Recessive economy looking upwards

Minister of Planning Ashraf al-Araby declared Egypt’s GDP growth should reach 2.3 percent for fiscal year 2012/13. Meanwhile, the Ministry of Finances released the first preliminary figures for fiscal year 2012/13 and for the budget 2013/14.

And while these figures confirm the dire state of public finances, state officials and economists believe the outlook is promising thanks to massive aid flooding in from the Gulf in the aftermath of former President Mohamed Morsi’s ouster.

Nonetheless, certain objectives set by the government seem exaggeratedly ambitious.

Second year of negative GDP per capita growth

The government announced earlier this month it would target a 3.5 percent growth in 2013/14.

“It is not an impossible target, but it will be hard to achieve,” says Allen Sandeep, head of research at Naeem Brokerage.

While the 2.3 percent growth in 2012/13 is slightly superior to the 1.8 and 2.2 percent growth registered in 2010/11 and 2011/12, it is below the population growth. According to the official statistics body CAPMAS, the Egyptian population increased by 2.6 percent in 2012.

In other words, the GDP per capita has slightly dropped in 2012/13. According to the Ministry of Finances, the GDP per capita had already dropped by 0.6 percent in 2011/12.

Meanwhile, the Egyptian pound’s drop on the international market triggered a wave of significant inflation over the last months, leading to an even more desperate situation for many households.

According to CAPMAS, urban inflation was higher in the first eight months of 2013 than during the whole year of 2012. The pound has lost almost 12 percent of its value against the dollar in 2013, most of it during the first quarter.

The biggest contributors to this slow growth have been the tourism, construction, telecommunications and real estate sectors, with growth rates ranging between 4.2 and 10.2 percent.

Insufficient growth to create jobs

This growth is therefore insufficient to provide jobs to the large young population entering in the work force every year. Unemployment figures reached a historical high of 3.6 million, or 13.3 percent of the active population, during the second quarter of 2013, according to CAPMAS. Unemployment amounted to 9 percent only at the end of 2010.

Araby explained in February that only about a third of newcomers on the job market could find employment.

The Cabinet issued a statement last week stating it a target of 800,000 new jobs by next June, thanks to its LE22 billion stimulus plan. It also aims to bringing the unemployment rate back down to 9 percent in this period. The 2013/14 budget plans a 67 percent increase of public investment.

However, for a labor force of 27 million, this 4 percent drop would represent more than 1.1 million new jobs, the new generation of workers notwithstanding.

A deficit level unseen in 20 years

While the Ministry of Finance says stimulating the economy is its top objective, it also hopes to curb the budget deficit.

The budget deficit reached 13.8 percent of the GDP in 2012/13, up from 10.8 percent in 2011/12 — a level never seen since 1990/91. It increased by 44 percent, or LE73 billion, during the last fiscal year.

The ministry aims to bring it back to 9.1 percent in 2013/14.

Is that objective realistic?

“It is a question mark,” answers Sandeep. “It will mostly depend on the subsidy reform, but I rather expect it to reach 10 to 10.5 percent next year.”

Tax raises and cuts in oil subsidies for 2013/14

To do so, the government needs to increase its revenues by LE160 billion, or 46.7 percent. Tax revenues would therefore rise by LE107 billion, or 42.6 percent. An extra LE30 billion is expected from tax on corporate profits, and LE52 billion from tax on goods and services.

This calculation takes into account the implementation of an Added Value Tax (VAT) at a raised rate, instead of the current sales tax. This tax is paid by all consumers even if necessity products have benefited from a discounted rate.

On the spending side, the government plans to increase its budget by LE106 billion, or 18.4 percent. This hefty increase indicates the government’s desire to break with the previous government’s proposed austerity policies.

However, a drop of LE10 billion is expected in subsidies. Food subsidies would drop by 5 percent while oil and gas subsidies should slide by 20 percent, or LE20 billion. The much heralded smart card system is supposed to help control smuggling and over-consumption.

Oil and gas subsidies represented more than 20 percent of all public spending in 2011/12, while subsidies as a whole represented 29.3 percent.

The subsidy budget increased by 26 percent last year, and was multiplied by two over the last five years.

Public salaries are to rise by 21 percent, according to Prime Minister Hazem al-Beblawi’s decision to set the minimum wage in the public sector at LE1,200.

Interests on debt are expected to increase by 24.6 percent next year, fueled by the public deficit and the slumping balance of payments.

They increased by LE42 billion, or 40 percent, last year and have been multiplied by almost three in the last four years.

Optimism still prevails

Despite the significant challenges outlined in this new budget, optimism prevails among the experts.

“The confidence is there, and the outlook is positive,” says Sandeep.

While the public finance crisis of early 2013 had hindered the last government’s ability to pump fresh money into the economy, the recent injection of Gulf aid has given well-needed margins to the interim government while keeping the foreign reserves afloat.

Part of the aid has been allocated to solidify public finances. According to Central Bank of Egypt data, foreign reserves gained almost US$4 billion between June and August 2013, reaching their highest levels since November 2011.

Another part of the aid will give government more time to reform the economy without the strict schedule and conditions imposed by the International Monetary Fund, which has been dragging its feet on granting a US$4.2 billion loan to Egypt since the revolution.


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