Egypt: Budget deficit jumps 37% y/y to EGP 781bn in Jul-Apr, equals 5.6% of GDP
Metodi Tzanov
Helping finance professionals understand what is going on in Emerging and Frontier Markets
Egypt's overall fiscal deficit widened by sharp 37% y/y to EGP 781bn (USD 16.5bn) in the first ten months of FY 2023/24 (Jul-Apr), as strong y/y increase in interest payments, subsidies, and compensation of employees outpaced strong y/y increases in both tax and non-tax revenues, according to the finance ministry's monthly?report. It should be noted that the fiscal deficit contracted by EGP 140bn m/m in March, as the government used part of the proceeds (EGP 179bn or USD 3.7bn) from the USD 35bn UAE investment deal to cover the gap. This is why the fiscal gap-to-GDP ratio eased to 5.58% in Jul-Apr from 5.64% recorded over the same period of the previous FY. The government has also revised the 2023/24 fiscal deficit target down to EGP 550bn or -3.95% of GDP as it plans to use USD 12bn from the UAE deal. This has not been reflected in the ministry of finance's report and the budget target remains at -7.0% of GDP.
The government recorded a primary surplus of EGP 469bn (3.35% of GDP) in Jul-Apr, compared to a primary surplus of 0.95% of GDP a year ago. While using proceeds from the UAE deal will help reduce government debt upfront, Egypt needs to enhance revenue mobilization to lower its high public debt and large gross financing needs, and to limit infrastructure spending, which puts too much strain on the fiscal account and on the local currency. Egypt's public finances have come under severe pressure due to high interest payments and the weaker pound, while more indicators point towards slowing domestic demand, which may also drag on tax revenues. The average maturity of local currency debt remains low at around 3.3 years, and the government wants to extend it to ease the burden of expensive domestic debt.
The government hiked the budget for subsidy and social protection by nearly 50% to EGP 530bn in FY 2023/24 as Egyptians struggle with surging living costs, imported inflation, and slowing economic growth. The government has revealeda new set of social measures aimed at easing the financial pressures on the most vulnerable and public sector employees, which are expected to cost the budget EGP 60bn a year. These?measures?include raising public sector wages, pensions, and grants. The government has also raised the annual income tax exemption threshold, which is expected to cost the budget EGP 10bn in lost revenue.
Budget implementation during Jul-Apr
领英推荐
Revenue
Fiscal revenue rose by strong 47.9% y/y to EGP 1.66tn in the period, accounting for 11.9% of full-year GDP. Tax revenues rose robust 34% y/y to EGP 1.24bn driven by Income (up 38% y/y) and VAT (up 26% y/y) as the government has rolled out programs to support consumption, which has come under pressure in more recent years. Egypt has imposed a new tax bracket of 27.5% on individuals, whose annual income exceeds EGP 800,000, although the tax exemption allowance on annual income was raised to EGP 45,000. Tax revenues from Suez Canal rose by nearly 50% y/y to EGP 87bn supported by higher tax rates as well as higher traffic and higher tonnages passing through the canal during the first half of the FY. Transit fees and transit surcharge fees for crude oil and petroleum product tankers have been raised a few times over the past two years, but security challenges in the Red Sea are already dragging on traffic. We estimate Egypt has lost USD 1.5bn revenue due to the traffic disruptions in Jan-Apr 2024. Meanwhile, non-tax revenues soared by 110% y/y to EGP 423bn on the back of EGP 179bn receipts from the Ras El Hekma investment deal.
Expenditure
The total expenditure rose by strong 44.3% y/y to EGP 2.45tn in the period, which accounts for 17.5% of full-year GDP. The increase in spending came on the back of higher interest payments, wages, and subsidies to the state grain buyer. Interest payments rose by sharp 88% y/y to EGP 1.25tn and account for 51% of total spending and 101% of tax revenues in the period. Debt service costs are thus the single largest category in spending and constitute a major credit weakness. The central bank has raised interest rates by cumulative 19pps since March 2022, which has made domestic debt more expensive - the relatively short maturity profile of Egypt's domestic debt makes the public finances vulnerable to interest rate movements. The recent FX reforms saw foreign investors rushing to buy local T-bills, which drove T-bill rates lower, but they remain elevated none the less at around 26%. The finance ministry expects debt-to-GDP to reach around 90% as of end-June 2024, and wants to cut the ratio below 80% by 2026/27.
Public investments fell 3% y/y to EGP 194bn as the government wants most of the ministries to freeze non-essential projects and spending that requires USD. The cabinet announced that public investments will be reduced by 15% during the second half of the year, and focus will be put on infrastructure projects that are near completion. The expenditure on social benefits rose 14% y/y to EGP 158bn, partly because of the increased contributions from the treasury to the pension funds as well as new social programs and expanded coverage of the existing programs. Egypt had said it would support the most vulnerable amidst rising living costs as more and more families struggle with surging consumer inflation, and plans to hike spending on social support in?FY 2024/25.
Meanwhile, subsidy payments rose 20% y/y to EGP 201bn, although the subsidy payments to the state-run grain supplier fell on the year. The government had delayed a series of electricity tariff increases to Jan 2024, but the bread subsidy will be lowered from June. The war in Europe had forced the government to postpone its plans to cut the costly bread subsidy as bread prices are a sensitive topic in Egypt, where many families rely on subsidized bread, and pose risks for social tension. Electricity tariffs and fuel prices are expected to be raised in July.