Egypt faces budget crisis because of rising oil prices

Egypt has gone from being an energy exporter to a net importer.
Sunday 04/02/2018
An Egyptian petrol station worker fills up a vehicle’s tank in the capital Cairo.          (AFP)
Upward trend. An Egyptian petrol station worker fills up a vehicle’s tank in the capital Cairo. (AFP)

CAIRO - Egypt is facing a budget crisis and may be forced into further debt due to rising oil prices.

Budget planners based their assessment of total spending in the 2017-18 budget, which will end in July, at $55 per barrel of oil. However, the price of oil has risen to $70 a barrel. This would throw Egypt’s projected budget out of balance and increase the deficit.

“We did not expect the price of oil to rise that dramatically,” said Mohamed Moiet, the deputy finance minister for treasury affairs. “This rise will cause the budget deficit to increase.”

A $15 increase in the price of each barrel of oil would raise the budget deficit for Egypt as much as $2.3 billion. Egypt is heavily reliant on oil imports, mostly from Saudi Arabia and Iraq, to meet its energy needs, with estimates indicating that Egypt will spend $9.5 billion on oil imports.

Cairo recently renewed a contract to import 12 million barrels per day of Iraqi crude oil over the next year.

Egypt has gone from being an energy exporter to a net importer as domestic output failed to keep pace with demand. Cairo is hoping that the exploitation of Zohr, a massive natural gas field off the Egyptian coast, will return stability to the country’s energy sector.

However, fuel subsidies remain an issue. In the 2016-17 budget, fuel subsidies amounted to $2 billion. In 2017-18, that figure has been raised to $6.2 billion due to the rise in the exchange rate of the US dollar against the Egyptian pound, one consequence of the November 2016 currency flotation.

The same policy change raised the amount Egypt owes in debt services every year. Egypt specified almost one-third of total spending in the 2017-18 budget of $68 billion to pay off foreign debt.

Financial planners were hoping to bring the budget deficit down to 4.4% by 2022. The budget deficit in the last fiscal year 2016-17 stood at 12.5% and there were hopes that the deficit would be down to 9.1% by the end of the current fiscal year.

Moiet said to make up for the rise in the price of oil and its effect on total spending in the budget, Egypt will have to borrow, either with loans from international creditors or by issuing foreign or national currency bonds.

“This will be the only solution for us to even slightly bridge the deficit,” he said.

This, however, will increase overall debt even more. Last June, Egypt’s foreign debt increased 41.6%, reaching $79 billion on a year-on-year basis.

Cairo has tried to bring the budget deficit down by stimulating domestic production to satisfy local demand and reduce imports. It has raised customs duties on imported commodities to give locally produced goods a competitive edge.

This policy is paying off. In 2017 overall imports fell from $66.3 billion in 2016 to $56.8 billion, the Ministry of Foreign Trade and Industry said. Exports increased 10% in 2017, to $22.4 billion, over 2016 the ministry said.

Stimulating production, economists said, would ease the budget deficit by reducing imports and raising exports.

“Production is the only way out,” said MP Mohamed Fouad, a member of the Parliamentary Budget and Planning Committee. “Increased production and exports will help Egypt evade borrowing as a solution.”

Another measure Egypt plans to take to reduce the budget deficit is to eliminate fuel subsidies. In November 2016, the government slashed fuel subsidies almost 50%, briefly reducing pressure on the budget. However, it ended up pumping in more money in the form of subsidies because of the rise in the price of oil on international markets.

The elimination of fuel subsidies is expected at the beginning of the new fiscal year in July. However, analysts warned that the move could lead to protests, particularly as some said that policy would likely increase commodity prices and raise the inflation rate.

Consumer inflation was 21.9% in December, down from 26% a month earlier.

“The fact is that the government walks a very fine line between the need to reduce the budget deficit and the need to keep the inflation at a low level,” said Fakhry el-Fiky, an economics professor at Cairo University. “To do this and avoid putting more pressure on consumers, the government needs to increase production and attract investments.”

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