Egyptian Finance Minister Ahmed Galal recently announced an EGP 33.9 billion ($4.9 billion) supplemental appropriation bill to the state budget. Although the bill will increase Egypt's (Caa1 negative) budget deficit, the supplemental spending will have minimal cost to the Government because financing will be via concessional aid from the United Arab Emirates (UAE, Aa2 stable), said Moody's
"This is the second increase in budgeted expenditures in the current 2013-14 fiscal year, which ends June 2014. It follows an EGP 29.6 billion package first announced in August 2013 and increased two months later, but which did not receive direct external support. The new supplementary budget contains more capital expenditure than current expenditure, which will improve Egypt's economic growth prospects. Real GDP growth fell to a two-year low of around 1.0 per cent in the third quarter of 2013 from 2.5 per cent a year earlier – a markedly weaker performance than in the five years before the January 2011 revolution and through the global financial crisis, during which real growth averaged 6.2 per cent.
"Investment spending, the largest portion of the package at EGP 19.8 billion, will help to rebuild infrastructure after three years of economic disruption following the revolution. It includes EGP 2 billion earmarked for the Suez Canal axis project. Government investment spending for fiscal year 2012-13 was EGP 39.5 billion, or about 6.7 per cent of total expenditures, down from EGP 48.4 billion, or 13.2 per cent of total expenditures, for fiscal year 2010-11. Together with the initially budgeted EGP63.7 billion and the first stimulus package, total Government investment will rise to 14.2 per cent of overall Government spending.
"In addition, one third of the supplemental spending, EGP 11 billion, will go to social programmes, including a minimum wage increase in the public sector and increasing pensions. This will positively affect private consumption.
"The UAE's aid package adds to support already pledged from countries in the Gulf Cooperation Council since the military overthrew President Mohamed Morsi and his cabinet on 3 July 2013. Saudi Arabia (Aa3 stable) has provided $3.6 billion out of $5 billion it pledged, and Kuwait (Aa2 stable) has donated another $2.7 billion out of $4 billion it pledged.
"Despite the likely positive effect on growth and the fiscally neutral financing from the UAE, Egypt continues to face fiscal challenges. The Ministry of Finance has reaffirmed its commitment to reduce the fiscal deficit to 10 per cent of GDP this fiscal year. But despite higher grants, we expect the fiscal deficit to exceed this target. Furthermore, the increase in current expenditure areas – in particular, the 17.6 per cent increase in compensation of civil servants in the first half of the fiscal year from a year earlier – will ratchet up Government spending in future budgets. Until the economy grows again, Egypt will continue to rely on external grants to finance its large deficits."