Thursday,19 October, 2017
Current issue | Issue 1204, (3-9 July 2014)
Thursday,19 October, 2017
Issue 1204, (3-9 July 2014)

Ahram Weekly

Narrowing the gap

An amended subsidies bill is the main feature of the country’s new budget, reports Sherine Abdel-Razek

Economy
Economy
Al-Ahram Weekly

After rejecting an earlier draft of the budget for fiscal year 2014/2015, President Abdel-Fattah Al-Sisi on Sunday ratified a budget projecting a trimmed deficit equivalent to 10 per cent of GDP compared to 12 per cent in the first draft and 14 per cent in the 2013/2014 fiscal year.

Revenues in the new budget are expected to rise by eight per cent to LE548.6 billion, while spending will climb by seven per cent to LE789.4 billion leaving a gap of LE240 billion, LE52 billion less than in the first draft.

The reduction in the deficit mainly stems from a LE40 billion saving in energy subsidies to LE100.3 billion, Finance Minister Hani Kadri Dimian told a news conference on Monday.

Dimian neither revealed the source of the remaining LE12 billion reduction in the deficit nor details on the value or the timing of the expected increase in the prices of diesel and gasoline.

However, he hinted at the expected effects of the plans by saying “there is a bottleneck that we need to get through. There will be a burden that we will all have to endure.”

Hani Genena, Head of Research at Pharos Securities, a leading local investment bank, told Al-Ahram Weekly that the savings would probably be based on raising both diesel and gasoline prices by at least LE1 per litre.

Rumors of an expected LE0.5-1 increase in price of Octane gas 92 led to the emergence of car queues in front of petrol stations in some neighborhoods during the last week.

Egypt consumed around 36 million litres per day of diesel sold at a LE1.1 per litre compared to its cost of LE5.4 per litre. This, according to Genena, means that the government pays around LE56.5 billion to subsidise diesel on an annual basis, almost half of the energy subsidy bill.

The government would save LE12 billion in this fiscal year if it increased the diesel price to LE2 per litre, Genena said. While the increase in prices could spark a domino effect in a hike in the prices of commodities, Genena added that “the inflationary impact will be one-off and may be minimal given that the black market rate for diesel has hovered above the LE2.5 per litre mark throughout the past year.”

According to Pharos Securities calculations, raising the price of gasoline Octane 92 from LE1.85 per litre to LE3 will save LE3.3 billion.

The LE1.15 increase will cost a driver who consumes 250 litres per month an extra LE287.5 and a total monthly cost of LE750 on fuel. “This may be high, but a typical person can save on the amount by cutting expenditure on other non-essential items,” Genena said.

Governments have refrained from tackling the subsidies ever since the so-called “bread riots” of the 1970s when minimal increases in prices led to nationwide protests.

But the experience of other countries in the region, according to Capital Economics’ William Jackson, suggests that subsidy cuts won’t necessarily translate into weaker economic growth and civil unrest, especially since academic evidence shows that the main beneficiaries of subsidies tend to be the richest households.

For instance, the richest 20 per cent of Egyptian households receive almost half of the total petroleum subsidies.

Commentators believe that the high subsidies on energy used in transportation, households and industry do not give people the incentive to rationalise their use of energy, exacerbating shortages and leading to recurrent crises.

While consumption increased by double digits during the last three years, production dropped on the back of foreign producers’ reluctance to invest in new exploration activity for a cash-strapped government that has been unable to pay them for their share of production.

The lack of gas supplies needed to operate the country’s power stations has resulted in blackouts that have made people’s lives anything but easy, especially during the long hot summer days.

Egypt has been scrambling to secure natural gas supplies, which its mainly oil-producing Gulf Arab allies cannot provide. Saudi Arabia, the United Arab Emirates, and Kuwait have given the country $6 billion in petroleum products since the ousting of Islamist former president Mohamed Morsi last summer.

The government is trying to overcome the problem by securing gas-import deals, the latest of which was concluded last week with Algeria to allow the country to receive five cargoes of liquefied natural gas before the end of the year. 

On a positive note, meeting in a London conference on Friday a number of oil and gas explorers in Egypt welcomed the government’s moves, expecting constraints on domestic energy prices to loosen and prompting new investment in oil and natural gas fields.

The changes should allow the government to cut the budget deficit and pay suppliers the money owed for fuel, Mohamed Shoeib, managing director at the Cairo-based Citadel group told Bloomberg on the fringe of the conference.

According to Bloomberg, the government’s demand to gas producers to cover domestic demand rather than export their production has prevented the UK’s British Gas Group from meeting contracted liquefied natural gas shipments this year.

The company has been in talks with the government about guarantees for future exports, with receivables for gas still owed by Egypt doubling in the year to 31 March.

Egypt plans to pay at least $1.5 billion to energy suppliers before the end of the year, according to Oil Minister Sherif Ismail.

“We would like to spend more” in Egypt, Randy Neely, Chief Financial Officer at Transglobe Energy Corporation told Bloomberg, but until then there are further payments for fuel supplies “we will be probably spending more outside of Egypt.”

 

While Egyptians have been preparing themselves for the increases for a while, commentators fear the effect of imposing them together with hikes in electricity and piped gas prices on the budgets of Egyptian households.

Piped gas tariffs doubled last month and Prime Minister Ibrahim Mehleb said earlier this week that the government would increase electricity tariffs for the highest consumption brackets by 15-20 per cent during the current fiscal year.

The ballooning budget deficit is a main concern when looking at the ailing economy, which has been badly affected by the three years of political upheaval following the 25 January Revolution which drove foreign investors and tourists away.

Running such a budget deficit, which is being financed by a spiraling increase in public debt, will leave nothing for future generations, according to Al-Sisi. 

According to Genena, the problem is that the bulk of expenses cannot be further reduced as they take the form of commitments to workers and creditors, leaving the government with only a small margin for manoeuvre.  

He said that in the draft budget expenditures stood at LE692 billion. “Out of this figure, LE354.2 billion represents commitments to public employees (salaries, wages, bonuses) and commitments to creditors (banks, social insurance companies, corporations) and accordingly these items cannot be slashed or else the government will be reneging on its obligations.”

On the other hand, the remaining LE337.8 billion includes food and energy subsidies, spending on goods and services and government investment expenditure. “Based on this breakdown, it is obvious that the subsidy bill and government spending on goods and services are the sole items that can be amended to generate the desired savings in the new fiscal year,” he said.

 He ruled out the government’s cutting investment expenditure at this stage, given the severe depletion in infrastructure over the past three years.

During his press conference, Dimian said that the government planned to restructure public-sector salaries and reduce the number of state employees over 20 years. Civil service and public-sector salaries account for about 6.5 million employees and about a quarter of the budget.

The value of salaries and wages have almost doubled since the 25 January Revolution, as around half a million people working on contracts have been permanently employed in government bodies, together with an increase in the minimum wage to LE1,200 last year.

Moreover, average weekly wages in the public sector are higher and have grown at a faster pace than private sector wages.

Still, “While cuts to subsidies and the public-sector wage bill would be unpopular, they are needed to put the public finances onto a more sustainable footing,” according to Capital Economics Jackson.

Other than the reduction in subsidies and salaries, analysts expect the government to cut interest rates by at least one per cent to lower government borrowing costs. “If the government borrows LE300 billion in the current fiscal year at nine per cent interest, it will cost LE27 billion in interest payments. This can be reduced to LE24 billion if the rate is lowered by one per cent,” noted Genena.

Lowering the interest rates on treasury bills would encourage the banks to limit their holdings in public debt, freeing more liquidity to lend to private sector companies. “Egyptian banks’ net claims on the public sector have risen from 30 per cent of GDP prior to the Arab Spring to around 55 per cent of GDP at the end of 2013,” wrote Jackson.

The increase in public debt, due to heavy borrowing through treasury bills, was among the reasons that Al-Sisi gave for refusing to ratify the earlier draft budget.  Under this projection, gross public debt would rise from LE1.7 trillion to over LE2.0 trillion.

A simple spreadsheet model of Egypt’s public debt created by Reuters in March suggested it would be several years before the rising ratio of debt to GDP, which was 89.2 per cent in the fiscal year to June 2013, leveled off and started to fall.

Other “unproductive expenses” that the government is working on reducing, according to Mehleb in comments made this week, is a 50 per cent reduction in the number of advisors to state bodies and a 20 per cent drop in the budget for Egypt’s diplomatic delegations abroad. 

Dimian said that the economy was expected to grow by more than three per cent in the next fiscal year, after two per cent expected in the current fiscal year.

add comment

  
 
 
  • follow us on