Draft budget shows slower fiscal improvement than projected: Moody's

Rating agency Moody's expects that lower oil prices in FY 2014/2015 will reduce fuel expenses to around EGP 70bn compared to EGP 100bn in the original budget

The draft state budget for the fiscal year (FY) 2015/2016, starting 1 July, shows a fiscal deficit of 9.9% of GDP, decreasing from 10.8% during the current fiscal year. However, this percentage represents a slower fiscal reform than projected by the government's Medium-Term Macroeconomic Policy Framework and the government's pre-budget statement for 2016, that estimated a budget deficit of 9.6% of GDP, according to a Thursday report by rating agency Moody's.
The slowdown in fiscal consolidation [reducing the fiscal deficit] is a negative sign, because it will translate into smaller reduction of public debt and keep the government's gross borrowing needs "precariously high for a longer period", said the report.
Regarding fuel subsidy rationalisation steps taken by the government, Moody's expects that due to lower oil prices fuel expenses in FY 2014/15 will amount to around EGP 70bn, marking 3% of estimated GDP. In the original FY 2014/15 budget fuel expenses were set at EGP 100bn, while the government's projections for the coming fiscal year indicate a further reduction to reach EGP 61bn.
However, the fiscal space created by lower oil prices is counteracted by additional expenditures. The draft budget projects 20% increase in spending compared to the current fiscal year reaching EGP 885bn.
The report further highlighted the key areas of expenditure increases. The costs of social programme allocations, and education are projected to increase 12%, reaching EGP 431bn, which is almost 50% of total public expenditures.
In addition, public sector wages and salaries, 26% of total expenditures, are projected to increase 14%, and public investment spending 66%, reaching EGP 75bn.
The report showed that the projected revenue increase of 26% to reach EGP 612bn, and tax share to increase to 70% of total revenues compared to 57% in 2013/2014, will depend on the quick implementation of tax reform. Moody's as well expects lower tax revenues than projected by the draft budget.
Furthermore, Moody's report further detailed that Egypt is facing declining budgetary donations, which will decline to EGP 2.2bn in FY 2015/2016 compared to EGP 25.7bn in FY 2014/2015 and EGP 95.9bn in FY 2013/2014, according to the draft budget.
The cabinet announced its approval of the draft budget on 18 June, coinciding with the first day of Ramadan and an hour before breaking fast, setting a target for deficit at 9.9% of GDP, around EGP 281bn.
GDP growth is expected to reach 5% during the coming FY, compared to 4.2% during the current FY, according to the draft budget.