This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 CAIRO 004374 
 
SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA, AND EB/IDF 
USAID FOR ANE/MEA MCCLOUD 
USTR FOR SAUMS 
TREASURY FOR MILLS/NUGENT/PETERS 
COMMERCE FOR 4520/ITA/ANESA/TALAAT 
 
SENSITIVE 
 
E.O.  12958: N/A 
TAGS: ECON EFIN ETRD EINV EG
SUBJECT: EGYPT'S FY2005/06 BUDGET: A MAKEOVER 
 
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Summary 
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¶1.  (U) On June 7 the People's Assembly passed the budget 
for fiscal year (FY) 2005/2006.  The new budget was drafted 
using the IMF Government Finance Statistics format, which 
allows for better use of fiscal tools and better assessment 
of the impact of fiscal policies on Egypt's economy.  Total 
expenditures in FY 05/06 are projected to reach LE 188.7 
billion and total revenues LE 130.2 billion, with a budget 
deficit of LE 58.5 billion or 9.3% of projected GDP.  The 
GOE will need LE 56.4 billion, or 9% of GDP, in net 
borrowing to finance its deficit.  The new budget format 
provides greater detail regarding revenues and expenses, 
including itemization of direct and indirect subsidies and 
expenditures previously categorized simply as "off-budget" 
expenses.  The new format directly addresses local and 
international concerns regarding GOE fiscal transparency and 
the need to continue reforms to support economic growth. 
End summary 
 
------------------------------ 
Parliament Approves GOE Budget 
------------------------------ 
 
¶2.  (U) On June 7 the Egyptian parliament approved the draft 
GOE budget for FY 2005/2006 (July 1, 2005 to June 30, 2006), 
which was unveiled by the Ministry of Finance (MOF) in late 
May.  Projected government expenditures in the approved 
budget are LE 188.7 billion, up 17.9% from the current FY 
2004/2005.  Projected revenues are LE 130.2 billion, up 11% 
from the current FY.  The projected deficit is LE 58.5 
billion, or 9.3% of the projected FY 05/06 GDP of LE 629 
billion, a slight decrease from the current FY deficit of 
10.3% of GDP.  Parliament increased by LE 860 million the 
funding allocated for education, health and utilities 
programs.  President Mubarak is expected to sign the budget 
before July 1, after which it will be published in the 
Official Gazette.  MOF also intends to publish the new 
budget on its website. 
 
¶3.  (U) In drafting the budget, MOF used, for the first 
time, the IMF Government Finance Statistics (GFS) 2001 
system, an international standard system that significantly 
improves the budget's transparency.  Parliament cleared the 
way for use of this new system in April 2005, when it 
amended the law regulating the GOE budget.  The amendment 
allows for restructuring of the GOE budget to render it more 
consistent with IMF government accounting standards, a long- 
time concern of the international financial institutions and 
foreign donors, including the USG.  MOF intends to reformat 
prior year budgets using the new system and post the 
revisions on its website.  Until this is done, however, 
comparison of the FY05/06 budget with the current FY budget 
is only possible for a limited number of items. 
 
¶4.  (U) Unlike the previous budget format, the new GFS 
system specifies all expense and revenue items for all 
government agencies (with the exception of the military). 
Details are provided for all transactions affecting 
financial and non-financial assets, as well as expenses 
previously classified simply as "off-budget" items.  Under 
the new system, indirect subsidies are also now clearly 
identifiable, as details must be provided for all government 
agency expenditures.  Unlike the previous format, which 
broke the overall deficit into three distinct tiers and made 
it difficult to assess the GOE's financing needs, the new 
system produces an aggregate monetary deficit figure.  This 
makes it easier to determine net government borrowing, 
project future expenses and revenues based on past 
performance, and quantify the impact of fiscal policies on 
government finances and the national economy. 
 
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Egypt's Statement of Government Operations 
------------------------------------------- 
 
¶5.  (U) Revenues:  Total revenues in FY05/06 are projected 
to reach LE 130.2 billion, compared with LE 102.5 billion in 
FY04/05, an increase of 27%.  Revenues include LE 81.6 
billion from taxes, up 21.5% from the actual preliminary 
figures for FY04/05.  (Note:  This is based on the 
assumption that macroeconomic reforms will increase the 
growth rate to 5%, thereby increasing the tax base and 
offsetting the reduction in the marginal tax rate enacted in 
a new tax law, which will be reported septel.  End note); LE 
2.9 billion from foreign and domestic grants; and LE 45.7 
billion from other revenues.  The breakdown of the 
government's tax income includes LE 40.9 billion from 
general income tax, LE 25.5 billion from sales tax, LE 8.99 
billion from customs and LE 6.3 billion from other tax 
sources, all constituting 62.7% of total revenues.  Foreign 
and domestic grants, in the form of direct transfers to the 
budget, remain relatively stable, averaging LE 1.68 billion 
in both FY04/05 and FY05/06.  Foreign and domestic grants 
for investment purposes dropped from LE 3.4 billion in 
FY04/5 to LE 2.9 billion in FY05/06.  Other revenues include 
proceeds from several economic entities, including the 
Petroleum Authority, Suez Canal Authority and the Central 
Bank of Egypt.  The Petroleum Authority is expected to 
transfer LE 12.6 billion to the general budget in FY05/06, 
compared with LE 6.5 billion in FY 04/05.  The increase is 
largely due to re-categorizing of energy subsidies in the 
new budget format.  Energy subsidies were previously 
identified as expenses of the Petroleum Authority, thereby 
reduced that entity's profits.  The subsidies are now 
categorized as general GOE subsidies. 
 
¶6.  (U) Expenses:  Total expenses for FY05/06 are LE 188.7 
billion, up 17.9% from LE 160 billion in FY04/05.  Expenses 
include LE 46.7 billion for compensation of public 
employees, a 14% from FY04/05.  (Note:  In what appears to 
be an election year move, the GOE has announced a 30% pay 
raise for public employees, substantially exceeding the 
normal 10% annual increase.  End note.)  LE 13.2 billion is 
allocated for Use of Goods and Services acquired by the GOE 
to provide public goods and services; LE 42.6 billion for 
interest payments, up 12.4% from FY04/05; LE 50.6 billion 
for subsidies, social benefits and grants; LE 18.2 billion 
for other expenses; and LE 17.4 billion for purchase of non- 
financial assets, also known as investments, which will 
decrease by 14% compared to FY04/05.  The decrease in 
investment spending is likely due to the GOE's move to rely 
more on private sector investment to stimulate the economy. 
The subsidies, grants and social benefits item includes, for 
the first time, details on direct and indirect subsidies for 
food and energy.  Direct subsidies totaled LE 15.6 billion 
in FY04/05 and will increase to LE 35.4 billion in FY05/06. 
Interest payments includes interest on domestic public debt 
of LE 38.4 billion; interest of LE 4.02 billion for external 
public debt; and LE 0.21 billion for expenses related to 
debt servicing. 
 
¶7.  (U) Operating Balance/Deficit:  The comparison of 
revenues and expenses shows government revenues cover only 
69% of operating expenses, or 30% of GDP, while revenues 
constitute only 20.7% of GDP.  The deficit resulting from 
the shortage in revenues totals LE 58.5 billion, or 9.3% of 
the projected GDP for FY05/06.  In the GFS system, the 
deficit is also known as the government's Operating Balance, 
which reflects the ongoing stability of the government's 
operations. 
 
¶8.  (U) Deficit Financing:  The GFS system also requires 
calculation of the net acquisition of financial and non- 
financial assets (i.e., net borrowing), which is projected 
at LE 1.73 billion for FY05/06 budget.  This amount is added 
to the general deficit, increasing the total to LE 60.3 
billion or 9.6% of GDP.  Total financing needs for FY05/06 
are projected at LE 77.8 billion, mainly coming in the form 
of loans from the National Investment Bank (LE 14.3 
billion), external loans (LE 0.91 billion), and Treasury 
bills and bonds (LE 61.7 billion).  The GOE's net borrowing 
needs are then calculated by subtracting LE 3 billion in 
projected proceeds from privatization of public companies in 
FY 05/06 and LE 20.5 billion in public debt payments 
throughout the year from total financing needs, yielding a 
net borrowing need of LE 57.3 billion, or 9.1% of GDP. 
 
----------------- 
Policy Objectives 
----------------- 
 
¶9.  (U) During his presentation of the budget to parliament, 
Minister of Finance Youssef Bhutros Ghali (YBG) stated that 
the FY 05/06 budget was not only more transparent, but also 
seriously addressed the economic problems facing Egypt, 
including the need to increase efficiency, decentralize 
fiscal policy, encourage investments, stabilize prices, 
create jobs and improve services while focusing on sectors 
with a comparative advantage.  With this aim in mind, YBG 
said the budget sets out three specific policy objectives: 
 
- Growth and achievement of GOE fiscal targets.  The budget 
set a target growth rate of 6% for FY05/06, while reducing 
inflation to 6-7% by increasing investment and employment. 
Social programs remain intact to protect low-income earners 
and provide basic services, but spending priorities are 
designed to ensure, in the medium term, continued growth, 
price stability and rational management of the deficit and 
public debt. 
 
- Assessment of the macroeconomic impact of fiscal policies. 
The new budget format allows the GOE to better identify 
revenue and expense items that directly affect economic 
activity and production of goods and services.  Calculation 
of the net balance of financial and non-financial assets 
also allows for assessment of the effect of public spending 
on the deficit and ultimately the GOE's need for deficit 
financing from the banking sector, CBE or other sources. 
 
- Modernization of fiscal policy tools.  Restructuring of 
the GOE budget complements the recent customs and tax 
reforms, which were designed to improve domestic and 
external competitiveness. 
 
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Comment: 
-------- 
 
¶10.  (SBU) In line with the GOE's recent agreement to 
publish IMF Article IV, the new budget brings the GOE one 
step closer to meeting international standards for fiscal 
transparency.  Local analysts are generally positive about 
the new budget and the fact that the GFS format allows the 
GOE, and outside observers, to actually assess the outcome 
of the GOE's fiscal policies.  This will certainly 
facilitate the ongoing World Bank public expenditure review 
by helping to identify areas in which further reform is 
needed.  Indeed, the budget appears designed to consolidate 
the reforms already made under the Nazif administration and 
set the stage for continued reform, particularly in the area 
of subsidies.  One local private sector economist noted that 
by clearly identifying subsidies, the GOE will be better 
able to make the case to the Egyptian public that spending 
on subsidies is excessive and in need of reform. 
 
¶11.  (SBU) Despite the increase in transparency, however, 
the new budget has its limitations.  Specifically, it does 
not disclose military spending, which accounts for a large 
percentage of annual expenses.  In not disclosing the 
details of military spending, another set of subsidies, 
namely those to military personnel and their families, is 
not specified.  Given the perhaps overly optimistic 
projection of revenues for FY 05/06, reform of large 
expenditures, such as subsidies, is badly needed to control 
an already large deficit.  Such reforms, however, will 
likely have to wait until after this year's elections.  End 
comment. 
 
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Draft Budget As Presented to Parliament 
--------------------------------------- 
 
¶12. (U) 
 
(LE Billion)                                    Projected 
                          Budget     Budget    % Change 
 
Fiscal Years             2004/2005  2005/2006 
--------------------------------------------- ------------ 
 
Expenses,                  160.00     188.67    17.92 
 Including: 
 Wages and Compensation     41.00      46.70    11.80 
 Use of Goods and Services   9.94      13.24    33.20 
 Interest                   38.43      42.61    10.88 
 Subsidies, Social Benefits 
  And Grants                29.32      50.55    72.41 
 Other Expenses             21.05      18.19   (13.40) 
 Purchase of Non-Financial 
  Assets                    20.26      17.40   (14.15) 
 
 
Revenues,                   102.46     130.15   27.03 
 Including: 
 Taxes                      71.21      81.61    14.60 
 Grants                      2.90       2.86    (1.38) 
 Other Revenues             28.35      45.68    61.13 
 
Deficit (Operating Balance) 57.54      58.52 
 
GDP                        558.00     629.00 
Deficit/GDP (%)              10.3        9.3 
 
 
Net Borrowing: 
Net Acquisition of Assets                1.73 
 
Total Deficit                           60.25 
Payment of Debt Installments            20.55 
                                        ----- 
                                        80.80 
Privatization Proceeds                   3.00 
 
Financing Required                      77.80 
 Covered by*: 
 Loans from National Investment Bank    14.33 
 External Debts to Finance Investments   0.91 
 Borrowing using T- Bills and Bonds     61.71 
* Available information did not indicate how the 
additional LE 850 million will be financed. 
 
New Financing Needs                     77.80 
Payment of Debt Installments            20.55 
 
Net Borrowing                           57.25 
Net Borrowing/GDP(%)                     9.11 
 
 
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Administrative Classifications 
------------------------------ 
 
¶13. (U) 
 
            FY04/05       Projected FY05/06 
 
Activities           Admin.  Municipal  Services  Total* 
 
Public 
 Services   55.75    54.09   7.97        0.63     62.69 
(LE Billion) 
 
Defense 
 And Nat'l 
 Security   14.11    15.63    --        0.007     15.64 
 
Public Order 
 And Public 
 Security 
 Affairs     7.52     7.90    --        0.41       8.31 
 
Economic 
 Affairs    10.91     3.86   1.99       3.43       9.29 
 
Environment 
 Protection  0.71     0.70    --        0.26       0.96 
 
Housing, 
 Utilities/ 
 Communities 3.76     0.90   0.25       2.39       3.55 
 
Health 
 Affairs     7.64     3.56   3.04       1.61       8.21 
 
Youth, Culture 
 And Religious 
 Affairs     5.45     4.95   0.45       0.92       6.32 
 
Education   22.69     4.01  14.46       6.22      24.69 
 
Social 
 Protection 31.56    47.60   0.52       0.06      48.18 
 
Total       160.10   143.19  28.68      15.95     188.67 
* Available information did not indicate how the 
additional LE 850 million will be financed. 
GRAY