Deputy finance minister explains steps to reduce FY 2016/2017 deficit, restructure public debt

Ahmed Farahat
13 Min Read
Deputy finance minister for fiscal policies, Ahmed Kouchouk

The government seeks to reduce the budget deficit to 9.8% of the gross domestic product (GDP) during the current fiscal year (FY) 2016/2017, equivalent to about EGP 319.5bn, compared to 11.8% at the end of FY 2015/2016.

Deputy finance minister for fiscal policies, Ahmed Kouchouk, explained to Daily News Egypt how the government would reduce the state budget deficit, as well as the economic reform programme. He also addressed Egypt’s negotiation with the International Monetary Fund (IMF) to borrow $12bn. The IMF has preliminarily approved the loan. However, Egypt still waits for the final approval of the fund’s executive board within two months.

How would the government reduce the state budget deficit of the current FY to about 9.8% of GDP?

We are committed to implementing the economic measures mentioned in the financial statement of the state budget, as well as improving economic activity to reduce the deficit.

The financial statement presented a group of reform measures in the medium term, which include improving the efficiency of tax systems, broadening the tax base, stopping tax evasion, and improve the tax collection process. These measures will contribute to increasing the tax revenue ratio of the total GDP.

The tax revenue currently represents 13% of GDP in Egypt, while it reaches 27% in many Middle Eastern countries and Tunisia.

The government targets to improve the efficiency of public finance management in the medium term to achieve a better return on government expenditures. This will reflect on the level of services provided to citizens and the amendment of the pension system. It will also increase non-tax sources, coming from surpluses of state-owned enterprises, as well as decrease electricity subsidies, and rationalise the petroleum products subsidy.

The reform of the electricity system was conducted as planned in the state budget, as was the application of the Civil Service Law. These measures were very good, and without them, the situation could have been very different.

The electricity subsidy in the current state budget reached EGP 28.9bn, compared to EGP 31.7bn in FY 2015/2016.

The Ministry of Finance is currently discussing the value-added tax (VAT) draft law with the parliament, and we are doing our best to pass this law.

We will follow-up on the state budget periodically and will issue a semi-annual report on the latest economic developments and reforms.

Were we late in conducting economic reform measures?

Of course, we delayed economic reforms for many years, and if we had implemented limited annual reform measures in the prices, we would not have reached this difficult situation. Companies today suffer significant losses, making them unable to meet their obligations.

How will you deal with the petroleum products subsidy?

We will rationalise the petroleum products subsidy and limit it to low-income citizens. We will gradually replace it with financial support for the targeted groups. I cannot announce the details of this plan now, as there are certain things that should not be announced in detail.

The petroleum product subsidies cost EGP 35bn in 2016/17, compared to EGP 61bn in 2015/16. The oil barrel costs $40 in the current budget.

How would you control the inflation?

We should control the inflation rate, not only because of the prices, but to improve the economic situation and increase growth rates.

The Central Agency for Public Mobilisation and Statistics (CAPMAS) announced that the annual inflation reached 14.8% in July.

What are the steps of restructuring the public debt?

There are four steps to reduce the public debt. First, we should decrease the primary deficit ratio of the GDP, as this would decrease the public debt. We should also increase growth rates by supporting export and industry programmes and improving the investment environment through the Bankruptcy Law and the single window system.

The other steps depend on reducing the average interest rates of loans through diversification of borrowing sources and issuing long-term bonds.

Does the Ministry of Finance seek to increase export subsidies to more than 2.6% in the current budget?

Of course, we have a desire to increase export subsidies through the Ministry of Trade and Industry’s programmes. However, it will depend on the success of the subsidy programme and the ministry’s quarter annual reports.

The Ministry of Trade and Industry’s programme depends on increasing the local component in products and reaching new markets through new exporters. Furthermore, the small exporters will be granted certificates of quality and financing for their activity.

Does the government intend to inject an economic stimulus package in the upcoming period?

We will abide by the state budget. It is not a must to provide a stimulus package. We have a number of problems in the investment environment that must be addressed to attract investors. If we implement these reforms and nothing changes, we will then introduce another alternative.

Did the cooperation between the Central Bank of Egypt (CBE) and the Ministry of Finance change?

The cooperation between the CBE and Finance Ministry is very strong at this stage. Cooperation takes place almost on a daily basis. Moreover, it is not limited to interest rates, but includes factoring of bank overdraft. We seek to boost the legal limit of withdrawal by next June to 10% of average public revenues over three years.

The Ministry of Finance earlier succeeded in factoring EGP 250m of bank overdraft between themselves and the CBE at a 12% interest rate through the issuance of bonds for the CBE with maturity periods of five, seven, and 10 years.

Minister of Fiinister of fid. internationa;of value ond nance Amr El-Garhy had said during a Ramadan sohour that bank overdraft stood at EGP 110bn.

The ministry and the CBE exchange information, numbers, and views related to the economic situation, as well as discuss diverse sources of funding in the next phase.

The Ministry of Finance is set to offer US dollar-denominated bonds on the market worth about $3bn to $5bn during the current fiscal year, as a part of funding the financial reform programme with $21bn over three years—including the $12bn loan from the International Monetary Fund (IMF).

What is the expiration period of the US dollar bonds?

The expiration periods of the dollar bonds that the Ministry of Finance is planning to offer in international markets vary between five and 10 years.

There is a possibility to offer a long expiration period-bond that could reach 30 years, in light of the future promotion campaigns that will include the Gulf, Asian, and European markets.

A number of American and European investors would prefer long expiration period investments—the 30-year period.

The current interest rates on the bonds are up to 6.5%, and the ministry is seeking to offer them at the previous rates of 5.78% on the $1.5bn dollar bonds after the recent economic reforms.

Have you chosen a stock exchange for the IPO?

The Initial Public Offering (IPO) will most probably be in the Luxembourg Stock Exchange, but that will be discussed with the winning investment banks.

The suitable timing from our point of view for offering the bonds is by the end of September or the beginning of October, but the timing of the IPO will be discussed with the IPO’s advisors, considering the liquidity in the financial markets and the presence of investors in the market at the same time.

Most importantly, we need to be ready to offer the bonds regardless of the timing of the IPO by selecting financial and legal advisors for the IPO to obtain approval for the procedures. We don’t want to be incapable of offering the bonds when the right time comes.

How will the Ministry of Finance and the Ministry of Petroleum cooperate on the debt and the savings resulting from the decline of oil prices globally?

The joint committees between the two sides will hold periodical and monthly meetings to discuss a number of topics such as taxes, subsidies, profits that devolve to the public budget, audits of the debt, the impact of the economic changes, and the growth of the production sector.

The value of the subsidy is EGP 27bn less than what was planned for it in the last FY’s budget, as a result of the decline in global oil prices. However, at the same time, the importing cost of a number of products increased. The increase ranged from EGP 23bn to EGP 25bn due to the rise in currency exchange prices.

In terms of how will we deal with the international financial institutions, we are ready and open to deal with all the institutions, and we will meet with the IMF, the World Bank (WB), the European Bank for Reconstruction and Development (EBRD), the African Development Bank (AfDB), and other financial institutions to study the financial and technical aids through reforming the public financial system and the institutional tax reports.

Once we approve the VAT law, we will have a greater opportunity to meet with these institutions and start the steps of the second segment of the WB’s $1bn loan.

The Ministry of Finance implemented the AfDB’s second segment’s requirements for the $500m loan, which included establishing an internal surveillance unit, approving the Civil Service Law, providing the general budget to the state—by improving the GDP—and working towards applying the VAT law.

How long is the IMF’s loan grace period, and what are the interest rates?

The IMF’s loan grace period will be roughly three and a half years, and the repayment will be within 10 years at an interest rate of 1.55% annually.

The government aims to improve the primary deficit of the general budget over three years at a rate of 5.5%.

The IMF’s loan agreement will be sent to the House of Representatives for approval, after the IMF’s board of directors gives the green light.

The government is obligated to achieve the general budget’s targets of the current fiscal year. We have implemented half of the economic reform programme that was agreed upon with the IMF in order to obtain the loan.

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