Egypt's new budget and lower electricity and fuel subsidies demonstrate a continued commitment to fiscal consolidation and economic reform, backed by the country's IMF loan programme, Fitch Ratings said in a recent note. "Narrowing the fiscal deficit supports Egypt's sovereign credit profile, but significantly reducing the public debt ratio is a multi-year task," the note confirmed. Egypt's parliament last week passed the state budget for the 2017-18 fiscal year (FY18, starting 1 July). The government had earlier cut fuel subsidies in a move that will save around EGP 35 billion ($2 billion) compared with FY17, when subsidy spending increased owing to sharp currency depreciation. Fuel subsidy reform is a key element of Egypt's $12 billion IMF programme, according to Fitch. The government has also followed through on its plan for a fourth round of electricity subsidy reform, lowering the electricity subsidy bill to EGP 30 billion, although it has extended the deadline for phasing out electricity subsidies to 2021 from 2019. "Cutting energy subsidies at the beginning of the fiscal year gives us greater confidence in the authorities' willingness to control expenditure and hence in the credibility of fiscal targets. The FY18 budget aims to reduce the budget sector fiscal deficit to 9.1% of GDP (with a primary surplus of 0.3% of GDP), from an estimated 10.9% of GDP in FY17," the note added. Fitch's forecast of 9.3% (and a primary deficit of 0.3%) implies modest slippage against the target while maintaining deficit reduction. "We think there is scope for stronger-than-budgeted revenues, given high inflation and following the introduction of the VAT last October," the report read. The value-added tax (VAT) should be a significant source of FY18 revenue due to an increase in the rate to 14%, the full-year effect, and improved administration of theVAT on services. The slightly wider forecast reflects the prospect of higher-than-budgeted spending. The government is increasing social spending, for example on food subsidies and pensions and a partial cost of living adjustment for government employees. Nevertheless, the wage bill is still only budgeted to increase by around 8% in FY18, which, even with attrition from retirements, would be significantly below the rate of inflation.
