Egypt’s new budget: Subsidy cuts and increased tax revenues

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The analytical statement of the Egyptian public budget project for the next fiscal year 2020/2021 revealed the abolition of electricity subsidies entirely, and the reduction of petroleum material subsidies by 46.8 per cent compared to the allocations for the current fiscal year 2019/2020. The fiscal year in Egypt begins in early July of each year and ends at the end of June of the following year. The new budget figures revealed a decline in support for petroleum products from about EGP 52.963 billion (about $3.36 billion) to EGP 28.19 billion ($1.8 billion) in the new budget. In practice, these figures mean that the subsidies will be completely abolished from some kinds of fuel, while the government will continue to support others, such as butane. The reduction in subsidies provided to limited income citizens also included a decline in subsidies for supply goods in the budget from EGP 89 billion ($5.7 billion) to EGP 84.48 billion ($5.4 billion), and support for passenger transportation from EGP 1.85 billion ($117.5 million) to EGP 1.8 billion ($114.3 million).

According to the financial statement delivered by Finance Minister Mohamed Maait before parliament on Tuesday, in exchange for the decline in subsidies, in the new budget project the government aims to increase the proceeds of taxes on goods and services from about EGP 415.3 billion ($26.4 billion) to EGP 469.6 billion ($29.8 billion). The government is also seeking to increase the value-added tax from EGP 209.14 billion ($13.3 billion) to about EGP 221.26 billion ($14 billion). These trends raised the concerns of Egyptian families, who are experiencing an unprecedented rise in commodity prices, because the statements of the finance minister implicitly mean that a new wave of price increases is on the way.

Egyptian families have been suffering from the falling value of the Egyptian pound since the liberalisation of the local currency exchange rate in November 2016, as part of the economic reform measures announced by the Egyptian regime. This caused the decline of the Egyptian pound rates to the US dollar. The rise in merchandise prices and the reduction in government subsidies have not been matched by an increase in wages, which has made the living standards of Egyptians decline significantly. While the Egyptians had hoped to begin reaping the promised fruits of economic reform and to feel some improvement, more suffering appears to be on the way to them.

Economists loyal to the Egyptian regime defend the Egyptian budget’s orientations for the new year by saying that the whole world is facing difficult economic conditions because of the implications of the spread of coronavirus. But observers respond to this by saying that the Egyptian regime has spent billions on low-yielding economic projects over the past years that are not a priority for Egyptian citizens, and has expanded the borrowing policy in an unprecedented manner, which worsened the country’s economy. During the parliament session the finance minister explained that “the government sent the draft budget to parliament at the end of March, in compliance with the provisions of the constitution.”

The finance minister hinted that the new draft budget was prepared ahead of the clarity of vision he now has due to the implications of the spread of the coronavirus, which prompted economists to demand a review of the new budget in accordance with the new conditions. The minister said that the current general budget achieved a preliminary surplus (without the debt service account) of EGP 40.4 billion ($2.6 billion), in the period from July 2019 to March 2020.

The size of the state’s general budget project for the next fiscal year 2020/2021 amounted to EGP 2.30 trillion ($146.1 billion), distributed between expenditures amounting to EGP 1.71 trillion ($108.6 billion) requirements for possession of financial assets amounting to EGP 28.8 billion ($1.8 billion), and the repayment of domestic and foreign loans amounting to EGP 555.5 billion ($35.3 billion). In a related context, the domestic and foreign loan installments and amortisation increased, according to the due dates set for them, from EGP 375.5 billion ($23.8 billion) in the budget for the fiscal year 2019/2020 to EGP 555.5 billion in the new fiscal year, an increase of EGP 180 billion ($11.4 billion), an increase of 47.9 per cent.