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Egypt faces deeper cuts amid stubborn fiscal deficit

Thursday, January 15, 2015

Subject

Egypt's fiscal outlook.

Significance

The Ministry of Finance has issued figures for budget performance after five months of the 2014-15 fiscal year, which started on July 1, 2014. The deficit is higher than in the previous year, but this is mainly because of the distorting effect of the massive transfusion of Gulf Arab aid after the removal of President Mohammed Morsi in July 2013. Other aspects of the accounts are more encouraging, including a rise in non-oil tax revenue and the likelihood that energy subsidies will fall sharply.

Impacts

  • The 2014-15 budget deficit is likely to be close to the target of 10% of GDP, assuming a modest level of Gulf aid in the coming months.
  • The relatively strong rate of economic growth will help to moderate the deficit as a percentage of GDP.
  • Increased tax revenue and lower energy subsidy costs will help to moderate the budget deficit.
  • However, it will remain high in absolute terms due to the bloated wage bill and increased interest payments.
  • The government will therefore have to take politically sensitive decisions, either trimming the state labour force or further subsidy cuts.
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