Saturday,22 September, 2018
Current issue | Issue 1297, (26 May - 1 June 2016)
Saturday,22 September, 2018
Issue 1297, (26 May - 1 June 2016)

Ahram Weekly

Budget troubles ahead

The government’s 2016-2017 budget has just been released, offering a foretaste of the challenges ahead, writes Sherine Abdel-Razek

Al-Ahram Weekly

The government presented a summary of its 2016-2017 budget to parliament on Sunday, 50 days before the new fiscal year is set to begin. It comes at a difficult time for the economy, with macroeconomic indicators looking bleak and fears of social unrest due to rising prices.

Minister of Finance Amr Al-Garhy told the parliament that the deficit for the coming year is expected to decrease to 9.8 per cent of GDP from a projected 11.5 per cent this year on total expenditure of LE936 billion.

To achieve this, the government is banking on new revenue streams together with plans to tighten expenditure, he said, including the application of the new value-added tax, reforms to the real-estate tax system, and a new customs act with stricter penalties on tax evaders.

The government also plans to manage both the public debt and its sources of financing more efficiently.

The largest source of revenues is taxes, coming in this year at LE433 billion, though these figures are large enough to be taken with a pinch of salt.

“Since the 2011 Revolution, and with the increase in indebtedness and the political pressures to reduce the deficit, the government has started to adopt a new technique: inflating the figures for the expected taxes in the budget, resulting in a failure to collect a percentage of these by the end of the year,” according to a report by the Egyptian Initiative for Personal Rights (EIPR), an NGO.

While the actual figures for the 2015-2016 fiscal year, to end in June, have yet to be released, the gap in 2014-2015 was as big as LE100 billion, with the government being able to collect only 75 per cent of what it had initially planned for, according to the EIPR.

The introduction of the new value-added tax (VAT) to replace the existing sales tax is the most important development in this year’s budget, but it is being cautiously received by some experts.

In addition to its effect on the already high inflation rate, the VAT tax, according to EIPR researchers, is an indirect tax imposed on consumption. It is shouldered by the end consumer rather than producers and traders, they said.

“As it is imposed on consumption, its burden is heavier on those with limited incomes, as the less the income, the higher the percentage of it directed to consumption rather than saving,” the EIPR report said. In short, the smaller an individual’s income, the more it will be eaten up by VAT.

Moving to the expenditure side of the budget, salaries will increase by 4.5 per cent to reach LE228 billion in 2016-2017, compared to a growth rate of 8.5 per cent in 2015-2016 over the previous year. Salaries almost doubled from 2011 to 2014 and witnessed a 25 per cent increase in 2014 alone with the application of the minimum wages law.

However, according to Eman Negm, an analyst at Prime Holdings, starting last year the government decided to apply wage controls prohibiting all government entities from hiring personnel outside the regular system and closing the door on hiring temporary labour.

Income tax exemptions on special bonuses have been cancelled, and new hires in the public sector tied to those leaving it.

Accordingly, the compensation of employees showed a slowdown in 2015-2016, registering an increase of only 10 per cent when compared to the previous year. “A further, slower rate of wage increases is expected in the upcoming years, aiming at lessening the budget deficit in the medium term,” Negm said.

This is in line with recommendations from the World Bank that should save Egypt $3 billion over three years. The bank said it has agreed with the government to reduce the size of the central government’s wages and salaries bill as a percentage of GDP, from 8.2 per cent in fiscal year 2014-2015 to 7.5 per cent by fiscal year 2017-2018.

The government is counting on heavy investment to energise the stalled economy, increasing its contribution by 50 per cent to LE107 billion. It is also embarking on a number of mega-projects like setting up 600,000 housing units and adding three new power stations to the national grid with a combined capacity of 14 gigawatts.

However, as Florence Eid, CEO of Arabia Monitor, a research and advisory firm focussed on the Middle East and North Africa region sees it, the scale and timeframe of these projects could end up undermining their success. Eid said that any failure in the plans could negatively affect the credibility of the regime.

“President Abdel-Fattah Al-Sisi’s original million-unit housing project for 2013, for example, has yet to get off the ground. Arabtec was initially contracted to build the units, but the development has stalled over a funding dispute between the company and the Egyptian government,” she explained.

The most worrisome figure in the budget is that of public debt, which is expected to reach LE3.1 trillion, or 97 per cent of GDP compared to 90 per cent this year and 79 per cent in 2009-2010. Debt service payments have increased to the equivalent of one third of overall government expenditure, reaching LE293 billion.

Negm attributes the increase to the recent hike in interest rates affecting treasury bill interest payments, which now amount to 30 per cent of gross domestic debt. This should be added to the LE20.8 billion the new Suez Canal Certificates are costing the government annually, including LE8 billion in interest payments and LE12.8 billion in principle provisions to be repaid at the certificates’ due date in 2020.

The government has boasted a 12.5 per cent increase in spending on social services to LE421 billion, with some LE46.3 billion earmarked for food subsidies. It has decided to increase the monthly value of subsidised goods distributed to the holders of ration cards from LE15 to LE18 per person to compensate for the decline in the value of the pound.

This is in accordance with President Al-Sisi’s comments in a speech last month, when he promised not to “overload” Egyptians with inflationary pressures resulting from the fluctuation in the value of the pound. The move has added LE2.5 billion to the cost of ration card allocations.

Social safety net programmes like the Takaful and Karama programmes are receiving much attention, with LE4.1 billion allocated to them in the new budget. Karama provides the elderly and disabled with a monthly stipend of LE320 per beneficiary. Takaful is for families with children living in poverty and takes the form of a conditional cash transfer given four times a year to help families provide for their children.

Beneficiaries of the Takaful programme are projected to increase to one million in the Aswan, Luxor and Qena governorates in 2016-2017.

Both education and health care receive higher allocations in the new budget in absolute terms, but their rates of growth are less than that of the inflation rate, which means that they have shrunk in real terms, with the overall value of both representing less than 4.7 per cent of GDP.

The constitution states that allocations to these two items combined should represent 10 per cent of GDP.

The figures for energy subsidies show that the government is sticking to its reform programme. Petroleum and fuel subsidies are set to fall by 43 per cent from this year’s level to LE35 billion. The cuts in fuel subsidies are based on an oil price of $40 a barrel, despite its recent increase to $50. The new budget also allocates LE29 billion to spending on electricity subsidies.

Despite the challenges, the government has targeted a growth rate of 5.2 per cent for 2016-2017, compared to 3.5 per cent in the current year. Capital Economics, a think tank based in London, considers this projection to be overly optimistic, given what it says is mounting evidence that the Egyptian economy is slowing.

According to Capital Economics, the effects of the devaluation are beginning to feed through into the wider economy. Inflation, year on year, jumped to 10.3 per cent in April from nine per cent in March.

The Central Bank of Egypt hiked interest rates by 1.5 last month in an attempt to keep a lid on prices. “Higher inflation and interest rates will act as dampeners on domestic demand and keep growth in consumer-facing sectors subdued,” said Capital Economics economist Jason Tuvey.

Another factor that will affect consumption and thus economic growth is the fact that Egyptian households are being hit by weaknesses in remittances. “Egypt is one of the most exposed countries to the present Gulf slowdown, and remittances, most of which originate in the Gulf, are falling by 15 per cent,” Tovey said.

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