VZCZCXYZ0003
PP RUEHWEB

DE RUEHEG #1863/01 2380500
ZNR UUUUU ZZH
P 250500Z AUG 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 0301
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS CAIRO 001863 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR NEA/ELA 
TREASURY FOR BEN DENNIS AND CHARLES MORAVEC 
COMMERCE FOR TOM SAMS AND NATE MASON 
 
E.O. 12958: N/A 
TAGS: ECON EAID EFIN EINV EG
SUBJECT: EGYPTIAN SUBSIDIES HIT THE FISCAL BOTTOM LINE HARD 
 
REF: 08 CAIRO 587 
 
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Summary: 
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¶1. (U) Recent data released by the GOE on spending during 
fiscal year 2007-8 (July-June) highlight the impact of 
inflation and the rising cost of government subsidies on the 
GOE budget. Sharp increases in revenue due to economic growth 
and tax increases were offset by a 25% increase in public 
spending. The cost of fuel and food subsidies has risen 
dramatically and continues to feed high budget deficits.  GOE 
officials are cautiously optimistic that inflation will 
subside somewhat in the coming year, but admit that the GOE 
fiscal deficit remains an obstacle to long-term economic 
stability. End Summary. 
 
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Up, Up, and Away 
---------------- 
 
¶2. (U) Preliminary budget results for the 2007-2008 fiscal 
year (July-June) highlight the severe impact on the Egyptian 
budget of increasing global commodity prices as well as the 
cost of GOE responses to threats to "public stability." 
Overall public spending climbed to LE 277.4 billion ($52.3 
bn) -- an increase of 25% over the prior year and slightly 
above the LE 273.6 billion ($51.6 bn) previously projected by 
the IMF.  Increases in taxes to offset government wage hikes, 
along with government revenue increases driven by continued 
strong growth in the economy, aided a small decline the GOE 
fiscal deficit from 7.5% of GDP in 2006-7 to 6.8% of GDP in 
2007-8. The GOE reported that tax revenues grew by 20.2% y/y 
and non-tax revenues climbed by 23.1%. 
 
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Subsidy Costs Explode 
--------------------- 
 
¶3. (U) The cost of GOE subsidies in 2007-8, primarily for 
food and energy, grew by 56% compared to the prior year, 
reaching LE 84.2 billion ($15.9 bn) including LE 60.3 billion 
($11.4 bn) for fuel and LE 16.5 billion ($3.1 bn) for food. 
These subsidies account for 30% of total public spending. 
This level of spending leaves little room for expenditures in 
other vitally important areas, despite rising need. As an 
example, in 2007-8 the GOE spent only LE 32.9 billion ($6.1 
bn) on education and LE 12.7 billion ($2.4 bn) on public 
health -- when combined still 25% less than what the GOE 
spent on the fuel subsidy alone. 
 
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Inflation Remains a Concern 
--------------------------- 
 
¶4. (U) Inflation continues to be high.  In July, inflation 
accelerated to 22.2% y/y (vs. a June figure of 20.2% y/y) 
with food inflation hitting nearly 29.9% y/y according to 
statistics released by the Central Agency for Public 
Mobilization and Statistics (CAPMAS). Continuing inflationary 
pressure led the Central Bank, on August 7, to raise 
overnight deposit and lending rates by 50 basis points to 11 
and 13% respectively. 
 
¶5. (SBU) Hany Kadry Dimian, Deputy Minister and Director of 
the Macro-Fiscal Unit of the Ministry of Finance told Econoff 
that he felt that the Egyptian economy had almost fully 
digested the wage hikes and the rise in commodity prices, and 
inflation had peaked.  He expected average inflation to drop 
to the 9-10% range in the 2008-2009 fiscal year. This view 
was echoed by the Hisham Ramez, Deputy Governor of the 
Central Bank, in a meeting August 20. Ramez commented that he 
felt inflation would return to more "normal" levels 
(somewhere below 8%) over the next 12 months, albeit from a 
much higher base.  Ramez also emphasized the importance of 
lowering the fiscal deficit. 
 
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Comment 
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¶6. (SBU) The GOE is very conscious of the public sensitivity 
to any changes in the prices of subsidized commodities, 
particularly food.  Shortages of subsidized bread resulting 
in long bread lines and heightened public anxiety about bread 
prices have prompted President Mubarak to involve the 
military in baking and bread distribution (reftel).  Recent 
drops in commodity prices, if sustained, may alleviate some 
near-term fiscal pressure; however, the subsidy regime 
remains a long term constraint on the GOE budget.  To reach 
the planned reduction in the fiscal deficit to 3% of GDP by 
2011, significant spending reforms are unavoidable. 
Additionally, reforming the subsidy system in a country that 
has long resisted such change will require courage, 
leadership, and a public relations acumen that the GOE 
frequently lacks. 
SCOBEY