Egypt’s inflation temporarily softens in April; more social spending assigned in new budget

Egypt's annual core inflation slightly decreased to 38.6% in April from 39.5% in March, according to data from the Central Bank of Egypt (CBE). Still, April's annual headline inflation remains well above the rate seen in April 2022 (14.9%), according to Central Agency for Public Mobilization and Statistics (CAPMAS) readings.

To alleviate the pressures of inflation and in tandem with interest rate hikes, authorities announced that spending on subsidies and social safety programs would increase by 50% in the new budget for FY2023-24 that starts on July 1. A 150 billion Egyptian pound government package came into effect at the start of April that includes 10 billion Egyptian pounds in wage and pension hikes and a 25% increase in cash transfers under the Takaful and Karama social support program.

The new budget also shows that the country's primary surplus is expected to hit 2.5% of GDP, which is the highest target the government sets within its efforts to cut debts. The government expects to bring in 70 billion Egyptian pounds (US$2.26 billion) through its privatization program next year, under which it hopes to sell stakes in many companies in the privatization program by the end of the third quarter of FY2023-24.

Total revenues are expected to grow by 38.4% in the new budget, while tax revenues are expected to climb by 28% due to the expansion of the tax base and the registration of new financiers.

Finance Minister Mohamed Maait said that allocations for subsidies, grants, and social benefits under the budget for FY2023-24 grew by 28.2% year over year. The budget includes subsidizing food commodities at an annual growth rate of about 20%, subsidizing petroleum products at a growth rate of 24%, subsidizing exports at 462.5%, and health insurance and medicines at an annual growth rate of 50.4%.

Rising interest rates, higher commodity prices, and the impact of the Egyptian pound's devaluation on the country's import bill are all putting pressure on the public purse. The projected average interest rate on government bonds and bills this fiscal year has risen to 18% from the 14.5% estimated in the budget, while the prices of oil and wheat have risen above the benchmark price used to calculate the budget. The ministry expects to spend 1.12 trillion Egyptian pounds on debt service in the coming year, up 45% year over year. This accounts for 37% of the government's total spend during the year. The amount of new borrowing is earmarked to increase by 22% in FY2023-24, with authorities expecting to sell 2.04 trillion Egyptian pounds in new treasury bills and bonds.

The budget document will be discussed in committees, and it should go up for a vote at the general assembly before the start of the new fiscal year on July 1.

Outlook

With a short-lived breather from elevated inflation, we expect prices to accelerate in May owing to some developments. Authorities hiked the price of diesel at the end of April. With diesel being the mostly widely used consumer fuel in the country, used in transportation, agriculture, and industry, the impact of a hike in its price has a much higher magnitude on general inflation levels compared to gasoline. S&P Global Market Intelligence estimates this recent increase to feed into headline inflation in May.

Additional price pressures will ensue in the coming months, factoring in the authorities' decision to hike subsidized food staples for ration card beneficiaries, to rein in rising food subsidy bills, further weakness in the Egyptian pound, and a resumption in hikes in electricity tariffs. Market Intelligence analysts maintain their 2023 average inflation forecast at 33%, with risks still largely tilted to the upside.

Although we anticipated a temporary deterioration in debt affordability in fiscal 2023 and 2024 in general government terms, a sustained increase in general government revenue allocation to interest payments reduces the government's capacity to continue servicing the debt stock even if it remains committed to running primary surpluses. On the external side, currency depreciation negatively inflates the value of foreign currency-denominated debt, lowering the prospects of a meaningful reduction in the general government debt-to-GDP ratio, which we project at almost 96% before edging slightly down in FY2023-24.

We expect foreign direct investment inflows to remain steady around 2.5% of GDP on the privatization push. Multi-lateral and bilateral support will continue at the same rate, in our view, but commercial financing could remain challenging. We do not expect direct Eurobond market access in the near term, but authorities could seek bonded financing via Samurai, Panda, and other similar alternative issuances. Given limited exposure to external commercial financing, we think domestic financing will continue to bear the brunt of elevated fiscal needs, with interest rates driven by the policy rates.

We estimate that Egypt's total interest-to-revenue ratio could cross 50% in FY2023-24. However, the bulk of the interest spending is domestic and external interest expense will likely only rise to 7% to 8% of revenues in the new fiscal year. The CBE has been on a persistent monetary tightening path over 2022 owing to significantly higher inflation, leading to a continuous rise in government borrowing costs. This is likely to keep the fiscal deficit elevated over the next three years, averaging above 7% in our view, even as authorities target a 2.5% primary surplus in FY2023-24.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.