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How COVID-19 widened Egypt’s budget gap

The coronavirus outbreak and the subsequent lockdown measures have largely affected Egypt’s budget deficit.
Mask-clad EgyptAir crew (safety measure due to the COVID-19 coronavirus pandemic) check the documents of travellers preparing to board an Airbus A320neo aircraft on the tarmac at Sharm el-Sheikh International Airport, in the Red Sea resort city at the southern tip of the Sinai peninsula on June 20, 2020. (Photo by Khaled DESOUKI / AFP) (Photo by KHALED DESOUKI/AFP via Getty Images)

The coronavirus pandemic has deepened Egypt’s state budget deficit to 6.5% of the gross domestic product (GDP) in the first 11 months of fiscal year 2020, which ended on June 30 — up from 6.2% of GDP for the same period a year earlier.

The deficit in the state budget was 389.1 billion Egyptian pounds ($24.3 billion) at the end of May, the Ministry of Finance said in a statement.

Revenue from the Suez Canal plunged 5.9% in the first 11 months of fiscal 2020 to 56.91 billion pounds ($3.56 billion), down from 60.5 billion pounds ($3.78 billion), another Finance Ministry statement said.

The state’s revenue from taxes fell to 601.4 billion pounds ($37.6 billion) from July 2019 to May 2020, compared to 616.4 billion pounds ($38.57 billion) in the same period a year earlier.

“The tax revenues fell because of the partial lockdown over the past months. An increase in the state budget deficit has been natural. However, it is not that significant,” Alia el-Mahdi, a professor of economics at Cairo University, told Al-Monitor.

The authorities imposed a nighttime curfew between March 25 and mid-June among other measures to combat the spread of the virus that causes COVID-19. The government reopened airports for international flights as of July 1.

“Revenues from tourism — which is a key hard currency earner — declined sharply due to the suspension of flights. Revenues from the Suez Canal and exports also fell. The coronavirus pandemic negatively impacted inflows of foreign direct investment. The decline in hard currency revenues has affected the foreign reserves at the central bank,” Mahdi said.

There were no tourist arrivals between March 19 and July 1 as Egyptian airports were closed for international flights. The country netted $13 billion from tourism in 2019, the Central Bank of Egypt said in a March 31 statement.

Mahdi pointed out that loans from the International Monetary Fund (IMF) and issuances of sovereign debt have made up for such a decline in hard currency inflows.

The IMF approved June 26 a 12-month Stand-by Arrangement to Egypt totaling $5.2 billion to address the balance of payments financing needs arising from the pandemic. On May 11, Egypt received a $2.8 billion loan.

Jihad Azour, director of the IMF’s Middle East and Central Asia Department, said July 13 that the Middle East and North Africa region had benefited by more than $17 billion. Most of those funds went to Arab countries like Egypt, which received $8 billion, according to Azour.

In June, Egypt received $400 million from the World Bank to support its transformational Universal Health Insurance System and to offer temporary financial protection to the most vulnerable across the country in order to protect them from high out-of-pocket health expenditures resulting from the COVID-19 outbreak. 

Public expenses rose by 6.8% to 1.171 trillion pounds ($73.4 billion), up from 1.096 trillion pounds ($68.7 billion), the Finance Ministry said in a statement. 

“The government paid 500 pounds [$31.40] to workers who lost their jobs during the lockdown. It also provided insolvent companies with financial assistance to overcome the crisis. Public health expenses also rose. That has lifted expenses,” Mahdi said.

She made it clear that the economic repercussions of the pandemic “have been inevitable.” She said, “There has been a slowdown as Egypt’s economy — which was forecast to expand by 5.6% to 5.7% before the COVID-19 pandemic hit the world — grew by 3.8% of GDP. However, the slowdown has not significantly affected the state budget deficit.”

Minister of Finance Mohamed Maait said the economy grew by 3.8% of GDP in fiscal year 2020. Egypt posted a 5.6% GDP growth in the first half of fiscal 2020, Planning and Economic Development Minister Hala el-Said said July 14.

“Egypt’s aggregate demand has shrunk since the coronavirus pandemic erupted. Successive governments worked on stimulating local demand to increase economic growth. Aggregate demand comprises four components: consumer spending, public spending, private investment and the boosting of exports,” Mahdi noted.

In a bid to push the domestic demand in order to get the economy back on track again, the authorities launched July 26 an initiative to boost local consumption. The initiative offers discounts up to 20% on consumer goods.

It is aimed at stimulating consumer spending to purchase locally made products. The authorities are seeking to incentivize factories to increase production via boosting consumer demand to create jobs and mitigate the repercussions of the pandemic.

“Certainly it is a good move. However, the initiative would bear fruit when low-income people have money to spend on consumer goods. The poor spend much of their income on consumer goods. Some of them have lost their income due to layoffs,” she said. “Of course, consumer spending is important, but stimulating private investment is more crucial as the private sector accounts for roughly 75% of jobs in Egypt.”

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