Reform implementation is key, broader challenge is to leverage high inflation environment: HSBC
The HSBC Bank Middle East Ltd has published its report about Egypt’s fiscal targets and economic performance for the first quarter (Q1) of 2017, saying that “Egypt registered a budget deficit of around EGP 800bn in Q1 2017, up 20% in nominal terms from Q1 2016, but down 0.5ppts to 12.4% as a share of GDP. The YTD deficit adds up to 11.2%, versus a full year (Jul 16-Jun 17) government forecast of 10.5%.”
The report added that during the first full quarter data release since a range of fiscal and foreign exchange reforms were launched last November, both the revenue and expenditure side saw sharp growth. It stated that the public revenues grew 45% yearon-year (y-o-y) in Q1 2017.
“Goods and services tax revenue were the main contributors, growing 60% y-o-y on the back of the newVAT and the impact of 30+% inflation on the tax base.”
HSBC said that the spending rose more slowly, but by a still substantial 35% y-o-y in Q1 2017.
“The wages grew 11%, but contracted in real terms in the high inflation environment. Debt servicing added the most to expenditure growth, increasing 54% y-o-y to make up 40% of public expenditure with interest rates up over 400bps in that period. This cost should continue to grow following the additional 200bp hike that took place in May.”
In its 2017/2018 draft budget, the government plans to reduce its deficit by 1.5ppts to 9% of GDP through raising revenues while keeping expenditures stable as a share of GDP.
“With spending almost 50% higher than revenues, the structural imbalance will be hard to remedy,” says the report.
HSBC noted that reform implementation is key, but the broader challenge is to leverage the high inflation environment to grow public revenues “while keeping spending growth under control.”