President Abdel Fattah al-Sisi officially ratified the budget for fiscal year 2015/16 last week after the Cabinet reduced the projected deficit to 8.9 percent of gross domestic product (GDP), or around LE251 billion. The target deficit is 2 percent lower than the fiscal year ending June, with a GDP growth rate set at 5 percent.
Mada Masr spoke to Amr Adly, an economic researcher at the Carnegie Center for Middle East Studies, to get his comments on the budget.
Mada Masr: The 2015/16 budget targets a deficit that’s almost 2 percent lower than the last fiscal year. Is this feasible, and how can it be achieved?
Amr Adly: I don’t think this goal is realistic, because the reduced [deficit] comes from overestimating the level of revenues that can be achieved. This, in turn, translated into exaggerated growth rates expected for the fiscal year, which were set by the Ministry of Finance at 5 percent. This is 1 percent more than the rate projected by the International Monetary Fund of 4.2 percent, which I see as more realistic, given domestic political developments and the fact that many of the capital flows that were expected have not been realized since March.
There is also the slow rate of exports, which is expected to be exacerbated by the instability of the situation in Europe — the biggest market for non-oil Egyptian exports — after the last developments in Greece.
MM: Revenues are expected to increase on the back of higher tax revenues, but the government has not been able to push forward the tax changes it announced, such as the capital gains tax and the proposed tax on the wealthy. Where is the anticipated surge in tax revenues coming from?
AA: As I said earlier, I think that there is a sharp overestimation of revenues in general, and tax revenues in particular, caused by the exaggerated estimation of unrealistic growth rates. This reflects the government’s neoclassical approach in managing taxes, which combines reducing taxes (such as lowering the income tax) to induce growth while expanding the tax base. This is the same approach that Youssef Boutros-Ghali previously succeeded in implementing, but will this approach succeed once again in light of lower growth? I don’t think so.
There is a reliance on non-tax revenues, such as the sale of state land or collecting returns on them, which is something we need to stop for a while to check and assess the possibility of achieving, since non-tax revenues related to fixed assets are usually not sustainable, meaning that they are one-offs because said asset is only sold once. This brings us to the main contradiction that governs the state’s fiscal policies: On the one hand, there is a decrease in tax revenues due to an inability to collect them, and on the other hand, a decrease in economic growth over the past few years.
MM: In your opinion, what is the reason for the dramatic decrease in grants to LE2 billion from last year’s LE25.7 billion?
AA: I think that this decline is sensible and presents nothing new. The generous assistance, which was estimated to be around US$23 billion from Saudi Arabia, the United Arab Emirates and Kuwait, flowed in to fund the transition phase that followed the ouster of [former President] Mohamed Morsi. [Grants] started to decrease directly after the election of Sisi, and came with the encouragement of holding the March economic summit and to embark on reducing subsidies. Gulf funders were aware of the importance of supporting Egypt in restructuring its finances and spurring economic growth, as opposed to funding the deficit indefinitely.
Since then, it has been restricted to supporting [foreign] reserves every now and then, such as the last US$6 billion, and the Egyptian government acts on this basis. This is the secret behind the recent restrictions to imports and the measures taken regarding the exchange rate, which is to retain reserves for the longest time possible in the absence of any indication that intense Gulf support will return, except in emergency scenarios. It is also in the context of the slow investment inflow and a contraction in oil exports.
MM: The focus of subsidy spending is shifting toward direct cash subsidies. What will this mean for the structure of the subsidy system, and how has it traditionally factored into the budget?
AA: These indications have existed for a long time. There are signs that show there will continue to be reductions in fuel subsidies in favor of redirecting subsidies toward the programs called Kafala and Karama for targeted cash subsidies.
The more important question is, what does the government intend to do in the medium term to subsidize fuel and oil prices?
Is the plan to take advantage of the global fall of oil prices to gradually lower the deficit? Or is the goal to liberate prices and allow them to be determined by the forces of the international market, since Egypt is a net importer of oil and natural gas? I don’t think that the government itself has a clear answer to this question.
Regarding this budget, it seems clear that the path will be continuing in the same manner of benefiting from lower global oil prices, considering that it has relatively increased from last year. It is unclear whether the state will hike petroleum products again, which would depend on the political situation. I believe Sisi will postpone this for as long as possible to protect his popularity.
MM: Some are calling this an austerity-driven budget. Is this how you view it?
AA: If we take the definition of austerity as one that serves to decrease the deficit as a percentage of GDP, then it is an austerity budget. In all cases, if we look at the increase in expenditures as a real increase, after subtracting the rate of inflation, it appears that the majority of the budgets in Egypt in the past few years were ones of austerity, meaning that the growth rate was zero or a little bit more.
MM: Is spending on health and education sufficient compared to inflationary effects?
AA: There is an increase in the allocations for education and health, which are, in fact, larger than the rates of inflation. This is positive — however, we need to look into the structure of expenditure on health and education, and ask if this expenditure will be put into infrastructure (schools, hospitals, equipment, et cetera), and to the training and education of employees.