Twelve days before the beginning of the new fiscal year in July, the Ministry of Finance has revealed some of the figures in the 2015/2016 budget. The draft budget should have been announced in March, discussed by parliament, and then ratified by the president. However, in the absence of a parliament, the draft was referred to President Abdel-Fattah Al-Sisi only last week, though he has the legislative power of parliament for approval. The draft, which lacks full details, projects a deficit of 9.9 per cent of GDP, compared to an expected gap of not less than 10.8 per cent in the current fiscal year. Analysts expect the president to query the projected deficit. The government last year presented a budget showing a deficit of 12 per cent of GDP, causing Al-Sisi to ask the government to redo its sums and lower the deficit to 10 per cent. A cabinet statement including some of the details of the new budget did not include a calculation of spending on energy subsidies. Some days later, a press release from the Ministry of Petroleum said the figure would be LE61 billion. The current budget projects the subsidies at LE100 billion with reductions in them included. However, thanks to the decline in oil prices in the second half of the year the actual amount spent on subsidising energy in the current year came in at LE70 billion. Expectations that oil will cost an average of $70 per barrel during the coming fiscal year should limit the import bill for crude oil, other petroleum products and natural gas, which is one reason why the subsidies figure is lower than that for the current year, according to Tarek Al-Mulla, head of the Petroleum Authority, in an interview with the state news agency MENA. Al-Mulla said there was a plan to rationalise fuel consumption by between three and five per cent, which could save up to half a billion US dollars (LE3.8 billion). He also cited the shift in the cement industry to rely on coal as a source of energy and the subsequent reduction in the amount of natural gas and fuel oil consumed by the industry as another reason for the relatively low subsidies bill. The cement industry consumes 10 per cent of all the energy used in industry in Egypt. Omar Al-Sheneety, managing director of the Multiples Group, an industry analyst, said that the fact that the statement pointed to a restructuring in the subsidies system translated into further reductions in the subsidies. In addition to the previously announced reduction in electricity subsidies for the highest consumption brackets, Al-Sheneety said the government would also reduce fuel subsidies. The percentage was related to the price of crude oil as the higher it gets the more subsidies will need to be removed in order to cover increases in the import bill without widening the deficit, he said. The government cut fuel subsidies last summer by almost 30 per cent in a move that economists saw as a step towards reforming the distorted subsidies structure that encourages consumption and changes Egypt from a net exporter to net importer of energy. However, the inflationary pressures of the move are still being felt. Another budgetary figure that stirred a lot of debate throughout last week was the LE2.2 billion the government has set as the value of expected grants, its lowest level since the 2011 Revolution. According to Reuters, the inflow of grants into the country, including cash and free fuel shipments mainly from Saudi Arabia and the UAE, reached LE95.9 billion in 2013/2014 and LE25.7 in the current fiscal year. Since December 2013 the Gulf countries have started to substitute grants by bank deposits with low interest rates of 2.5 per cent and oil shipments with easy payment methods. “The obvious decline in the aid figure reflects a reliance on local sources to finance the budget,” Reuters noted. While there were few details of these “local sources,” analysts believe they must mean local borrowing from banks through bonds. The weeks preceding the announcement of the draft budget saw a disagreement between the minister of finance and the head of the Central Bank of Egypt, Hisham Ramez, over the latter's reservations about transferring Central Bank profits to the ministry of finance. The banking sector is already burdened by billions of pounds of state borrowings, said Al-Sheneety. Analysts are unanimous that in order to cover the gap left by the missing grants the government might resort to the international debt market by issuing more euro-bonds and/or trying to get a loan from the IMF. Egypt's first offering in the international bonds markets was oversubscribed earlier this month. As for the IMF, while International Cooperation Minister Naglaa Al-Ahwani told the MENA news agency last month that Egypt was not currently seeking an IMF loan because the pace of required reforms might not be compatible with social conditions in the country, observers say that the lack of sources of finance could push the government into seeking one anyway. The government's main source of revenue, taxes, came in at LE422 billion in the new budget. The tax figure is less than it should be as the government has introduced several changes to the tax system, leading to a loss in revenues. On the eve of the Egypt Economic Development Conference (EEDC) held in March the government lowered income tax rates to 22.5 per cent compared to 25 per cent or more, in addition to cancelling an additional temporary five per cent tax on more than LE1 million in profits. Seen as a pro-business move, this was followed by the controversial step of freezing the capital gains tax on stock market transactions for a couple of years. As a result, today's budgetary figures only reflect the implementation of the new Value Added Tax which is currently levied only in certain limited cases. Meanwhile, the budget has seen a large increase in expenditure on social welfare programmes. “Achieving social equality and improving the standard of living of those in need is the focal point of this budget,” finance minister Hani Qadri Dimian said in a statement. The draft budget projects a total of LE431 billion in expenditure on social programmes, or about 49 per cent of total public expenditure and a 12 per cent increase on the current fiscal year. The increase in the value of expenditure is a cosmetic increase, however, as 12 per cent is less than the inflation rate of 14 per cent, commented Al-Sheneety. The budget also earmarks LE38.4 billion for bread and commodities subsidies, with the expected increase in beneficiaries of smart cards for bread distribution of three million expected to push the total up to 70 million. “It is obvious that the reason the government has taken all this time to put the budget together is that it is trying to present it in such a way as to appease both investors and the man in the street,” Al-Sheneety added. Growth is expected to rise to five per cent in the draft budget, as opposed to 4.2 per cent in the current fiscal year. “The economic situation is witnessing a gradual improvement, and this is reflected in the increase in growth and the ratings of the international agencies,” Dimian said. His statement also noted that the bullish growth forecasts were based on the government's reform programme and regaining international and local confidence in the economy, as seen in the upgrading of Egypt's credit ratings four times over the last six months.
