Egypt: economic reform plans
Published 9 July 2014
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0.1 Detail
Announcement
On 29 June, two days before the new financial year, President Sisi made his first major economic policy decision by approving the new finance bill and the budget for 2014-15. Sisi had rejected a first draft submitted by the Cabinet, insisting on a lower deficit. The full details of the approved version have yet to be published, but much has already been shared through the media.
Cutting the deficit
The new budget aims to reduce the budget deficit from 13% to 10%. Planned government expenditure is $110bn, 9.4% higher than in 2013/14 although with inflation running at about the same rate, this is a relatively flat budget. The government hopes to reduce the deficit partly by increasing the tax base through a new property tax, a 5% additional tax on incomes exceeding $150,000, imposing taxes on capital gains and dividends, and introducing VAT in early 2015. The other element is a hoped for reduction in subsidies by around 20%, particularly for fuel which amounts to almost $18 billion annually. See separate Update.
Trends in Spending
However, government spending is forecast to grow. Subsidy savings and extra tax revenue are to be reallocated to education, healthcare and the ever-rising public sector wage bill.
Subsidies
Reform of subsidies remains the biggest challenge. The messaging from the President down has been to reduce consumption, tighten belts and prepare for price rises. Sisi participated (and won) a much-publicised cycling race to encourage the braver souls to venture into Cairo traffic on bicycles and will give up half of his wealth and salary to the ‘Long Live Egypt’ fund, which he himself will oversee and to which the military have also given $140m.
Fuel
PM Mehlab meanwhile has said it would be treason not to reform the current subsidy regime. Led by government statements and speculation in the press about fuel price rises on 1 July, petrol queues formed and fights broke out as people rushed to fill up. But the expected price increases of 30-50%, have failed to materialise, making the Government’s ambitious 20% reduction target more difficult to achieve.
Three Year Outlook
The budget process has been shepherded by Hany Dimian, the Finance Minister. There are hopes he will keep to a 10% budget deficit for the next three years. The latest World Bank projections foresee growth around 3% until at least 2016, far below what is needed to absorb the 700,000 new workers entering the labour force each year. Even this fiscal deficit is huge by international standards. Egypt will be looking to the Gulf again for support. There is reportedly the prospect of another $20bn but, even with this, the Egyptian economy will need to take bold steps to attract investment, stimulate growth and create jobs.
Energy Supply and Gulf Backing
Energy supply is a particular concern. The customary summer power cuts have started earlier this year and are lasting longer than previously. Payment of the outstanding dues to foreign oil and gas companies is vital to unlocking further investment in Egypt’s gas fields.
0.2 Disclaimer
The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.