VZCZCXYZ0015
RR RUEHWEB

DE RUEHEG #2167/01 1930921
ZNR UUUUU ZZH
R 120921Z JUL 07
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 6109
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0296

UNCLAS CAIRO 002167 
 
SIPDIS 
 
SIPDIS 
STATE FOR NEA/ELA, NEA/RA, EB/IDF 
TREASURY FOR IA/MATHIASEN AND HIRSON 
COMMERCE FOR 4520/ITA/ANESA/OBERG 
E.O. 12958:  N/A 
TAGS: ECON EFIN EINV EG
SUBJECT: 2007/2008 BUDGET APPROVED 
 
Summary 
------- 
 
¶1. (U) The Egyptian budget covering fiscal year 2007/2008 (July 1, 
2007-June 30, 2008) was recently approved and the preliminary 
results from the just-ended fiscal year were released as well. 
Revenue collection remained robust (although not as strong as last 
year) and growth of expenditures tapered off from last year, so a 
deficit reduction is expected.  The new budget contains many of the 
same characteristics as budgets past, but some wrinkles as well. 
Although deficit reduction is a key element of the economic reform 
program, the government envisions an increase of expenditures in 
2007/2008, so some recent progress on deficit reduction may be lost 
next year.  End summary. 
 
Reforms reaping some benefits 
----------------------------- 
 
¶2. (U) Recently released budget documents indicate that the Finance 
Ministry is already beginning to celebrate additional revenues 
created from some of the recently enacted reforms: (i) wider tax 
base as a result of lower rates and increased compliance, (ii) 
tariff rate reductions leading to higher customs revenues, (iii) 
Treasury Single Account reform reportedly generating interest 
payment savings, (iv) interest payment savings from the 
restructuring of the relationship between the National Investment 
Bank and the Social Insurance Funds, (v) the stamp duty, and (vi) 
the reduction in energy subsidies. 
 
¶3. (U) Actual revenue collection for the recently-ended fiscal year 
is expected at LE 172.1 billion ($30 billion), a 13.8 percent 
increase over last year.  Expenses were LE 212.1 billion ($37.3 
billion), a 2.1 percent increase over last year.  A significant 
contributor to those increased revenues is estimated one-time 
inflows of LE 28.6 billion ($5 billion) from privatizations.  The 
bulk of that comes from the third mobile license sale (LE 15 billion 
or $2.6 billion) and the Bank of Alexandria sale (LE 9 billion or 
$1.6 billion). 
 
Subsidies are a mixed bag 
------------------------- 
 
¶4. (U) Subsidies have long been an important part of any Egyptian 
budget.  Roughly 15 percent of the 2005/2006 budget (or six percent 
of GDP), for example, was dedicated to energy subsides (excluding 
electricity).  To put that in perspective, the Egyptian Center for 
Economic Studies estimates that energy subsidies are twice the 
amount the government spends on defense and three to four times 
those spent on health.  Until the 2005/2006 budget year, these 
subsidies were always implicit (i.e. not referred to in any budget 
document), but Parliament and international pressure helped 
encourage the government to reflect these figures. 
 
¶5. (U) The new budget states a very welcome upfront goal of 
redistributing subsidies from wealthy to the lower-income classes. 
Energy subsidies have quadrupled in the last three years as a result 
of steadily rising oil prices, even when taking into consideration a 
partial reduction in subsidies last year, and Egypt still has some 
of the highest energy subsidies as a percentage of GDP in the world. 
 The new budget envisions energy subsidies dropping slightly from LE 
40 billion to LE 37 billion (from $7 to $6.5 billion), while the 
overall subsidy bill will edge upwards from LE 54 billion to LE 58 
billion (from $9.5 to $10 billion).  Another improvement in this 
year's budget is that the electricity subsidies, which had remained 
implicit, are exposed as a line item (LE 2 billion or $352 million) 
for the first time. 
 
What to do with the windfall? 
----------------------------- 
 
¶6. (U) The Government is committed to reducing the budget deficit by 
1 - 1.5 percent each year until reaching a goal of three percent in 
2010/2011.  Per the GOE figures, that yearly target was achieved in 
FY2006/2007, as the estimated overall budget deficit fell from 8.2 
percent to 6.7 percent.  Faced with the choice of using the 
windfalls to further reduce the deficit or to spend the windfalls, 
the government envisions more of the latter in 2007/2008, while 
stating its intention to still meet the 2011 deficit target.  As a 
result, the overall deficit is expected to tick slightly upwards to 
6.9 percent of GDP next fiscal year.  Much of the windfall in 
2006/2007 went to retirement of non-performing loans in the public 
banks (LE 9.2 billion or $1.6 billion).  Other uses last year were 
for the railroad refurbishment and expansion of sewage treatment 
plants.  The government has many social objectives it feels it must 
address so the 2007/2008 budget envisions uses for teachers 
salaries, housing, training, Upper Egypt, etc. 
 
¶7. (U) Comment:  Using the privatization receipts to clean up the 
non-performing loans at the state-owned banks will obviously improve 
the banks' bottom lines.  However, the GOE still needs improve bank 
management and risk management tactics so that the build up of bad 
loans does not immediately repeat itself. 
 
Transparency and budget process still needs help 
--------------------------------------------- --- 
 
¶8. (U) Data accuracy and availability continues to be a problem in 
Egypt, although improvements certainly have been made in recent 
years, most notably with Egypt qualifying for the IMF's Special Data 
Dissemination Standards several years ago.  In 2006, the Open Budget 
Institute gave Egypt a score of 18 (out of 100) on budget 
transparency.  The U.S. continues to work with the Ministry of 
Finance to improve budget processes and transparency, but more work 
remains.  The Egyptian budget is not programmatically driven, nor 
does it use results-based budgeting approaches.  While the 
Parliament is increasingly interested in trying to debate the 
content of the budget, without aggregations by function, or analysis 
of previous years' results or failures, the Parliamentarians' job is 
made quite difficult. The Constitutional amendments approved earlier 
this year do give the Parliament more potential influence over the 
budget process.  The amendments: allow Parliament to amend the 
Government's budget proposal, allow Parliament to move funds from 
one budget chapter to another, and provide Parliament with more time 
to evaluate the budget before the fiscal year starts. 
 
Inflation vs. deficit reduction 
------------------------------- 
 
¶9. (U) Despite the improvements in budget transparency, an analysis 
of the budget still shows many areas of wasteful and unproductive 
spending, and a lack of spending on development of human capital. 
Unless wasteful spending is addressed, it may be difficult for the 
GOE to make the needed investments in human capital and 
simultaneously stay on track to reduce the deficit by 1.5 percent 
each year.  While the GOE expects several additional new revenue 
measures in the coming year (real estate tax and VAT, most notably), 
their revenue impact is also expected to be minimal, at least 
initially.  Government spending is a large contributor to money 
growth, and is contributing to higher than anticipated inflation in 
¶2007.  It is precisely these fears of increased inflation which 
account for GOE hesitation in introducing the VAT and making further 
subsidy reductions.  While these two steps would have a positive 
effect on the deficit, increased inflation exacerbate the already 
skeptical attitude of much of the Egyptian population toward the 
benefits of the government's economic reforms.