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Public Policy

Positive performance: Managing Egypt’s budgetary pressures

ahmed bayoumi
Last updated: 2022/11/02 at 10:29 PM
ahmed bayoumi
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COVID-19 could be seen as an acid test to the Egyptian economy’s ability to go along the path of its economic reform program implemented over the period 2016-2019. When the pandemic broke out, the FY2020-2021 budget – touted to be the largest budget in Egypt’s history hitting an all-time high of EGP 2.2 trillion – had already been prepared; hence, it was planned without COVID-19 in mind. Now, with coronavirus, among other circumstances, providing the backdrop for the budget, the budget can be considered exceptional. This article analyses three items considered to have the most significant influence on the budget, i.e. fuel subsidy, bread (wheat) subsidy, and public investments, with the aim of identifying the overall trend in these items and the possible effects of them on Egypt’s general budget.     

Fuel subsidies

As part of the economic reform program, there has been substantial liberalization of prices of petroleum products in Egypt, which helped boost the economy in the face of COVID-19. However, fuel subsidies are still included as a separate item in the budget of FY2020-2021 with EGP 28.1 billion, down from EGP 52.9 billion last year. According to the government, fuel subsidies are calculated on the basis of the average price per barrel – $61. Considering that Egypt’s daily consumption of oil is estimated at 743,000 barrels a day, this means that a mere $1 increase in the price of a barrel would mean upping fuel subsidies by EGP 3-4 billion. 

Bread subsidies

In the FY2020-2021 budget, EGP47.5 billion were allocated to bread subsidies, accounting for 57 percent of essential food subsidies totaling EGP 84 billion. Russia – the fourth largest producer of wheat after China, India, and the US – is Egypt’s main supplier of wheat. Russia offers competitive prices of wheat compared to other global producers. This may be ascribed to the Russian government directing subsidies to wheat which helped improve its global competitiveness. As such, wheat prices in Egypt are highly dependent on prices of Russian wheat export prices. To ease the inflationary pressures resulting from price fluctuations of food commodities in Russia, Moscow introduced a wheat export tax of €25 in the period from 15-28 February which was raised later to 50 percent in the period from early March to next July. This brought about a first-time-ever increase in the prices of Russian wheat reaching $300 a ton. Accordingly, the value of wheat exports delivered on 4 February could be estimated at $285 a ton, with an $85 per ton increase from the rate established in the FY2020-2021 budget, i.e. $200 a ton as has been noted earlier by the minister of supply. Looking at possible alternatives for Russian wheat, the American wheat comes to surface with prices ranging from $285-298 a ton depending on the grade. With no cheaper alternative, the Russian tax will place more pressures on the budget with the need to increase allocations directed to food subsidies by EGP 19 billion in the FY2020-2021 (the difference between the market price, i.e. $285 and the budgeted price, i.e. $200). This increase would be eschewed if the government had signed future contracts to avoid fluctuations in wheat prices and export rates, a likely possibility given President Abdel-Fattah El-Sisi’s directives to the government last April to secure strategic reserves of food to face COVID-19 implications. Although this increase in wheat prices could be temporary (from February to July), wearing off with the removal of the tax effect and the widespread distribution of COVID-19 vaccines, Russia plans to impose a floating tax, the rate of which is yet unknown, on wheat exports, the effect of which on Russian wheat pricing is still unclear.

Public investments 

During the COVID-19 pandemic, Egypt devoted considerable efforts to boost the economy’s growth. In FY2020-2021, government investments of gross domestic product (GDP) increased, accounting for 16-18 percent of public spending, a percentage that is higher than the average rate of government investments during the previous seven years, which stood at a rate of 14 percent till FY2019-2020. These public investments contributed to a decline in the unemployment rates, going down by two percent to record 7.2 percent in the last quarter of 2020, down from a record high of 9.6 percent in the second quarter of 2020). Added to this, public investments are likely to promote the expected growth in GDP, causing it to rise to 3.5-4 percent by the end of FY2020-2021.

Overall, the previous factors are likely to have a bearing on the expected fiscal deficit in FY2020-2021. For instance, interest, a general item in the budget accounting for 40 percent of spending, will see a decrease due to export shortfalls which would probably result in a cost saving of $5 billion. Food subsidies are envisaged to increase to account for 11 percent of spending due to the rise in wheat prices following Russia’s newly-imposed tax. In addition, public investments are anticipated to increase by 60 percent in the first half of FY2020-2021, making up 16-18 percent of spending; thus, exceeding the budgeted figure by EGP 20 billion. 

On this account, the Egyptian economy is projected to grow by 3.5-4 percent with a budget primary surplus. However, increasing bread subsidies and government investments will lead to an increase in the overall fiscal deficit by 40-50 basis points, reaching about 6.7 percent, a relatively better percentage than what several economic reports forecast, particularly knowing that there are many domestic financial resources capable of funding the deficit. 

Egypt’s economy has managed so far to dodge the COVID-19 crisis, which marks the success of the economic reform program and decision-making circles in Egypt. 

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TAGGED: covid 19, Economic reform, Egypt budget, Featured
ahmed bayoumi April 24, 2021
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