Higher Debt Service Bill to Widen Egypt’s Budget Deficit in FY2023/2024: Report

Egypt’s budget deficit will increase by one percent in the fiscal year (FY) 2023/2024 to account for 7.1 percent of GDP, up from 6.1 percent in FY2022/2023, due to the increase in debt service payments, according to a report by Investment bank HC Securities and Investment.

The report expects GDP growth rate to reach four percent in FY2023/2024, which is slightly lower than government estimates of 4.1 percent but higher than the 3.6 percent predicted by the International Monetary Fund (IMF) in an October report.

Interest payments accounted for 60.3 percent of Egypt’s total expenditure in the first three months of FY2023/2024. As a result, Egypt’s expenditure surged to EGP 790.86 billion in July-September from EGP 466.42 billion a year earlier.

In a gloomier scenario in which tourism revenue drops 15 percent owning to Israel’s war on Gaza War in Palestine, HC economist and financial analyst Heba Monir predicts that GDP growth could decelerate to 3.3 percent in FY2023/2024.

The war has already had an impact on tourism, with 50 percent of tourism bookings in Sinai being cancelled in the first weeks of the war, according to a top executive who spoke to Ahram Online in October.

Independent of the gloomier scenario, Monir also expects the Egyptian pound to lose 19 percent of its value in FY2023/2024, which would push the average inflation for the year to 33.2 percent, up from 24.1 percent in FY2022/2023.

Since March 2022, Egypt has devalued its currency three times in response to a foreign-currency crunch. With these three waves of devaluation, the pound has lost over 75 percent of its value against the US dollar since March 2022.

Monir stated that the CBE is likely to hold interest rates unchanged in its next meeting on 21 December, as inflation is on the supply side, which means that inflation is caused primarily by factors affecting the availability or cost of goods and services rather than excessive demand from consumers.

In the latest monetary policy meeting on 2 November, the CBE maintained interest rates after raising them by a total of 11 percent since March 2022.

Since March 2022, the CBE has hiked the key interest rates by 11 percent (1100 bps).

“In 2024, we expect an improvement in the government's partial asset sale programme, tourism, Suez Canal, and Egypt's worker remittances to possibly trigger the start of monetary easing, which would lead to a higher GDP growth in FY2024/2025, on our numbers,” Monir predicts.

“In our view, Egypt's commitment to the IMF's reforms, most importantly levelling the playing field with the private sector, is essential to attract FDIs again and restore FX liquidity,” she added.

Remittances from Egyptians abroad, which traditionally surpass the Suez Canal or tourism revenues, tumbled 30.8 percent in FY2022/2023 to $22.1 billion, down from $31.9 billion in FY2021/2022.

As for the privatization programme, the Egyptian government plans to attract $5 billion from the offering of power plants and state-owned companies from October 2023 until the end of June 2024.

The programme is a part of Egypt’s commitment to the IMF based on a $3 billion four-year loan agreement which has suffered multiple hurdles that impeded the first and second of eight planned reviews on the Egyptian economy to disburse the loan installments.