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Wednesday, 23 March 2022

Cabinet approves austerity budget, trims GDP outlook

GDP forecast downgraded as cabinet signs off on 2022-2023 budget: Egypt has revised downwards its GDP forecast for FY 2022-2023, according to figures in the draft budget that was approved by ministers yesterday. The government sees the economy growing at a 5.5% clip in the coming fiscal year, according to a cabinet statement, down from the 5.7% figure that was forecast before the Ukraine conflict shook global commodity markets and hit state finances.

Prime Minister Moustafa Madbouly had directed the Finance Ministry to restructure the FY 2022-2023 budget to “reassess priorities” amid rising basic commodity and oil prices on the back of the Russia-Ukraine war, an earlier readout from Cabinet had said.

Translation: A combination of austerity and increased social spending. The revised budget will prioritize social protection programs to help support the populations most affected by fallout from Russia’s war in Ukraine. But the Finance Ministry will also need to be disciplined in its spending and should enact austerity measures if necessary, Madbouly said. Each ministry will review its spending in light of current events, he added.

That message was reinforced by cabinet spokesperson Nader Saad last night, who declared that “government austerity is the main headline of the budget” in an interview on Al Hayah TV channel (watch, runtime 9:58). Saad provided no further details on where spending cuts might come.

None of this is surprising given the state is facing bns of EGP in extra costs due to rising commodity prices. The government expects to spend an additional EGP 15 bn this fiscal year due to heightened wheat prices, while oil prices are now in the triple figures — far above the USD 65 price assumed in the state budget.

The statement is light on numbers, but this is what the budget outline looks like:

It turns out that the government is still targeting a 6.1% budget deficit at the end of 2022-2023. This was the preliminary figure announced by the Finance Ministry earlier this year, but just three days ago Minister Mohamed Maait said that the target had been revised to 6.3%. The deficit is expected to narrow to 6.9% at the end of the current fiscal year.

The primary surplus is expected to come in at 1.5%, down from the 2% penciled in for the medium term in the initial draft budget and in keeping with the Finance Ministry’s revisions earlier this week.

The government plans to focus spending on strengthening the social safety net, education, and healthcare, as well as supporting manufacturers and exporters, the statement says, without providing a breakdown of spending.

It’s not going to be investing as much as planned: Public investments in 2022-2023 will rise by 15.2% from the previous year, down slightly from the previous 16.2% target, according to a separate statement.

Still no word on debt: Maait didn’t disclose the ministry’s debt-to-GDP target for the coming fiscal year. The minister said in January that public debt levels were expected to fall to below 90% of GDP in 2022-2023.

This is the latest in a series of moves that remind us of March 2020. The government also announced yesterday EGP 130 bn package of tax incentives and social safety measures that looked a lot like the stimulus and bailout measures introduced in March 2020 to manage the fallout from the covid-19 pandemic. Egypt also revised its budget at the time to factor in the likely impact of the pandemic, cutting the GDP growth forecast to 5.1%.

WHAT’S NEXT? The document should make its way to the House of Representatives, where it will be discussed in committees at the same time as various ministries lobby FinMin for allocations. The final document typically goes up for a vote at the general assembly before the start of the new fiscal year. If the budget doesn’t pass before 30 June, the current budget rolls forward to direct state spending until the new document is passed.

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