Where does social protection spending stand in Egypt’s 2nd COVID-19 budget?

The new fiscal year is set to begin in July, and just like the last year, Egyptian officials are preparing the budget in the middle of the COVID-19 pandemic. However, unlike the budget for FY 2020/2021, which was based on projections preceding the global economic downturn, officials are preparing next year’s budget with the pandemic fully in mind. 

While the budget may still be subject to revision, Finance Minister Mohamed Maiet provided the first snapshot of the new fiscal year in a briefing before the House of Representatives last week. In light of the austerity measures that have been a hallmark of Egypt’s economic policy in the leadup to and following the US$12 billion agreement with the International Monetary Fund in 2016, Mada Masr breaks down the social protections aspects of the proposed budget.

Social protection measures include a number of line items for spending on health, education and subsidies.

For the upcoming fiscal year, the health sector has been granted priority in the proposed budget, with expenditures nominally increasing by 16.27 percent — a 9.27 percent real increase when the average expected inflation of 7 percent is factored in. Likewise, earmarks for education also saw a nominal growth of 9.56 percent, or a real growth of 2.56 percent adjusted for average inflation. 

In contrast, funds for subsidies, grants and social benefits came in at the bottom of the government’s list of priorities. The chart below illustrates the nominal and real growth rate in expenditure items in the general budget.

Even with these increases, however, the budget has yet again failed to meet the constitutionally mandated spending minimum for health and education. 

According to the Constitution, the state must allocate at least 3 percent of gross national product to spending on the healthcare sector. In 2016, the House of Representatives used gross domestic product to calculate the expenditures due to a shortage of data on GNP. GDP refers to the total value of production within the country, where as GNP includes production by Egyptians beyond the country’s borders, including Egyptian investments abroad, for instance. The Constitution also stipulates that the state must allocate 6 percent of GNP to spending on education, which includes both primary and higher education.

The chart below shows spending on health and education as a share of GDP in the proposed budget for FY 2021/2022 compared to the percentage set out in the Constitution.

When it comes to subsidies, the government has allocated up to LE321 billion in support for the coming fiscal year. However, about LE21 billion of this is being carried over from allocations that were unused in the LE326 billion budget for FY 2020/2021.

The chart below illustrates expenditure priorities for several items in the budget concerning subsidies, grants and basic social protection as a percentage growth in the new fiscal year’s budget compared to the current budget.

Heba al-Laithy, a statistician at Cairo University and an advisor for the Central Agency for Public Mobilization and Statistics (CAPMAS), thinks that the relatively small growth in food subsidies – which does not keep pace with expected inflation – is linked to the state’s plan to exclude anyone who is “undeserving of food supplies.” This would in turn decrease the overall cost of such support.

“This direction in and of itself is fine,” Laithy says, “as long as those who are excluded really don’t deserve the subsidies. But on the other hand, the funds saved from excluding certain people shouldn’t be thought of just as a way to decrease the cost of food subsidies with an aim to only reduce expenses. Rather, these funds ought to be reallocated to deserving families by increasing their food subsidies, which didn’t happen.”

The proposed budget aims to bring the number of beneficiaries of food subsidies down to 63.2 million individuals from the 64.3 million per a December announcement by the Supply Ministry and 71 million beneficiaries in FY 2017/2018. The decline in the number of beneficiaries has not been accompanied by an increase in the size of subsidies per family still on the program.

“Regarding cash-transfer support, such as social security and the Takaful and Karama programs, it is natural that some families would stop receiving monetary support after their situation improves. Therefore, conditions to receive such support wouldn’t apply to them, and this would allow other families to enjoy it,” according to Laithy. “But maintaining the total cost of monetary support this way means that the real value of support directed to families has decreased due to inflation, especially as cash transfers should have expanded significantly. In other words, the exclusion of some families should have stopped and the total number of benefiting families should have increased to confront the social repercussions of the pandemic. This did not happen in either the current budget or in the one proposed for the next fiscal year.”

For Laithy, an approach to confront poverty cannot be solely based on spending on health and education without improving spending on subsidies as well. “Fiscal policies that direct allocations to health and education contribute to confronting poverty at a medium and long-term interval. Meanwhile, subsidies confront poverty in the short term. Therefore, it isn’t enough to improve spending on health and education as social protection without improving subsidies.”

Noaman Khaled, an economist and the assistant director of research at Arqaam Capital Investment Bank, thinks that the government is basing proposed budget for the coming fiscal year on an assumption that the indirect economic and social implications of the COVID-19 pandemic will come to an end because economic activity is returning – at least, gradually – to normal. Therefore, the government is not prioritizing confronting the implications of the pandemic by spending on subsidies, grants and social benefits in general. Alternatively, in the government’s view, it is necessary to fix the direct implications of the coronavirus spreading in the form of reforming the health system by spending on the health sector, Khaled says.

For Khaled, the government’s top priority in the budget is to decrease expenditures and increase revenues in order to reduce the budget deficit and public debt, as well to halt any extraordinary spending related to confronting the economic implications of the coronavirus, including expenditures directed to supporting economic activity.

As part of its agreement with the IMF in 2016,  the government has been reigning in its budget deficit, which sat at 12.5 percent of GDP in FY 2015/2016. In the proposed budget, the aim is to cut the deficit down to 6.6 percent from last year’s 7.7 percent. 

“The priority on cutting the budget deficit is due to a need to improve Egypt’s credit rating, which seems stable at its current. But it isn’t improving either because of the current deficit. Credit rating institutions see a need to reduce it to 3 percent on average, which is the prevailing average in emerging markets.”

Since inking the US$12 billion loan, Egypt has increasingly relied on external debt to stabilize its economy. However, it also has to make payments on these external debt obligations which come in at about 90 percent of GDP. 

In its September 2020 country report on Egypt, the IMF notes that “a significant portion of external debt is scheduled to mature in the next years, in part reflecting the maturity of large deposits of several Gulf Cooperation Council members at the CBE.” Highlighting the importance of its credit line, the IMF report writes Egypt has approached “creditors with a view to rolling them over at longer maturities and have already rolled over at least $6 billion of the $13.4 billion that is scheduled to mature during FY2019/20 and FY2020/21.”