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An ambitious financial outlook
Published in Al-Ahram Weekly on 28 - 03 - 2019

Egypt's draft budget for 2019-20 is with the House of Representatives, the lower house of the country's parliament, for approval after having passed cabinet scrutiny. The House has three months to deliberate on the document before it is signed into law before the new fiscal year begins on 1 July.
The new budget targets a six per cent GDP growth rate, up from a projected 5.6 per cent rate in the current fiscal year. It also increases public investment by 40 per cent to reach around 13 per cent of total expenditure. It hopes to cut public debt to 89 per cent of GDP from around 98 per cent today.
It hopes to achieve these targets through improved revenues, with the Ministry of Finance targeting a 13.5 per cent rise in tax revenues in the upcoming fiscal year. The ministry forecasts that receipts from taxes will reach some LE860 billion, up from LE755 billion in the current fiscal year, according to the ministry's preliminary budget statement released on Monday.
Total revenues are anticipated to increase by 17 per cent to around LE1.1 trillion, with non-tax revenues expected to increase by 30 per cent to reach around LE280 billion.
The government could achieve the targeted revenues given the forecasts of increased growth and the subsequent rise in taxes from the business sector, said Hani Farahat, head of research at CI Capital, an investment bank.
Radwa Al-Sweify, head of research at Pharos Holding, an investment bank, said the government's plan to restructure the Egyptian Tax Authority would lead to an increase in tax revenues and its attempts at formalising the informal sector would also increase the amount of taxes collected.
Egypt's total expenditure in the 2019-20 fiscal year could reach up to LE1.574 trillion, a 12 per cent increase on this year's expenditure of LE1.403 trillion, the Ministry of Finance statement said.
The government is expecting a total deficit of LE445 billion, or 7.2 per cent of GDP, during the next fiscal year, down from 8.4 per cent of GDP targeted for the current fiscal year.
The expenditure targets may be difficult to keep, Al-Sweify said, since it was prone to sudden increases. She said that the debt service item alone stood at around 40 per cent of total expenditure. According to the budget statement, interest rates on public debt could rise next year by 6.7 per cent to reach around LE570 billion.
Cabinet officials told the media this week that the government would continue working on social protection schemes, programmes to reform pensions, and the improvement of the quality of public services offered.
This is in line with the preliminary statement saying that salaries and compensation for employees are estimated to reach around LE300 billion, compared to LE270 billion in 2018-19. The allocations reportedly include the increases in the minimum wage and pensions announced this week by President Abdel-Fattah Al-Sisi. The minimum wage is set to increase by around 40 per cent to reach LE2,000 in the new fiscal year.
The Finance Ministry also raised allocations for social grants and subsidies in the 2019-20 budget by 3.8 per cent to stand at LE328 billion, or around 20 per cent of expenditure.
The budget statement showed that ministry assumptions put the price of a barrel of Brent crude oil at $74 in 2019. This falls within a safety margin given international estimates that oil prices in 2019 will stabilise within the range of $60 or $70 per barrel. However, any increase in the price of oil, even by $1, is bound to affect the targeted deficit.
Oil prices would also affect the subsidies bill for fuel products, Farahat said, adding that Ministry of Finance forecasts of international oil prices were in line with global estimates. The government has allocated LE89 billion for fuel subsidies in the current fiscal year.
In drafting the new budget, the government has considered interest rates. The adoption by many countries of monetary policies favouring higher interest rates in a bid to lower inflation could mean increasing domestic interest rates by 50 to 100 percentage points, which would reflect a higher cost of debt, it said.
“A one per cent increase in interest rates in fiscal year 2019-20 will raise the debt-service bill by LE8 or LE10 billion,” the Finance Ministry statement said.
The ministry expects a reduction in interest rates on government bills and bonds in 2019-20 to reach 15.5 per cent, down from 18 per cent in the current fiscal year.
Egypt's 2019-20 budget assumes an exchange rate of LE17.46 to the dollar, instead of the current LE17.25. The Ministry of Finance announced last week that it had used the average official exchange rate announced by the Central Bank of Egypt (CBE) from 1 to 15 March as a basis for calculating estimates for 2019-20 budget items.
The dollar rate for the new budget will be determined after parliament approves the draft and when it goes into effect on 1 July, Farahat said. Al-Sweify said Pharos Holding had set the price of the dollar for the coming year at LE18.5 and that lower figures were not indicative of the anticipated value.
The government targets a gradual decrease in the public debt-to-GDP ratio in the next three years to reach 80 per cent by the end of June 2022 and achieving a sustainable annual primary surplus of two per cent of GDP in 2020-21.
However, achieving a primary surplus is directly linked to the state's ability to raise revenue, Al-Sweify said, who stressed that taking control of the debt-service bill would be a challenge for the government.

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