The new fiscal year is here as well as the long-awaited new budget. The Ministry of Finance released a financial statement revealing its revenues and expenses plans for the 2015-2016 fiscal year only on the very first day of the year, however. The budget in its final form is a second draft, as the president ratified it only after the minister of finance had trimmed the initially proposed deficit from 9.9 per cent of GDP to 8.9 per cent, mainly by lowering allocations to salaries, health and education.
While the allocations for the three items came in higher than last year, growth rates in the money dedicated for salaries and education came in at eight and four per cent, respectively, marginal increases that will likely be eaten up by the high inflation rate which stood at 13 per cent in May compared to 11 per cent in April. The salaries allocations alone represent one quarter of the new budget, and they have been pointed to several times by members of the cabinet as a burden that needs to be dealt with, especially after the introduction of the new civil service law which is expected to rationalise the growth of the salaries budget by linking salaries to performance. The financial statement noted that the government had adopted procedures to control this item by fixing the bonuses and allowances given to government employees at the same levels as in the previous year.
The country's ballooning debt-servicing figure as revealed in the budget is worrisome, with its value for local and foreign borrowing increasing by 25 per cent to represent 28 per cent of overall government expenses. The government has been relying heavily on borrowing through treasury bills and bonds since the Revolution due to the economic slowdown and high deficit.
Moreover, it tapped the international debt market last month through a Euro bond of $1.5 billion and is expected to issue more bonds in the international markets. The overall level of debt has reached the exceptionally high level of LE2.5 trillion, equivalent to 90 per cent of GDP. The energy subsidies in the new draft remain unchanged from the first draft at LE61 billion compared to a projected LE100 billion in the previous year, highlighting the possibility of further reductions in petroleum products subsidies during the year. And while the year is supposed to witness the second round of electricity subsidies reductions, according to the plan initiated last year to phase out these subsides by 2019, the electricity allocations increased to LE31 billion in order to finance six new power stations that will add 3.6 Gigawatts to the national network capacity. The plan to cut energy subsidies starting last year aimed at directing 15 to 20 per cent of the savings to cash transfer programmes, which will receive LE4.7 billion this year compared to nothing on 2014/2015. This figure includes the takaful, or solidarity, programme which gives cash to families on condition that their children attend school and undergo regular medical check-ups.
Another plan, karama, or dignity, covers the elderly and disabled. Social spending is getting a lot of attention this year. In addition to increasing the value of social solidarity pensions by 73 per cent, under the new budget those with limited incomes will be receiving health insurance and medicines worth LE4.2 billion .
Three million Egyptians will be added to the beneficiaries of the bread smart card programme to reach 70 million. Overall spending on investments comes in at LE75 billion. The statement notes that the low level of spending on this item will be compensated by mega-projects financed by off-budget resources or special financing instruments like the Suez Canal certificates or the private sector. Egypt was able to attract pledges of investments of around $60 billion during the Egypt Economic Development Conference in March. The foreign direct investment received by the country rose to $5.7 billion during the nine months ending in March, compared to $3.2 billion during the corresponding period the previous year. Moving to the revenues side, the 33 per cent increase in tax revenues to reach LE422 billion programmed under the new budget reflects the government's stated policies.
The full application of the new Value Added Tax to replace the sales tax will take place this year, with revenues expected to increase from LE120 to LE180 billion. This increase will likely push the prices of services and commodities up, exacerbating problems relating to the devaluation of the pound.
The Central Bank of Egypt (CBE) allowed the pound to depreciate against the dollar during its regular auctions on Thursday and Sunday, pushing it down to LE7.73, its lowest level since the auctions began in December 2012.
The move will likely make Egypt's imports more expensive and push up inflation.
One of the main revenue sources pinpointed by the budget is profits from state bodies and public companies and banks to the treasury. Taxes paid by sovereign bodies such as the General Petroleum Corporation, the Suez Canal and the Central Bank of Egypt have increased by18 per cent to reach LE66 billion, with CBE taxes doubling.
The statement also points to plans to find a mechanism through which the Central Bank would be able to transfer its profits throughout the year to the treasury instead of sending them in a lump sum the following year.
One of the main problems that delayed the announcement of the new budget was the disagreement between the Central Bank governor and the minister of finance on the plans.
The government expects a five per cent growth rate throughout the year, which analysts see as far-fetched as the severe decline in grants, from $25 billion to LE2.2 billion, together with the expected rise in oil prices amid regional political tensions, are likely to put a brake on growth estimates.
