2014/15 budget goes into effect Tuesday, but still no details on its provisions

With Egypt’s new financial year starting Tuesday, President Abdel Fattah al-Sisi approved a budget for the upcoming year late on Sunday.

He had rejected a previous draft approved by the interim Cabinet in May, as he disapproved of its projected deficit of 12 percent of the GDP and public debt of over LE2 trillion.

The approved budget aims for a deficit of 10 percent of GDP by calling for both an increase in revenue and a decrease in spending, largely thanks to higher taxes and reduced energy subsidies. However, the government still has not released specific details as to how and when the changes will be carried out.

According to a statement from Finance Minister Hany Qadry, the new budget calls for an expenditure of LE789 billion and public revenues of LE549 billion, amounting to a deficit of LE240 billion, or 10 percent of GDP. The projected deficit for the financial year ending Monday is LE243 billion, around 12 percent of GDP.

An earlier draft budget for the upcoming 2014/15 fiscal year projected a deficit of around LE288 billion, or 12 percent of GDP, with revenues at LE517 billion and expenditures at LE807 billion. 

That budget was approved by the transitional Cabinet on May 25, but was not among the flurry of decisions signed into law by outgoing interim President Adly Mansour, who left office on June 6.

“Mansour filed many laws at the last minute, but the budget was not one of them,” notes AbdelAziz EzzelArab, an economics professor at the American University in Cairo.

This raises questions as to whether Mansour declined to ratify the budget because he knew Sisi would not have approved it, says EzzelArab.

However, Amr Adly, an economic researcher at Stanford University, dismisses the public wrangling over the budget as political theater.

“There was no debate. I don’t even think there was discussion between Sisi and the Cabinet when it came to the budget. It’s only a propaganda measure,” he argues. “It’s just made as some kind of a show to convey to the public that they have to make sacrifices.”

Although the new budget will come into effect on Tuesday, scant details have been provided about the policies it contains, and it was passed before civil society groups and outside experts had a chance to evaluate its provisions.

In May, when the earlier draft budget was approved by the Cabinet, it drew controversy for being passed to the president without any public consultation. In the absence of a parliament, many activists have called for a period of public comment and debate.

“Ever since the revolution, none of the budgets were subject to any political or social debate. That has been the trend,” says Adly.

The newly approved budget was passed with even less scrutiny than the earlier draft. On Tuesday, June 24, Sisi announced he would not sign the existing draft into law. Over the next few days, closed meetings were held to discuss fiscal policy, and a new draft was submitted and approved on Sunday.

The lack of public discussion is particularly serious given indications that the new budget will contain controversial austerity measures, such as sales tax increases and subsidy cuts. Qadry said that around LE40 billion will be saved by cutting energy subsidies, according to Reuters.

“It isn’t good to rush a budget,” says EzzelArab. “The simple rule of thumb is the famous ‘no taxation without representation.’ Especially an austerity budget needs discussion.”

Even the International Monetary Fund, a major proponent of eliminating energy subsidies, does not recommend cutting subsidies without information campaigns and public consultation. In a 2013 study of energy reforms around the world, the IMF found that clear and proactive communication with the public was a key factor in success, along with careful timing of price increases and measures to reduce the impact on the poor.

In Egypt, contradictory rumors and anonymous statements in the media about when and how energy prices will change have already led to fuel hoarding. And while persistent energy shortages may have helped convince Egyptians that the current system cannot be sustained, customers already dissatisfied with blackouts and long lines for fuel are unlikely to be pleased about paying more for inadequate services.

Until more details are released about both the budget and reform plans, however, experts can do little more than speculate about what is coming next.

“The government has not shown any plans through which these cuts are going to be translated into decisions,” says Adly. “There is no hard information at all. I’m not sure whether this is being done on purpose, to pass things smoothly without antagonizing people, or because there is no clear plan.”

The latter possibility is not to be dismissed, Adly cautions. On Monday afternoon, the Ministry of Finance released an eight-page financial statement addressing the 2014/15 budget. In the report, the minister asserted that spending would be directed to prioritize social justice and to achieve the greatest possible protection for vulnerable citizens.

However, keeping in mind that the public deficit and debt are the “top priority,” the minister stressed the need to reduce subsidies through both price changes and a diversification of energy sources.

“Adjusting macroeconomic indicators, most importantly the budget deficit, inflation and balance of payments by structural measures is no longer a luxury or a choice,” the statement read.

A few specific measures were mentioned, including changes to the customs law, expanding the tax base via a Value Added Tax and adjustments to property tax and income tax laws. The latter includes a temporary 5 percent tax increase on income and profit over LE1 million, which was signed into law as one of Mansour’s final acts as president.

However, the statement did not actually itemize the rules for expenditure and revenue that will come into effect tomorrow, or explain how plans to reform subsidies will fit in with past programs, such as a planned smart card system for gasoline purchases.

Nor is there any indication of a clear, long-term plan to spur economic growth, says Adly.

“The Finance Ministry is dominated by neo-classical economists very concerned with the budget deficit, and not really concerned with pursuing economic recovery,” he asserts.

The government is looking to cut the deficit with the least short-term political cost, Adly continues, regardless of whether such moves will actually help recovery.

In the short term, the state seems to rely on capital inflows from the Gulf to stimulate the economy through new investment projects, and avoid further stagnation while still narrowing the deficit.

But as for the long term, Adly says, “God forbid. Nobody thinks for the long term in Egypt.”

Isabel Esterman 

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