Egypt's target budget deficit of 9.8% has a high probability of hitting more than 11%, said a recent report published by Pharos Research.
For that not to happen, the government needs to adjust revenues and expenses in a way that would generate a net budget savings of EGP47.9 billion, to stay in line with the aforementioned target.
Following 2011, the government started monetizing its deficit directly through the central bank as the budget deficit widened sharply from 8.1% of GDP in FY2009/10 to 13% of GDP in FY2012/13. Deploying the printing machine resulted in more money chasing slow-growing domestic production.
In addition, with limited growth in productivity, the result was a combination of soaring inflation and higher pressure on the country’s dwindling external position.
Add to those the politically driven decision to defend the local currency versus the USD, which made things even worse.
In terms of sustainability, Pharos believes that fixing the fiscal imbalances should go hand in hand with the exchange rate policy.
Revisiting the government budget assumptions of FY2016/17 is crucial in order to extrapolate Egypt's macroeconomic outlook. The exchange rate and oil price assumptions play a leading role in determining the deficit.
Every USD1.00 increase in price of petroleum-based products would raise energy subsidies by EGP1.9 billion and would raise revenue from EGPC by EGP0.4 billion, creating a net increase in budget deficit of EGP1.5 billion.
Every EGP0.10 weakness for the EGP/USD exchange rate would raise energy subsidies by EGP0.8 billion and reduce EGPC revenue by EGP0.3 billion, resulting in a net increase of EGP1.1 billion in the budget deficit.
Last July, the Ministry of Finance had set its budget for FY2016/17 on an oil price assumption of USD40.00 per barrel and an average exchange rate at EGP9.00 per USD, which when both were adjusted for USD51.57 and EGP11.08/USD, respectively, the end result is a fiscal deficit that is EGP40.2 billion wider than budgeted.
Pharos estimates that the implementation of a more flexible exchange rate would increase the food subsidy bill by EGP7.7 billion than budgeted.
