Dubai: Egypt’s fiscal deficit is projected at 12.2 per cent of GDP in 2016. Analysts anticipate that gradual fiscal consolidation will continue as a result of the second phase of fuel subsidy cuts, new fiscal measures including those involving the implementation of value-added tax (VAT) and the increase of electricity prices, and low energy prices will moderate deficits next year but at slow pace.

“In our view, the government has a very limited ability to significantly cut spending, given Egypt’s large wage bill, the need for social assistance to low-income individuals and families, and the country’s high debt service cost,” said Nourredine Lafhel, an analyst at Standard & Poors.

Spending on public wages and salaries, subsidies and social transfers, and debt service represents about 80 per cent of the total expenditures in the 2015-2016 budget. Moreover, the government is obliged to channel some of the savings from subsidy reforms into constitutionally mandated higher spending on health, education, and scientific research.

S&P has forecast that general government debt to increase to 91 per cent of GDP in 2016. The annual change in general government debt is expected to average about 13 per cent of GDP in 2016-2019, down from 14 per cent of GDP in 2012-2015. The general government interest expenditure is projected to reach 37 per cent of general government revenues on average in 2016-2019. Financial assistance from official lenders, such as the International Monetary Fund, the World Bank, and some Gulf Cooperation Council (GCC) countries, remains an important component in the government’s debt financing strategy.

Concessional funding

The government’s debt strategy during this fiscal year (July 2016 to June 2017) also includes the possible issuance of a new Eurobond of up to $3 billion (Dh11 billion), and up to $1.5 billion from the World Bank and the African Development Bank via a development policy financing loan. In November 2015, Egypt reached an agreement with the World Bank and the African Development Bank to receive $4.5 billion in concessional funding over the next three years, of which $1.5 billion have already been disbursed.

“IMF funding will support the Central Bank of Egypt’s stock of foreign reserves ($19 billion at end-October) and boost confidence among economic agents and investors. It may also pave the way for international bond issuance,” said Toby Iles, Director Sovereigns at Fitch Rating.

Analysts say the fiscal impact of devaluation is mixed. Public sector external debt is low as a percentage of total public debt, but the weaker currency will increase the size of the debt, and the interest rate rise will push up the interest payment bill yet further. The weaker currency will also put pressure on the government’s import costs. But the increase in fuel prices and the IMF programme will help control spending although the IMF loans themselves will also add to debt.