The Madbouly government now expects the budget deficit to contract to 6.2% this fiscal year, down from a previous 6.9% target, as the economy absorbs the initial shock of the outbreak of war in Ukraine, Finance Minister Mohamed Maait told a Bank of America delegation, according to a Finance Ministry statement.

The cushion suggests we were doing better than expected before Russia invaded Ukraine: Officials widened the deficit target in mid-March after the price of key commodities including wheat and oil spiraled following the outbreak of war. The new 6.2% target not only reverses that revision, but is more ambitious even than the 6.7% goal FinMin laid out in its draft budget nearly a year ago. The news implies the government was significantly ahead of its target prior to the outbreak of war, giving it a cushion to absorb fallout from that and the commodity price acceleration that pre-dated it, but that it turbocharged.

The outlook for the primary surplus is also somewhat sunnier: The government is now targeting a primary surplus of 1.3% in this fiscal year. That’s an improvement on the 1.1-1.2% it had predicted a month or so before Russia invaded Ukraine (though it doesn't quite meet the 1.5% penciled in at the start of the year). We’re also still planning to bring the debt-to-GDP ratio below 90% by June as outlined in the draft budget, with the aim of cutting back to 85% by 2025 (up from the 82.5% targeted before Ukraine was invaded).

What changed? Policymakers have stepped in to limit the damage. In a bid to stem outflows, the Central Bank of Egypt devalued the EGP last month and raised interest rates by 100 bps. We also officially requested support from the IMF to mitigate the impact of the war on our economy and are in talks for a fresh financial package. Recent economic reforms have also made us “more able to flexibly manage internal or external issues and absorb the largest possible amount of global shocks,” Maait said.

We’re also getting support from the Gulf: Recently announced investment and funding from Saudi Arabia, Qatar, and the UAE, totaling some USD 22 bn, is also partly to thank for the improved outlook. BNP Paribas estimated Egypt’s total funding gap in FY 2021/2022 at around USD 17.6 bn.

TBD- Next year’s budget. Ministries and government agencies are looking at ways to trim spending for next fiscal year, after the cabinet in March signed off on a revised FY 2022/2023 budget in light of recent price hikes. The government is now targeting growth of 5.5%, a 6.1% budget deficit and a primary surplus of 1.5%. We’ve had no word yet on revised debt-to-GDP figures — and everything could change up to and until the budget is passed by the House, typically before the end of June.