Egypt’s budget in COVID-19’s era

CAIRO - 21 April 2020: Coping with the global and economic circumstances taking place as a result of coronavirus (COVID-19) and the precautionary measures taken to curb it, Egypt’s cabinet, headed by Prime Minister Mostafa Madbouli, approved, on March 26, the draft budget and the sustainable development plan for the new fiscal year 2020/2021.

During the parliament's session on April 21, Minister of Finance Mohamed Ma’it delivered the financial statement of the state’s general budget project for the new fiscal year 2020/21 as a prelude to its discussion by specific committees, headed by the plan and budget committee.

The draft budget that is the biggest in the country’s history comes with expenses of 1.71 trillion and revenues of LE 1.3 trillion, according to Ma’it's previous announcement.

Ma’it clarified that 20/21 draft budget reflects the directions of the political leadership to improve the standard of living of citizens through effective initiatives that contribute to improving the quality of public services, and strengthening the pillars of social protection, in a manner that ensures that all groups of society benefit from development returns.

“Wages allocate LE 335 billion in the new budget with an increase of LE 34 billion or 11.3%, compared to current fiscal year,” the minister said, clarifying that the new budget aims to improve the wages of workers in the country and improve their conditions.

The increase in wages comes to pay periodic bonuses by 7% of the wages for those who are subject to civil service law and 12% of the basic salary for those who are not subject to civil service law, with a minimum of LE 75, and an additional incentive ranging from LE 150 to LE 375.

“Taking into account President Abdel Fatah el-Sisi directions of raising the allowance for medical professions by 75%, which will be disbursed to doctors and nursing agencies, at a value of LE 2.25 billion,” Ma’it added.

According to Ma’it, allocations for goods and services amounted to LE 100.2 billion, while subsidies accounted for LE 326.3 billion; including: LE 19 billion for “social security, and takaful and karama” pensions, and LE 170 billion pounds for the General Authority for Insurance and Pensions, to pay the second installment of the state’s public treasury obligations to the authority, 14% special allowance to pensioners, and increasing the allocations for social housing support to LE 5.7 billion, with a growth rate of 70%, in addition to increasing the financial allocations established to support exports to LE 7 billion.

The minister also pointed out that LE 4 billion has been allocated to raise the tax exemption limit from LE 8,000 to LE 15,000 and reduce the job-earning tax brackets for all low- and middle-income groups.

Health sector allocations rise LE 23.4 billion to LE 95.7 billion in 20/21 draft budget, and education allocated LE 46.7 billion and LE 7.8 billion went for scientific research.

He noted that the government aims to bring down the total deficit of the gross domestic product (GDP) to 6.3%, achieve a primary surplus of 2%, and increase government investments to LE 280.7 billion pounds, or 64.3% over the current fiscal year, thus contributing to economic activity, and continuing to improve infrastructure and create an investment-stimulating environment.

The minister said that the draft of the state budget for the new fiscal year reflects the state’s keenness to move forward in completing the process of economic and social reform and strive to reduce debt and deficit rates of GDP, and to strengthen the structure of the national economy by pushing productive activities, stimulating industry, and expanding the export base. He also referred to the decrease in the value of the debt service benefits from the current fiscal year.

The draft budget of 20/21 depended on the average exchange rate prevailing in the market during the period from January 1 to the end of March 2020, as well as the price of a barrel of oil at $61.

In previous statement, Finance Minister said that the new fiscal year 2020/2021 draft budget aims to maintain the greatest degree of financial stability while supporting economic activity by achieving a reduction of the total deficit to 6.3% of GDP and achieving a primary surplus that allows the path of reducing the debt of the budget.

“The draft budget targets to support, and stimulate economic activity, growth and employment, especially the productive sectors, in conjunction with the continued efforts to improve the quality of infrastructure while ensuring that everyone benefits from this improvement,” he added.

The Minister added that the new draft budget targets specific initiatives and measures that improve the living conditions of citizens, especially the middle class, as well as a positive contribution to strengthening human development activities and areas in the fields of health and education, and the continued expansion of proper pricing of goods and services, in a way that guarantees the efficient allocation of resources and uses by all parties, as well as targeting the expansion of the tax base and maximizing the return on state assets by increasing the surpluses transferred to the public treasury.

According to Ma’it, Egypt's 2020/2021 draft budget aims to reduce public debt of GDP to 82.7% by end of June 2021, and to achieve a primary surplus of 2% during the coming fiscal year.

“Egypt's Ministry of Finance is intensifying its efforts to continue the growth of budget revenues at rates that exceed the rate of expenditures,” Ma’it stated, adding that also aims to increase the section of wages and compensation in 20/21 budget to accelerate the income of workers.

Ma’it clarified that Egypt's new budget targets an annual wage growth rate that exceeds the inflation target.

Moreover, social measures package in Egypt's new budget includes allocations for delivering natural gas services to homes for 1.2 million housing units.

It also includes allocating about LE 36 billion to initiatives to support the sectors of health, pre-university education and social solidarity, according to Ma'it.

“Egypt's 20/21 budget also contains allocations for the gradual implementation of the comprehensive health insurance system.”

Finance Minister clarified that allocations for state-funded medical treatment in Egypt's new draft budget for 20/21 have increased.

“Egypt's new budget will work to ensure the continuous increase in allocations for public investments funded by the Treasury in a manner that exceeds any other increases of public expenditures,” Ma'it stated, adding that exports allocations in 20/21 draft budget hiked LE1 billion, compared to FY of 2019/20

Egypt’s sustainable development plan for 2020/2021

During the cabinet meeting, the cabinet approved the sustainable development plan for 2020/2021 that was prepared in light of the negative repercussions of the spread of the Corona virus on the global economy, and its expected effects on the Egyptian economy.

For her part, Minister of Planning Hala el-Saeed stated that Egypt's target of growth rate will dip to 5.1% from 5.6% in 2019/2020, attributing this decline to the slowdown of growth rate during the third and fourth quarter to 5.2% and 4%, respectively.

“Egypt's total government investments rose 12% during the period from July 2019 to February 2020, amounting to LE90.9 billion,” Saeed said.

She clarified that sectors of food and accommodation, household services, manufacturing, wholesale and retail trade, will be affected by COVID-19 outbreak.

Moreover, she stated that Egypt's unemployment rate to dip to 8.5% by end of 2020/2021 in case COVID-19 crisis ended during FY 2019/2020.

“Egypt targets growth rate of 4.5% in 20/21 but might decline to 3.5% in case the outbreak of COVID-19 continued,” Saeed.

Meanwhile, Capital Economics expected in a report Business Today attained a version of, that Egypt’s GDP would reach 5.5% in 2019, shrinking 1.3% during 2020, before surging to 7.8% in 2021. Renaissance Capital also said that the government’s measures to contain the covid-19 outbreak — including imposing a nighttime curfew and partial closure of restaurants — could threaten 30% of Egypt’s nominal GDP.

As per inflation rate, it’s expected to increase to 9.8% if the crisis continued until December 2020, according to Saeed.

Capital Economics anticipated consumer prices to hit 7.5% in 2020 and 7.3% in 2021.

“With the continuation of COVID-19 till the first half of FY20/21, total investment will dip to LE 740 billion from 960 billion,” Saeed said, adding that Egypt's governmental investments are planned to hike 33% to LE 280 billion from LE 211 billion in 2019/2020.

Egypt's investments financed by the treasury and loans are planned to increase 64% from LE 140 billion to LE 230 billion, Saeed noted.

According to Capital Economics, the fears of the negative impact of coronavirus on economy might push countries towards a financial assistance from the International Monetary Fund. Regarding Egypt, the London-based research consultancy firm said that the state only completed its IMF deal in 2019 and policymakers had openly discussed the possibility of a non-financial package.

“Balance sheets are much stronger now than when Egypt went to the Fund in 2016, but policymakers may decide to return to the IMF in order to shore up investor confidence.”

In November 2016, the Executive Board of the IMF approved a $12 billion loan as a financial assistance to Egypt to support the Egyptian economic reform program.

Upon the board's approval in November, Egypt embarked on a bold economic reform program that included floating its currency, losing around 50% of its value, as part of the economic reform program which imposed taxes, including the value-added tax (VAT), and cut energy subsidies, all with the aim of trimming the budget deficit.