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Are Egypt’s Rising Debts A sign of Crisis or a Step of Growth?

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By: Rehab Isamil

Yields on Egyptian debt have reached highs this year due to the increase of interest, which increased by about 180% during the period from 2014/15 to 2018/19, due to the growth in domestic and external borrowing. The government also has raised its key interest rates by 700 basis points in total since November 2016 when it floated the pound currency to secure a $12 billion International Monetary Fund loan aimed at reviving its economy.

As a result, the debt interest reaches recently LE541 billions constitutes the biggest tranche of expenditure in Egypt’s budget 2017/2018, amid inflation reached a three-decade high with a staggering 34.2% in July 2017, according to The Central Agency for Public Mobilization and Statistics (CAPMAS).

But the inflation have gradually eased since, falling to their lowest levels in less than a year and reach 13.8% in June 2018, CAPMAS.

Amr el-Garhy, the former minister of Finance, announced in May, that “public debt was doubled five times during the last five years from LE700-800 billions,” currently it exceeds LE 3 Trillions.



El-Garhy added that the government in the next four years targets to decline the public debt to be set at 75-80% from the gross domestic product (GDP), adding to expand the tax and other revenues, and reaching a primary surplus of 2% of GDP.

Mohamed Reda, Group CEO at Solid capital, explains this increase as a result for the government dependence on debt instruments offered in the form of bonds and treasury bills to finance the budget deficit (The difference between the government’s annual revenues and expenditures), as the domestic interest shapes 94% of the total debt interest. “But we need to prevent it escalating further in the future and keep working to decrease interest rates,” he said

But we need to prevent it escalating further in the future and keep working to decrease interest rates.

The budget deficit every year is added to the following year’s budget, adding to the amount of loans we have received in these four years, so it is expected that the debt interest reach that limit, unless we change the monetary policy” said Rashad Abdou, an economics professor at Cairo University and head of the Egyptian Forum for Economic and Strategic Studies.

4 years later, the public debt interest will continue holding the largest portion of the expenditures, but with lower amount from 500 – 400 billion.

“4 years later, the public debt interest will continue holding the largest portion of the expenditures, but with lower amount from 500 – 400 billion.” Fakhry Elfiky, a professor of economics at Cairo University and former assistant to executive director of IMF, expects as the government targets to decline the public debt from 107-108% from the gross domestic product (GDP)  in 2016/2017 Budget, to be set at 91-92% of GDP for fiscal year 2018/2019, with an annual decline to reach 80% by 2020.

This decline will be achieved by decreasing the budget deficit, reaching a primary surplus of 2% of GDP, according to the ministry of Finance.

Two Budgets During Two Presidential Terms

So how the government’s priorities and economic plans changed under the role of President Abdelfattah el-Sisi? To answer this question, we compare the new  the recent state’s general budget for the fiscal year 2018-2019, which comes at the beginning of a second presidential period for President al-Sisi, with the budget of first presidential period of 2014\15.

The new budget estimated spending with LE1,424 trillion and revenue targets of around LE989 billion, compared to 2014/15 where the total revenues set up at LE465 billion, and the total expenditures set up at LE989 billion.

Although the government has pushed through steep fuel and electricity subsidy cuts this year, Subsidies and social benefits has raised by about 68% during the period from 2014/15 setting approximately LE198 billion, reaching LE323 billion in 2018’s budget.

In 2015, the government issued a monetary aid program, “Takaful w Karama” to provide financial aid to almost two million families with monthly pension of average LE450, which equals $26.

wages and employees’ compensation have beed escalated by about 34% from around LE 198 billion 2014/15 to LE 266 billion in 2018/19.

“The wages and employees compensations usually sees an average of  10% annual increase, so after 4 years it may reach LE395 billion, holding the same third rank in expenditures, “he explained and added that “the subsidies will still hold the same second rank as the government’s vision is to convert the subsidies for energy and food commodities into direct financial aids”

The government has allocated LE148 billion for investment and purchase of non-financial assets, marking a 140% increase on 2014/15’s level.

Last year, the government enacted new investment and industrial licensing laws measures officials say will boost domestic and foreign business activity in the country.

The government also hopes a series of mega-projects during the last five years including the flagship new capital city and an economic zone adjacent to the newly-expanded Suez Canal, will encourage additional investments.

More Taxes, Dept Interest and Investment

When comparing the two budgets we found that the government has allocated LE148 billion for investment and purchase of non-financial assets, marking a 140% increase on 2014/15’s level, as it is targeting to boost investment and foster tax revenues in addition to decrease debt interest.

Foreign reserves rose by the end of June to $44.258 billion from $44.139 billion, the central bank announced separately, continuing their climb since Egypt secured the $12 billion IMF loan.

Still, the government has imposed several amendments on taxation regulation as a part of the reform program on basis of IMF three-year deal. The new VAT law no. 67 of 2016 to replace the sales tax law no. 11 of 1991. VAT is a 13% standard rate applies to most supplies of goods or services, and it was increased to 14% in 2017.

The real solution is by finding ways to diversity non-tax revenue resources, through improving the investment climate, upgrading the infrastructure, promoting tourism.

Depending on taxes as a way to earn money is always under discussion.So while Mohamed Reda says that “tax revenues secure achieving fiscal sustainability in the state’s revenues and continuity in public services,” Rashad Abdo is against imposing more taxes, as they lower consumer spending which tends to decrease business revenue and put negative pressure on investment. “The real solution is by finding ways to diversity non-tax revenue resources, through improving the investment climate, upgrading the infrastructure, promoting tourism, eliminating bureaucracy, supporting small and medium enterprise,” he said.  

During the period from 2013 to 2016, the government’s investments costed LE234 billions; including LE67 billions were targeting the housing and construction sector, funded mostly by the Public Treasury، while about 10% percent were funded through loans and grants.

The construction sector was a priority for the government’s investment, followed by transportation section as LE 34 billions were allocated for the investment in this sector during the same period.

Although some sectors like Education, health, industries and agriculture have a great social impact, but they held lower percentages from government’s investment during that period.

There is no international standard to indicate that efficiency in the sectoral allocation of public investment lies in its focus on infrastructure sectors more than sectors such as health, education, agriculture and industry, as priorities differ from a country to another according to its development plans.

These measures were praised by some economists but lamented by many Egyptians who say they are struggling with soaring living costs.

As the discussions continue, the government continues to apply its fiscal policy in line with its international commitments. While  the biggest challenge remains the poverty rate, which reached this year as high as 60% in some Egyptian governorates, according to the World Bank.

Data journalist intern at InfoTimes. She’s also a multimedia journalist, teaching assistant at Faculty of Media and Mass Communication at the British University in Egypt (BUE) and an MA candidate at the American University in Cairo (AUC)

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Rehab Ismail

Data journalist intern at InfoTimes. She's also a multimedia journalist, teaching assistant at Faculty of Media and Mass Communication at the British University in Egypt (BUE) and an MA candidate at the American University in Cairo (AUC)

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