Govt cuts spending on investment, increases social spending to meet IMF recommendations, financial sector figures say

The president announced a new LE180 billion social support package on Wednesday, the third such measure in under a year, three days after the government introduced measures to cut state spending on investments.

The measures are likely part of a sequence of steps the government is taking as it works to revive the stalled loan program with the International Monetary Fund, said two figures in the financial sector who spoke to Mada Masr.

An IMF delegation was in Cairo last week to discuss the rearticulation of the program and a framework for an agreement that would see the loan amount increased to a degree commensurate with the economic reforms the government is willing to implement.

The international financing institution postponed paying out millions to Egypt over the last year, owing to the government’s slow implementation of key policy recommendations on which the disbursement of installments is conditioned, including currency devaluation. The government and the IMF have so far agreed twice to push back deadlines for reviewing the program’s progress.

In addition to currency devaluation, the IMF also recommended at the outset of the loan agreement in 2022 that Egypt “manage” national investment projects in line with a sustainable balance of payments and economic stability.

“In order for the IMF to have a guarantee for the loan, [state] expenses must be put under control,” head of research at Arabeya Online Brokerage Mostafa Shafie told Mada Masr, commenting on the correlation between the new regulations on investment spending and the anticipated loan restructuring and increase agreement with the IMF.

The government is to reduce state spending on investment by 15 percent under the FY 2023/24 economic development plan, as per the decision it took on January 31. Investment projects under the defense and interior ministries are exempted, as are those initiated by the Health Ministry. But otherwise, the regulations apply to all entities “included in the state’s general budget, as well as general economic authorities.”

No new projects are to be added to the national investment plan for either the current year or the previous fiscal year. Work and funding will only be allowed to continue on projects that are already 70 percent complete. All other projects are prohibited from initiating any new related contracts, either directly or through public tenders. The government will also be prohibited from buying passenger cars until June, when the fiscal year ends.

Even though the decision will only apply to the final four months of the current fiscal year, “it might tone down pressures on the state budget in order to achieve gross domestic product growth,” said Shafie, adding that it could theoretically be extended to FY 2024/25 as well.

The LE180 billion social spending package, meanwhile, is to be activated in March. It will include a 50 percent raise to the public sector minimum wage, hiking it from LE4,000 to around LE6000 per month.

The package also includes LE74 billion in spending to increase state pensions for 13 million people by 15 percent and another LE5.5 billion for a 15 percent increase in payouts for those who qualify for the Takaful and Karama program.

LE6 billion is also to be spent on hiring 120,000 public sector medical professionals, teachers, and workers in other administrative agencies — an exception to a previously existing freeze on government hires.

With the devaluation of the Egyptian pound against the dollar being another key IMF recommendation that the government is expected to implement, Shafie described the social spending measures as a proactive way for the state to confront the social impact of the inflationary pressure that will come about as a result of the new IMF agreement.

The rate of increase to the minimum wage implies that the official exchange value of the Egyptian pound is likely to fall sharply, said a financial analyst at an investment company who spoke to Mada Masr on condition of anonymity.

Social protection packages were also introduced by President Abdel Fattah al-Sisi in July and September last year as a way to support the population amid the economic crisis. Social spending was among the IMF’s 2022 recommendations, which advised that Egypt should “strengthen social safety nets to protect the vulnerable.”

The new government policies also come alongside news of potential inflows, which the government is awaiting to support its foreign currency reserves and reduce the impact of liberalizing the currency’s exchange value.

But aside from their relation to the loan program, Shafie and the financial analyst noted that the new policies could have other downstream effects.

“There might be national projects that have not reached a certain percentage of implementation [less than 70 percent] where employment could witness a halt, and this could lead to an increase in unemployment rates in the coming period,” said Shafie.

The financial analyst, meanwhile, noted that while the minimum wage increase could help public sector employees cope with an increased cost of living after devaluation, wage increases also have an inflationary impact in themselves that redoubles the impact of inflation caused by increasing demand each year in Ramadan.