies for people close to the poverty line [not only to those below it].”
As is the case with food subsidies, the limited growth in the budget allocation to cash payments is driven by the Social Solidarity Ministry’s decision to remove beneficiaries from the Takaful program, which is meant for families with school-aged children, according to Laithy.
The government reassesses which households qualify for the program every three years, which “generally leads to a slow increase in the number of enrolled families,” she said.
The financial aid programs Takaful (Solidarity) and Karama (Dignity) were first implemented in March 2015, two years after fuel subsidies were first cut and in-kind food subsidies were converted into cash payments. Both programs paid out a baseline sum of LE325 per household member, with an additional allotment for each child, and a maximum of three children per household. Takaful, which received the lion’s share of funding in the government’s cash transfer program, was presented as allowing Egypt’s poor to break out of the poverty cycle by making payouts contingent on child education and health conditions thus guaranteeing better jobs.
“It’s imperative that the Social Solidarity Ministry allows those who were previously ineligible for the program to enroll,” Laithy says, adding that the review of beneficiaries should be suspended and the criteria for adding households should be relaxed.
Hania Sholkamy, one of the designers of the Takaful and Karama programs echoed Laithy’s comments, saying the programs could help ease the economic impact of the coronavirus if it’s expanded to include more families.
The noticeable growth in the export subsidies, which would not assist low-income families, is also much in line with the government’s prevailing policies. Exporters are already set to receive LE2.5 billion by the end of June as part of the urgent coronavirus relief effort.
The growth in social housing subsidies is also a continuation of the policy to inject public investments in the housing sector.
Public sector salaries, meanwhile, will grow by over 11 percent to LE335 billion pounds, surpassing expected inflation, albeit lower than last year’s increase. However, this might be troubled by news that Parliament is considering legislation that would deduct 1 percent from the salaries of all civil service employees over the next 12 months and reallocate it toward coronavirus relief.
Education and healthcare: What’s new?
The preliminary budget documents present conflicting figures for healthcare spending for FY 20/21, compared to last fiscal year’s figure.
In one place, the allocations toward spending on health come in at LE 245.5 billion, a 45 percent increase over the figure for the LE 166.6 billion allocated in the current fiscal year.
However, the spending for the current fiscal year changes to LE73 billion — the figure recorded in last year’s budget — and LE93 billion at another place in the document.
The discrepancy comes from a redefinition of what is classified under expenses to include items outside the Health Ministry’s direct expenditures, a high-level official at the Finance Ministry told Mada Masr on condition of anonymity. The same goes for education expenses.
Healthcare and education expenses are being classified under “a more general and comprehensive” rubric, the source says, which includes spending from “not only budgetary entities,” such as the Health Ministry, but also from public companies and government authorities. The official points to hospitals run by the police, the Armed Forces or Al-Azhar, as well as the comprehensive health insurance programs, as falling under this wider rubric.
According to the official, interest payments on debt servicing have been added to the health and education budgets, as “these sectors benefited from the loans.”
The practice of re-classifying expenses started a few years ago to inflate spending on education and healthcare to meet constitutional requirements.
The new classification helps the government “get around its constitutional obligations,” EIPR said in a 2017 report. The move was also criticized because it included police and army hospitals, exclusively used by the personnel of these institutions.
Public healthcare spending stands at about 3.72 percent of Egypt’s Gross Domestic Product (GDP) in the new budget, comfortably exceeding the 3 percent minimum constitutional requirement, thanks to the new categorization. Without the budgetary reclassifications, it would stand at less than 1.5 percent.
Parliament has also agreed to calculate spending relative to GDP instead of Gross National Product (GNP) due to the scarcity of data on the latter. GNP is usually larger as it includes output by Egyptian nationals and Egyptian investments abroad.
The same goes for education spending, which will grow 15 percent to LE364 billion. This number reflects a wider definition of education spending, including, for example, schools run by the New Urban Communities Authority, and not just those run by the Education Ministry, the official says.
Per the Constitution, the government must spend 4 percent of GDP on primary and secondary education and 2 percent on higher education.
Without the budgetary reclassifications, spending on education would come in at around LE157.58 billion, about 2.8 percent of GDP.