The widening gap between government revenues and expenses leading to a large fiscal deficit and an overdependence on borrowing has been one of the main woes of the Egyptian economy. 

The situation was exacerbated during the last few years due to successive external shocks, such as the Covid-19 pandemic, the Russia-Ukraine war, and the regional geopolitical tensions depriving the country of important foreign currency resources, together with the government’s spending heavily on infrastructure projects. 

“Public investments were essential for the development of the new cities including the New Administrative Capital, expanding healthcare infrastructure for implementing the Universal Health Insurance Scheme, and improving living standards through social protection projects like the Decent Life (Hayah Karima)programme,” noted Mona Bedeir, chief economist at the Al-Baraka Bank. 

However, “the rapid execution of these projects has often resulted in spending multiples of what could have been achieved with more deliberate planning, yielding limited immediate economic benefits in some cases,”Maha Rashied, an economist at Dcode Economic & Financial Consulting, told Al-Ahram Weekly.

The resulting deficit left no space to sustain high public investment, especially with rising debts and inflated government guarantees for loans to public corporations. 

According to the Ministry of Finance, general government debt is projected to reach 91.4 per cent of GDP in fiscal year 2024. Guarantees surged from 21 per cent of GDP in January 2022 to an estimated 34 per cent by June 2024.

“These rising liabilities pose significant risks to fiscal sustainability, necessitating tighter controls on public spending,” noted Bedeir.

The situation compelled the government to agree to the International Monetary Fund (IMF) recommendation to implement drastic fiscal consolidation measures. It issued a prime ministerial decree in early 2024 aimed at enhancing the monitoring and control of public investments. This includes the stricter oversight of projects by economic authorities and military-owned entities, said Rashied.

New ceilings have been proposed on government guarantees and public investments, including for large-scale national projects, she added.

The Madbouli government also decided to cap investments in mega projects in the 2024-25 budget at LE1 trillion. The Planning Ministry explained that this sum would be pumped into ongoing national projects that are at least 70 per cent complete and expected to enter the operational phase within a year or two at most.  

Investments in new projects are to take place only if deemed necessary and only upon the approval of the cabinet. 

Reducing investments in mega projects will provide short-term fiscal relief, noted Bedeir, who added that to ensure long-term economic benefits better planning, monitoring, and execution are needed. 

The government earlier defended its heavy spending on mega projects by saying off-budget sources funded this. These sources included surpluses realised by the 55 economic authorities that had separate and independent budgets.

They include the Suez Canal Authority, the General Authority for the Supply of Commodities, and the New Urban Communities Authority.

In order to limit spending and ensure better transparency, the government decided this year to integrate the budgets of 40 out of the 55 economic authorities in the state budget to be called the unified public budget. 

According to former finance minister Mohamed Maait, the aim is to “show the real financial capabilities of the state through consolidating all its revenues and expenditures with those of the economic bodies.”  

While the government had been reducing subsidies on electricity and fuel since 2015, this year it became more serious about changing its subsidy formula in order to “better target the most needy,” as the IMF put it. 

Egypt spends around LE370 billion on direct subsidies, according to the 2024-25 budget, of which 36 per cent was allocated to food. 

2024 saw subsidised bread prices increasing by 300 per cent, its first hike in decades, fuel prices raised three times, and the introduction of a 40 per cent hike in electricity tariffs.

“Delaying these actions would have risked undermining investor confidence and jeopardising access to vital external support,” said Bedeir.

However, the moves added to the inflationary pressures that Egyptian households have been shouldering for two years. The government represented by the top executive showed an understanding of these woes. President Abdel-Fattah Al-Sisi in October said that if the agreement with the fund would hurt Egyptians and put them intolerable burdens, the agreement would be re-evaluated. It is yet unclear which part of the agreement would be revisited but analysts keep giving suggestions for alternatives to the most painful decisions.

Of all the moves, increasing the price of the subsidised baladi bread from LE0.05 to LE0.2 per loaf in May was the most unexpected. 

Egyptians are the largest consumers of bread in the world, devouring triple the global average annually. It is a main calorie source and an indispensable staple for a large part of the population. 

The beneficiaries of ration cards used to get five loaves of the 90-gram baladi bread per person per day at five piastres a loaf. The number of beneficiaries ranges between 65 and 70 million.

Prime Minister Mustafa Madbouli justified the move by explaining that a loaf of bread costs the state LE1.25 but is sold at five piastres. “With an average of 100 billion loaves of bread produced per year, the overall value of bread subsidies is hovering around LE120 to LE125 billion,” he said.

The price had been kept steady since the 1980s despite repeated rounds of reforms. An attempt to change the subsidy system sparked riots in 1977.

This is not the first time the government has increased baladi bread prices, economic researcher Salma Hussein noted. She explained that the government had reduced the weight of the subsidised loaf four times between 2014 and 2020, reducing its weight from 130 to 90 grams, which is another way to increase the price. 

In a paper published on the website of Alternative Policy Solutions, a research unit affiliated with the American University in Cairo, Hussein mentioned several alternatives to cutting food subsidies to fix the budget deficit.

Implementing the capital gains tax on mergers and acquisitions, which the government has frozen since 2015, is one. Another is eliminating the exemptions from the property tax that were granted to large companies at the onset of the coronavirus pandemic and have been in place since. 

Hussein also suggested that the government reduce interest rates on public debt as an alternative to increasing bread prices, noting that each one per cent rate cut on treasury bills would save LE80 billion.

However, for Bedeir it is the fuel subsidy reductions that could have been postponed, particularly on diesel.

“Diesel is critical for the cost of living, especially for low-income households,” she said, adding that the price hikes had disproportionately affected transportation costs, leading to indirect increases in food and basic commodity prices.

The government moved the price of fuels upwards three times during 2024, leading to an overall increase in different Octane fuel types ranging between 33 to 38 per cent. Diesel prices soared by 63 per cent. 

At their new level, octane and diesel prices are only 15 and 31 per cent subsidised by the government. In May, Madbouli said that the fuel subsidies would be phased out by the end of 2025.

Bedeir noted that postponing this reform would provide the government with the necessary time to expand and improve targeted social safety nets, ensure vulnerable households are protected from sudden price shocks, and develop a greener and more efficient and affordable transportation network to reduce the reliance on fossil fuels.

Another plan to efficiently manage subsidies and thus reduce spending would be shifting the subsidy programme towards paying cash directly instead of offering products at reduced prices, a system many economists and the IMF say could be more efficient than the current in-kind subsidies.

However, the transition would require meticulous planning to avoid inflationary effects and leakage, Bedeir said.

Investments in financial infrastructure are needed to ensure proper delivery as well as the building of a reliable database of all beneficiaries, both prerequisites for such a move according to economists. 

In order to compensate for the inflationary pressures resulting from these moves, the government added 73,000 families to the Takaful and Karama programmes that provide direct financial support to vulnerable households. 

This brings the total number of beneficiaries to 5.2 million families including 21 million people.

It also hiked the minimum wage for both public and private-sector employees twice in 2024 to reach LE6,000.

* A version of this article appears in print in the 26 December, 2024 edition of Al-Ahram Weekly