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Cablegate: Egyptian Subsidies Hit the Fiscal Bottom Line Hard

VZCZCXYZ0003
PP RUEHWEB

DE RUEHEG #1863/01 2380500
ZNR UUUUU ZZH
P 250500Z AUG 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 0301
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS CAIRO 001863

SENSITIVE
SIPDIS

DEPT FOR NEA/ELA
TREASURY FOR BEN DENNIS AND CHARLES MORAVEC
COMMERCE FOR TOM SAMS AND NATE MASON

E.O. 12958: N/A
TAGS: ECON EAID EFIN EINV EG
SUBJECT: EGYPTIAN SUBSIDIES HIT THE FISCAL BOTTOM LINE HARD

REF: 08 CAIRO 587

--------
Summary:
--------

1. (U) Recent data released by the GOE on spending during
fiscal year 2007-8 (July-June) highlight the impact of
inflation and the rising cost of government subsidies on the
GOE budget. Sharp increases in revenue due to economic growth
and tax increases were offset by a 25% increase in public
spending. The cost of fuel and food subsidies has risen
dramatically and continues to feed high budget deficits. GOE
officials are cautiously optimistic that inflation will
subside somewhat in the coming year, but admit that the GOE
fiscal deficit remains an obstacle to long-term economic
stability. End Summary.

----------------
Up, Up, and Away
----------------

2. (U) Preliminary budget results for the 2007-2008 fiscal
year (July-June) highlight the severe impact on the Egyptian
budget of increasing global commodity prices as well as the
cost of GOE responses to threats to "public stability."
Overall public spending climbed to LE 277.4 billion ($52.3
bn) -- an increase of 25% over the prior year and slightly
above the LE 273.6 billion ($51.6 bn) previously projected by
the IMF. Increases in taxes to offset government wage hikes,
along with government revenue increases driven by continued
strong growth in the economy, aided a small decline the GOE
fiscal deficit from 7.5% of GDP in 2006-7 to 6.8% of GDP in
2007-8. The GOE reported that tax revenues grew by 20.2% y/y
and non-tax revenues climbed by 23.1%.

---------------------
Subsidy Costs Explode
---------------------

3. (U) The cost of GOE subsidies in 2007-8, primarily for
food and energy, grew by 56% compared to the prior year,
reaching LE 84.2 billion ($15.9 bn) including LE 60.3 billion
($11.4 bn) for fuel and LE 16.5 billion ($3.1 bn) for food.
These subsidies account for 30% of total public spending.
This level of spending leaves little room for expenditures in
other vitally important areas, despite rising need. As an
example, in 2007-8 the GOE spent only LE 32.9 billion ($6.1
bn) on education and LE 12.7 billion ($2.4 bn) on public
health -- when combined still 25% less than what the GOE
spent on the fuel subsidy alone.

---------------------------
Inflation Remains a Concern
---------------------------

4. (U) Inflation continues to be high. In July, inflation
accelerated to 22.2% y/y (vs. a June figure of 20.2% y/y)
with food inflation hitting nearly 29.9% y/y according to
statistics released by the Central Agency for Public
Mobilization and Statistics (CAPMAS). Continuing inflationary
pressure led the Central Bank, on August 7, to raise
overnight deposit and lending rates by 50 basis points to 11
and 13% respectively.

5. (SBU) Hany Kadry Dimian, Deputy Minister and Director of
the Macro-Fiscal Unit of the Ministry of Finance told Econoff
that he felt that the Egyptian economy had almost fully
digested the wage hikes and the rise in commodity prices, and
inflation had peaked. He expected average inflation to drop
to the 9-10% range in the 2008-2009 fiscal year. This view
was echoed by the Hisham Ramez, Deputy Governor of the
Central Bank, in a meeting August 20. Ramez commented that he
felt inflation would return to more "normal" levels
(somewhere below 8%) over the next 12 months, albeit from a
much higher base. Ramez also emphasized the importance of
lowering the fiscal deficit.

-------
Comment
-------

6. (SBU) The GOE is very conscious of the public sensitivity
to any changes in the prices of subsidized commodities,
particularly food. Shortages of subsidized bread resulting
in long bread lines and heightened public anxiety about bread
prices have prompted President Mubarak to involve the
military in baking and bread distribution (reftel). Recent
drops in commodity prices, if sustained, may alleviate some
near-term fiscal pressure; however, the subsidy regime
remains a long term constraint on the GOE budget. To reach
the planned reduction in the fiscal deficit to 3% of GDP by
2011, significant spending reforms are unavoidable.
Additionally, reforming the subsidy system in a country that
has long resisted such change will require courage,
leadership, and a public relations acumen that the GOE
frequently lacks.
SCOBEY

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