Spiking budget deficit in Egypt – the worse is expected

The overall public budget deficit in Egypt increased by 0.3 per cent, amounting to EGP 57.1 billion ($3.6 billion) during the first seven months (July/January) of the current fiscal year 2022/2021.

According to a statement by the Egyptian Ministry of Finance, the budget deficit rose to 4.7 per cent (EGP 335.5 billion) as a percentage of GDP, compared to 4.4 per cent (EGP 278.4 billion) of GDP during the same period of the previous fiscal year. It is expected that the budget deficit will continue to rise until the end of the fiscal year next June, exceeding government estimates (6.9 per cent), affected by the rise in wheat and oil import prices, and the expected decline in tourism revenues, because of the Russian invasion of Ukraine and high global inflation.

Budget deficit details

The total budget deficit results from the difference in expenditures and public revenues, and despite the increase in the two items, the increase in expenditures exceeded the increase in revenues. Expenses increased by 12 per cent on an annual basis to reach about EGP 928 billion ($59 billion), compared to an increase in revenues by 7.7 per cent to EGP 592 billion ($37.7 billion), including tax revenues of EGP 460.5 billion ($29.2 billion), which grew 13.2 per cent year over year.

The finance justified the rise in the fiscal deficit by increasing expenditures, especially debt interests, wages, workers compensation and government support, as government benefits increased by 16.2 per cent to about EGP 349 billion ($22.2 billion) at the end of last January, and government support and grants rose by the same percentage to EGP 156 billion ($9.9 billion), besides, wages and compensation for state workers rose 10.6 per cent to EGP 206 billion ($13.1 billion). As it is clear, government debt interests devour a huge proportion of revenues, amounting to 59 per cent, as well as 37.6 per cent of expenditures, and this is a result of the government’s excessive tendency to borrow, especially from abroad, which led to a rise in external debt to a record level of $137.4 billion last September, compared to $46 billion in June 2014 (the beginning of President Abdel Fattah Al-Sisi’s rule).

The deficit is expected to exceed government estimates

In January, the Ministry of Finance revised its forecast for the budget deficit from 6.7 per cent to 6.9 per cent. This was before Russia declared war on Ukraine, but now that war has been declared, things seem to be getting worse. The government estimated the price of a barrel of oil in the budget at $60 a barrel, while the price of a barrel on March 3 reached $110 a barrel. Despite the abolition of government subsidies on fuel (except for diesel), the automatic fuel pricing committee cannot move prices by more than 10 per cent, which means that the public budget will bear the difference.

According to previous statements by the Minister of Finance, every dollar increase in the price of a barrel of oil costs the state budget EGP 3.5 billion, and if oil prices continue to rise, the deficit will rise significantly. On the other hand, the Ministry of Finance estimates the price of a tonne of wheat at $255 in the current fiscal year’s budget, expecting about 5.1 million tonnes to be imported. International prices have risen above government estimates to reach $380 per tonne in early March. Every $10 increase in the price of a tonne of wheat adds about EGP 2.5 billion to the public budget, which means an increase in the deficit.

Allen Sandeep, head of research at Naim Investment Bank, expected that the total deficit in Egypt would record 7.4 per cent by the end of the current fiscal year without taking into account the Ukrainian crisis so far, which is more than the government’s estimates by about 0.5 per cent. All this will eventually be reflected on the citizens, as the increase in the deficit means increased borrowing and an increase in the burdens borne by the citizens, and the government will take the opportunity to raise the prices of some commodities, such as subsidised bread, which will not be in the interest of the poor citizen who is already suffering from high prices due to the global inflation crisis.