Summary of Egypt s Budget Report

Summary of Egypt s Budget Report 15 16

The Summary of Egypt s Budget Report 2015-16 issued by the Egyptian British Chamber of Commerce conducts research into the Egyptian government s major objectives and economic targets for the coming financial year, while comparing it to Egypt s economic performance over the past five years. This year our report highlights the significant efforts exerted by Egypt s government to achieve its planned financial reforms by decreasing its budget deficit, maximizing revenues and decreasing government spending. The projected increase of LE 50 billion in non-tax revenues compared to last year is a particularly encouraging sign of increased transparency. Government investment remains a concern; as a percentage of GDP, total government investment is projected to reach 2.6 percent in 2015-16; this does not represent a major increase compared to previous years. In our view the government needs to exert serious efforts to encourage the private sector and foreign investors to fill the investment gap. Considerable investment is needed in infrastructure projects, as well as in modernisation of government assets and services. This can be achieved via currently successful PPP schemes. The budget report could also benefit from further clarifications and justification particularly in the following areas: salaries & wages (benefits within salaries in particular), special funds and grants. Overall the report is encouraging and clearly demonstrates the serious efforts made by Egypt s current government to ensure continuous economic and social recovery. Major Objectives of the Budget & Economic Targets The Egyptian government identifies three major objectives in its 2015-16 budget report: Creation of job opportunities Economic and financial stability Sustainable development and social justice The budget report outlines seven economic targets to ensure that these three major objectives are achieved: 1. The government s most crucial target in support of the above outlined objectives is a GDP growth of 5 percent for budgeted year 2015-16, aiming at a GDP growth of 7 percent in 2018-19. The government already achieved a 4.2 percent growth in 2014-15, and growth for the first half of 2015 was 5.6 percent. 2. The budget report further outlines a plan to reduce unemployment by 1 percent to reach 11.5 to 12 percent in the coming financial year. The government targets a drop in unemployment to 10 percent in 2018-19. 3. The budget deficit should not exceed 9 percent of GDP with a target of 8 to 8.5 percent by 2018-19. This excludes foreign aid and programmes. 4. Egypt s public debt (domestic and foreign) should not exceed 90 to 91 percent of GDP; the actual target is a public debt of 80 to 85 percent of GDP by 2018-19. 2

5. The government aims to reduce inflation by 1 percent to reach 11 percent in 2015-16; a further reduction to a maximum inflation rate of 7 to 8 percent is the objective for 2018-19. 6. The government intends to raise foreign exchange reserves to cover the import of essential goods for at least 3 ½ months (an absolute figure of $19.6 billion) by the end of 2015 (December). Egypt s foreign reserves will increase towards the end of the year as the tourism season starts and income from the Suez Canal, non-oil exports and foreign direct investment (FDI) picks up further. 7. The budget report lists plans for increased government investment in infrastructure projects including roads, land reclamation, housing, the underground and overground rail network, ports and other transport projects. Chart 1 Fiscal Deficit as % of GDP 16 14 12 SCAF Morsi Mansour El Sisi First Year 10 8 6 Mubarak El Sisi Second Year 4 2010/11 2011/12 2012/13 2013/14 2014/15* 2015/16** * Estimated ** Budget Challenges to the Budget The main challenge listed in this budget report is the weakness in world demand, which will affect Egyptian exports globally, and have an impact on Suez Canal receipts as well as income from tourism. The budget report touches upon, but does not fully illustrate the impact of the security situation on Egypt s business and investment environment; it fails to mention any potential internal threats that could hinder the achievement of budget targets outlined in this report. According to this budget report, Egypt s economy faced challenges in 2014-15 but is now recovering as a result of noticeably increased political stability, as well as economic and fiscal reforms. Tax reforms include a unified income tax ceiling of 22.5 percent. The new unified tax rate of 22.5 percent will also apply to corporation tax and future projects operating in the special economic zones including the Suez Canal megaproject. Further incentives and facilities to small and micro enterprises have been introduced. Tax on capital goods is reduced from 10 to 5 percent, capital gains are exempt from tax, and finally sales tax will be replaced by the VAT system. 3

Facts & Figures Table 1: Public Sector Receipts in LE Billion 2015-16 Budget % of Total Revenue 2014-15 Estimate* 2013-14 2012-13 2011-12 Presidency El Sisi - El Sisi Mansour Morsi SCAF Total Tax Revenues 422.4 67.9 317.8 260.3 251.1 207.4 Income Tax 43.3 7 35.3 28.5 23.5 19.5 Corporation Tax 109 17.5 95 90 92 69.6 Capital Gains Tax** 11 1.8 10.6 11.1 7.2 3.7 Stamp Duties 14 2.2 12 10 8 8 Other Direct Tax 36.1 5.8 21.9 14.7 12.8 9.7 Sales Tax 159.9 25.7 108 77 80 72.4 Customs Tax 27.4 4.4 21.6 18 17 15 Other Indirect Tax 21.7 3.5 13.4 11 10.6 9.5 Total Non-Tax Revenues 197.6 31.7 142.6 100.6 94 86.1 Oil & Gas 29 4.7 35.1 22 19 15.1 Suez Canal 19.7 3.2 19.2 18.1 16.4 16.2 Mining 10.1 1.6 0.2 0.1 0.2 0.1 Special Funds & Accounts 19.2 3.1 15 17.1 15.5 14.3 Surplus Special Economic Authorities 10.6 1.7 2.6 1.6 1.9 2.2 Surplus Central Bank of Egypt 34.4 5.5 13.4 9.3 11.4 15 Mobile Licensing 2 0.3-0.1 0.4-0.8 Cement & Steel Re-bars 3.2 0.5 0.2 0.2-0.3 Sale of Non-Productive Assets (Mainly state-owned 13 2.1 0.2 0.2 0.5 0.7 land) Profit from State-Owned Enterprises 8.4 1.3 3.2 3.2 3.5 4 Others 48 7.7 53.5 28.7 25.2 19 Grants 2.3 0.4 25.7 95.9 5.2 10.1 Total Revenues 622.3 100 486.1 456.8 350.3 303.6 % of GDP 22-20 22.9 20 19.3 * Estimated figures subject to signed approval by Egypt s president in the coming months ** Capital Gains on Central Bank of Egypt and all Commercial Banks only Source: Ministry of Finance Egypt (MOF) 4

Table 2: Public Sector Spending in LE Billion 2015-16 Budget % of Total Expenditure 2014-15 Estimate* 2013-14 2012-13 2011-12 Presidency El Sisi - El Sisi Mansour Morsi SCAF Salaries & Wages, Insurance & Employee Compensation 218.1 25.2 200.7 178.6 143 122.8 Purchases of Goods & Services 41.4 4.8 30.5 27.2 26.7 26.8 Debt Interest 244 28.2 195.1 173.1 147 104.4 Total, out of which: 231.2 26.7 200.4 228.6 197.1 150.2 Food Stuff/Commodities 43.9 5.1 42.3 37.2 35.1 32.2 Petroleum & Products 61.7 7.1 70.3 126.3 120 Electricity 31.1 3.6 28.8 13.4 8.5 Social Services & Grants 78 9 50.6 43.5 28.1 16.6 Development Subsidy 5 0.6 1.5 1.2 1.2 2.8 Economic Subsidy 5.8 0.7 6.5 7 4.2 3.2 Subsidy Reserves (Provisions) 5.7 0.6 0.4 - - - Government Investment Total, out of which: 75 8.7 60.2 52.9 39.5 35.9 Construction 53 6.1 41.5 28.5 22.5 21.8 Machineries & Transport Equipment 14 1.6 13.2 10 9.5 7.2 Others 8 1 5.5 14.4 7.5 6.9 Other Expenditures 54.9 6.4 49.6 41.1 34.9 30.9 Total Expenditures 864.6 100 736.5 701.5 588.2 471 % of GDP 30.5-30.3 35.1 33.6 29.9 * Estimated figures subject to signed approval by Egypt s president in the coming months Source: Ministry of Finance Egypt (MOF) Table 3: Headline Fiscal Aggregates in LE Billion 2015-16 2014-15 2013/14 2012-13 2011-12 2010-11 Revenue & Expenditure Budget Estimate* Outturn Outturn Outturn Outturn Presidency El Sisi El Sisi Mansour Morsi SCAF Mubarak a. Total Revenue 622.3 486.1 456.8 350.3 303.6 265.3 b. Total Expenditure 864.6 736.5 701.5 588.2 471 401.9 Cash Deficit (b-a) -242.3-250.4-244.7-237.9-167.4-136.6 Net Acquisition of Financial Assets 8.8 12.1 10.7 1.9-0.7-2.1 Overall Fiscal Deficit -251.1-262.5-255.4-239.8-166.7-134.5 % of GDP 8.9 10.8 12.8 13.7 13.6 9.8 * Estimated figures subject to signed approval by Egypt s president in the coming months Source: Ministry of Finance Egypt (MOF) 95.4 5

Egypt Public Sector Receipts 2015-16 in % Non-tax Revenues 31.7 Grants 0.4 Total UK public sector receipts are projected to reach 666 billion in 2015-16 Income from Tax 67.9 93.2 percent of all UK public sector income is expected to come from tax receipts Egypt Public Sector Spending 2015-16 in % Total UK public sector spending is projected to reach 745 billion in 2015-16 Government Investment 8.7 Others 6.4 Salaries & Wages 25.2 50.1 percent of all public sector spending is allocated to social protection and healthcare (NHS) 13.3 percent is allocated to education 26.7 Purchases of Goods & Services 4.8 Only 4.7 percent is allocated to payment of debt interest Debt Interest 28.2 Source: Ministry of Finance Egypt (MOF) & HM Treasury 6

At a Glance 2015-16 Budget in LE Billion 2 Grants Cash Deficit* 242 Salaries, Wages & Insurance 218 Purchases of Goods & Services 41 Non-tax Revenues 198 Other Indirect Tax 22 27 Customs Tax Sales Tax 160 Capital Gains Tax 11 Other Direct Tax 50 In LE622bn Total receipts Other Expenditures 55 Corporation Tax 109 Income Tax 43 Out LE864bn Total Expenditures Other 94 Government Investment 75 Petroleum 62 Debt Interest 244 Subsidy on Commodities Electricity 31 44 *Egypt s total fiscal deficit for 2015-16 is projected to reach LE 251.1 billion. This includes the net acquisition of financial assets at LE 8.8 billion which is added to a cash deficit of LE 242.3 billion (above). 7

At a Glance 2014-15 Estimate in LE Billion 26 Grants Cash Deficit* 250 Salaries, Wages & Insurance 201 Purchases of Goods & Services 30 Non-tax Revenues 143 Other Indirect Tax 13 22 Customs Tax Sales Tax 108 Capital Gains Tax 10 Other Direct Tax 34 In LE486bn Total receipts Other Other Expenditures 50 Corporation Tax 95 Income Tax 35 Out LE736bn Total Expenditures 59 Government Investment 60 Debt Interest 195 Subsidy on Commodities Petroleum 42 70 Electricity 29 *Egypt s total fiscal deficit for 2014-15 is estimated to reach LE 262.5 billion. This includes the net acquisition of financial assets at LE 12.1 billion which is added to a cash deficit of LE 250.4 billion (above). 8

The Chamber s Notes Revenues a. Capital Gains Tax In May 2014 the Egyptian government approved a new 10 percent capital gains tax on profits made on the stock market. In the 2014-15 budget this adds almost LE 4 billion to the total income from capital gains. However, the government has responded to investor pressure by suspending the 10 percent levy in May this year. The levy still applies to the Central Bank of Egypt and all other commercial banks; the government still expects to receive LE 11 billion from capital gains tax in 2015-16. b. Non-tax Revenues Egypt s non-tax revenues are projected to contribute 31.7 percent to its total revenues for 2015-16, these include revenues from the oil & gas sector, Suez Canal receipts, income from mining fees, etc. (see table 1). The breakdown provided in this year s report reveals that the government s effort to increase transparency is bringing in added funds for the treasury. The oil & gas sector surplus is expected to double compared to five years ago - from 15.1 billion to a budgeted LE 29 billion in 2015-16. The Central Bank of Egypt surplus is estimated to increase from LE 5.5 billion in 2014-15 to a staggering LE 34.4 billion in 2015-16. The sale of non productive assets mainly state-owned land is also projected to increase from LE 0.2 billion in 2014-15 to a substantial LE 13 billion in this year s budget. Other strong contributions to Egypt s revenue stream come from the mining sector, the cement & steel re-bars manufacturing licences, and a special economic authorities surplus. Special funds are expected to contribute a significant LE 19.2 billion to this year s revenues. However, there is no clarification in the budget report that provides further details while all other items in non-tax revenues are thoroughly analysed. c. Grants The 2015-16 budget shows a significant expected reduction in grants. In 2013-14 income from grants was LE 95.9 billion, this year grants are expected to reach LE 2.3 billion. The report does not provide any further breakdown which would be helpful in determining the reason behind the drop in grant revenues. What we do know is that Egypt received considerable economic support from foreign donors during the presidency of Adly Mansour - immediately after the ouster of former President Mohamed Morsi of the Muslim Brotherhood - to revive Egypt s ailing economy. Egypt s economic recovery since 2014 means that the country is no longer as reliant on aid money to ensure a strong economic performance in the coming year. Expenditures a. Salaries & Wages, Insurance & Employee Compensation Egypt s government expects to spend LE 218.1 billion on salaries, insurance and employee compensation in 2015-16; this is 25.2 percent of total government expenditure for the year. The budget report provides a further breakdown where only 14.4 percent of this total is spent on actual salaries; bonuses make up 40.1 percent of the total, and another 25.1 percent of the total LE 218.1 billion is paid out in benefits to government employees. There is a distortion in Egypt s 9

salary structure where over 65 percent of all salary expenses to civil servants are paid in bonuses and benefits and basic salaries account for less than 15 percent of the total. There is also a significant jump in salaries expenditures over a 5 year period as a result of the implementation of a minimum wage in the public sector. b. As a result of the government s subsidy reform programme started in 2014, subsidies are projected to decrease significantly from 11.4 percent of Egypt s GDP in 2013-14 to a budgeted 8.2 percent in 2015-16; the estimate for 2014-15 is also 8.2 percent. There is a slight rise in subsidies for commodities as expected. The government is projected to spend considerably less on petroleum subsidies in 2015-16 LE 61.7 billion compared to an actual LE 126.3 in 2013-14 - as a result of a drop in world oil prices, as well as the gradual reduction of fuel subsidies as part of Egypt s subsidy reform programme. Remarkably electricity subsidies are expected to increase to LE 31.1 billion compared to LE 13.4 billion in 2013-14. In 2013-14 electricity subsidies reached an estimated 0.7 percent of GDP, this is projected to increase to 1.1 percent of Egypt s GDP in 2015-16. The budget report gives no explanation for the increase in electricity subsidies, this item needs further clarification. c. Government Investment Government investment as a percentage of GDP is expected to increase minimally from an estimated 2.5 percent in 2014-15 to a budgeted 2.6 percent in 2015-16; the figures contradict with plans for serious increased investment stated in the report s economic target list (page 1-2). While a government investment of LE 75 billion will not be sufficient to ensure adequate housing for low income groups and maintenance of all transport networks, it opens doors for private sector investment in this area. The government needs to outsource work in this sector either to private companies, foreign investors or via PPP schemes similar to previously successful PPP projects in river transportation and notary services for example. The Egyptian-British Chamber of Commerce 2 nd Floor T. 020 7499 3100 24 New Broadway info@theebcc.com W5 2XA London www.theebcc.com 10