Tentative Fiscal Consolidation Underway in Egypt


CEIC Macro Watch Global #35 - August 29, 2014 The announcement of the latest details of the ambitious Suez Canal development project hit the headlines this month. At least a part of the gains of Egypt’s main stock index, EGX 30, which reached a six-year high, was attributable to foreign investors buoyed by the perceived prospective benefits of the project – i.e. increased fiscal revenue, new employment opportunities and the overall positive impact on trade and investment. More tangible evidence of long-anticipated structural improvements in the economy comes from the willingness of President Abdul Fattah el-Sisi to step up the unpopular economic reforms: namely, the recent reduction of the costly fuel subsidies - a measure aimed at improving the government's overstretched finances. The preliminary data for fiscal year (FY) 2014 (to end-June) show that subsidies, grants and social benefits, totalling 177 billion Egyptian Pounds (EGP) or 25.5 billion US dollars (USD), were the largest expenditure item in the government’s budget. For FY2013 (the latest available) petroleum subsidies alone amounted to EGP 120 billion, or around USD 18.6 billion. Interest payments also weighed considerably on the budget in FY2014, amounting to EGP 173.1 billion (USD 24.9 billion), up from EGP 147 billion (USD 22.8 billion) in the previous fiscal year. Overall, the fiscal deficit has reached an alarming level – rising to EGP 253.7 billion (USD 36.5 billion). However, the rate of increase in the deficit has slowed considerably and the dollar value of the deficit actually decreased from fiscal 2013, when it stood at USD 37.2 billion (equivalent to EGP 36.5 billion or 13.7% of GDP). Some concerns have been raised over possible solvency issues as public debt reached 93.8% of nominal GDP in FY2013, a 12 percentage point increase from FY2012. Quarterly data of domestic public debt show that the new government that came into office in July 2013 has managed to contain the debt increase – in the first quarter of 2014, domestic government debt stood at 78.9% of nominal GDP, compared to 79.1% a year earlier. However, other pressing issues which affect the Egyptian economy – the external imbalances, chronic inefficiencies in the agricultural sector and the labour market, and lack of transparency and accountability in economic governance – are yet to be addressed. Lacklustre real GDP growth in the vicinity of 2% year on year, which has been the case in Egypt over the past few years owing to the instability, falls short of what is needed in the context of an economy mired in social tensions, persistently high unemployment (measuring 13.4% as of the first quarter of 2014), and a dire need to raise incomes. While president el-Sisi’s revealed commitment to fiscal adjustment has been welcomed by the proponents of structural reforms, the challenges before the Egyptian economy remain significant, especially for those at the lower end of the income distribution who will inevitably bear the brunt of fiscal consolidation. By Stoyan Kiryazov in Bulgaria - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog

29th August 2014 Tentative Fiscal Consolidation Underway in Egypt

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