The government has been saying for years that it needs to cut the fuel subsidies bill to free up funds for spending on health, education and other social services. But it is no closer to achieving that target even after last week's cuts in fuel subsidies as instead of having to find LE35 billion for the subsidies it will now have to find LE64 billion. The floatation of the Egyptian pound, also announced last week, has translated into a 90 per cent loss in the value of the pound, and this means that the government will now have to pay almost double what it was paying before to cover the subsidies bill. The Central Bank of Egypt (CBE) announced the flotation of the Egyptian currency on 3 November, and the pound is now trading officially at above LE17 to the dollar. The budget had initially been calculated on an LE9 exchange rate and at $40 per barrel of oil, Minister of Petroleum Tarek Al-Molla has said. Now higher oil prices ranging between $45 and $50 per barrel come into play. Had no subsidies cuts been carried out, the subsidies would have reached LE72 billion. So in effect the cuts have helped decrease the bill, partially offsetting the increase as a result of devaluation, said Sara Saada, chief economist with HC Securities and Investment. The fallout from the floatation has been affecting other government expenses as well, including interest rate payments which have gone up on the back of the CBE decision to raise interbank deposit and lending rates by three per cent to 14.75 per cent and 15.75 per cent, respectively. Egypt's banks took the decision one step further and offered 20 per cent and 16 per cent interest on 18-month and three-year certificates of deposit. The move was intended to encourage dollar hoarders to exchange the US currency for Egyptian pounds and benefit from the higher interest rates on pound deposits. Though this was an initiative by the state-owned banks, the private banks followed suit, translating into higher debt servicing costs for the government, Saada said. Rates on 91-day treasury bills rose to around 19 per cent from 14.5 per cent last week, while the yield on 266-day bills increased to 20.367 per cent from 16.5 per cent. Total government debt, domestic and external, reached LE2,676.9 billion, or 96.6 per cent of GDP, at the end of March 2016, Ministry of Finance figures show. However, Saada said that the rate hike was a short-term monetary policy action to defend the currency and that it would be gradually altered. Moreover, interest rates on Suez Canal certificates, earlier receiving 12 per cent interest rates, were raised to 15.5 per cent to discourage holders from abandoning the certificates in search of higher paying ones elsewhere. These certificates, issued in May 2014 and maturing in three years, were used to collect the LE60 billion needed to finance the New Suez Canal. Raising interest rates on Suez Canal bonds will cost the state LE2.2 billion, Deputy Finance Minister Mohamed Maait has been quoted as saying, bringing total interest payments on these certificates to LE9.2 billion. Interest payments on domestic debt will increase by around LE42 billion to reach LE358.7 billion, according to Prime Holding. “This will push interest payments as a percentage of total expenditures from the 29 per cent budgeted by the government to 37 per cent,” it said. In addition to what Pharos Securities Brokerage has called the “triple impact on the budget deficit,” namely the foreign exchange liberalisation, the interest rate hike and the fuel subsidies cut, the government has also committed itself to additional social spending to avert the negative impacts of these measures on the poor. This will mean further widening its expenditures. The measures include increasing ration card commodities subsidies per person from LE18 to LE21, increasing the commodities subsidies bill to around LE50 billion from LE44 billion, Minister of Finance Amr Al-Garhi said during a press conference last Friday. Prime Holding, a local investment bank, estimated it would reach LE58 billion when the cost of importing the commodities is factored in. Prime Holding also pointed to other government moves to add LE10 billion to the budget for the safety net to protect low-income families, reaching LE78 billion. “This will push subsidies, grants and social benefits as a percentage of total expenditures to increase from the 21 per cent budgeted by the government to 25 per cent,” it said. All these factors could cause the budget deficit to reach 14.5 per cent as a percentage of GDP if the exchange rate is around LE15 to the dollar until the end of the current fiscal year, Prime Holding said. “The best-case scenario for the budget deficit as a percentage of GDP is 14 per cent if the exchange rate decreases to LE13 per dollar by the beginning of 2017 when the exchange rate overshooting is absorbed,” it added. However these figures may be overestimated. The effect on the budget is expected to be minimal, Yasser Sobhi, deputy minister of finance for macro fiscal policies told the Weekly. He attributed this to the fact that on the revenues side a lot of government revenues, such as income from Suez Canal, are denominated in hard currency and will accordingly be calculated as per the new dollar rate and will therefore almost balance out the increase in expenditure. He said it was too early to give an accurate estimate of the potential budget deficit. The Minister of Finance also does not appear to be worried. Speaking on a television show last week, he said that he “would have been worried more if we had not taken action when the situation would have been more difficult. These are problems that have existed for years.” “The devaluation was necessary to improve the efficiency of the system and the external position that will eventually result in higher resources and an improved exchange rate over the medium term,” added Saada. She pointed out that though the devaluation increased the subsidies bill in terms of expenditure, it would also increase the Egyptian pound value of any foreign loan or grant received by the government. The government had been targeting a budget deficit of 9.8 per cent of GDP, the equivalent to LE319 billion, in the current fiscal year. It was estimating total revenues of LE670 billion and expenditure of LE975 billion. For several years now it has been targeting decreasing the budget deficit to below the 10 per cent threshold without success. In fiscal year 2015-16, the budget deficit came to 12.2 per cent. The government will need to increase revenues and/or rationalise expenditure in order to meet the projected deficit of 9.8 per cent of GDP, Pharos said. The minister of supply has said that food subsidy ration cards are currently being reviewed. Non-eligible people will be excluded and more eligible others may be included. In order to boost revenues, Pharos said that the government has also said it could impose further progressive taxation without specifying figures. There are proposals for the addition of another bracket of 30 per cent tax on annual incomes above LE500,000. 22.5 per cent is currently the maximum personal income tax rate in Egypt. Tickets for the Cairo underground metro might also see increases despite government denials. The government's main sources of revenue are various forms of taxation, the proceeds of sales of goods and services, and grants. Its main expenditures are debt servicing, the compensation of employees, purchases of goods and services, and subsidies and social benefits.
