Egypt's budget deficit target hard to maintain if expenses increase

Marwa Hussein, Tuesday 22 Oct 2013

Egyptian government announces stimulus package to increase minimum wage and income tax exemption while keeping budget deficit at ten percent

Ahmed Galal
Finance minister Ahmed Galal (Photo: AO)

Egypt's Ministry of Finance announced this week a package of measures to enhance the economy and promote social justice.

The plans are expected to increase state expenses in 2013/14 by almost LE40 billion. However, the government said the state deficit would not exceed ten percent of Egypt’s gross domestic product (GDP).

"The targeted ten percent budget deficit is unlikely to be maintained, we are expecting deficit to reach some 13.5 percent," said Wael Ziada, head of research at EFG-Hermes, the country's leading investment bank.

The new measures include a stimulus package of LE29.6 billion ($4.2 billion), a raising of the minimum wage in the public administration sector to LE1200 ($171) starting January – which is expected to cost LE9 billion, an increase of the exemption level of income tax, and the implementation of property taxation.

The rise of the exemption level for the lowest bracket of wage earners from LE5000 to LE12000 per year will decrease state revenues by LE4 billion, while the implementation of property tax should earn the treasury between LE2.5 and LE3 billion.

To achieve these aims without widening the deficit, the government needs either to generate extra revenues or to cut existing expenses, or a mixture of both.

"In addition to aids and loans, the government will implement many reforms such as property tax, replacing sales tax with value added tax (VAT), increasing fees on quarry extraction, and cutting energy subsidies. Many of these reforms will be announced soon," said Yasser Sobhi, Head of Fiscal Macroeconomic Policies at the Ministry of Finance.

In its financial statement for the 2013/14 budget, the government attributed failure to meet the deficit target last year to two factors: A slowdown of economic growth compared to its initial forecast, and the non-implementation of announced structural reforms.

The reforms that were not met last year are exactly the same as the government proposals this year. Similar reforms have been repeatedly announced on various occasions since 2008, long before Mubarak's ouster, but they were always postponed due to their high social and political cost.

"The announced targets are hard to achieve without a clear plan to cut fuel subsidies, as the VAT will not increase fiscal revenues significantly immediately after its implementation," suggests Ziada, adding that the growth rate will matter.

Growth rates forecast in the budget are 3.8 percent, a figure many analysts believe is too ambitious. EFG-Hermes expects a more modest rate of 2.5 to 3 percent, while a recent Reuters' poll expects it not to exceed 2.6 percent.

The only sure ways of increasing state revenues are aids and loans. Egypt’s interim government has received $12 billion in aid from Gulf countries, much of which has been deposited in the Central Bank and is to be refunded over several years.

Though the loans and aids from Gulf countries are soft loans, with mild conditions compared to other sources of finance, they will still increase Egypt's debt.

According to the budget, Egypt's debt is expected to reach 89 percent of GDP in 2012/13, compared to 85 percent a year earlier.

Not achieving the targeted deficit will not be a first for Egypt's government. In the 2012/13 budget, the government forecast a deficit of 7.6 percent, which was revised to 10.7, then 12 percent. Finally, the government announced the deficit for the previous financial year would reach a high of 14 percent of GDP, recording some LE240 billion (roughly $34.8 billion), almost double its initial target. 

Short link: