EGYPT: PRIME MINISTER SPEAKS ON ECONOMY AND DOMESTIC

UNCLAS CAIRO 000605 SENSITIVE SIPDIS STATE FOR NEA/ELA E.O. 12958: N/A TAGS: ECON EINV EFIN ETRD PGOV EG SUBJECT: EGYPT: PRIME MINISTER SPEAKS ON ECONOMY AND DOMESTIC SPENDING Sensitive but unclassified. Please handle accordingly. ¶1. (U) KEY POINTS -- On April 6, Egyptian Prime Minister Ahmed Nazif addressed the Egyptian parliament and discussed the global economy and President Mubarak's proposed budget for fiscal 2009/10. The key points he made were: -- The Egyptian economy continues to grow, but growth is slowing. -- GOE revenues in both local currency and foreign exchange are falling. -- The proposed LE323 billion (US$57.68 billion) budget for FY2009/10 that begins July 1 is 6.1% lower than last year, but because of lower revenues the fiscal deficit is slated to rise by 50% to LE100 billion (US$17.86 billion) or 8.4% of GDP. -- The draft budget includes increases in spending on both health and education. These increases will be financed by lower costs in the GOE subsidy program resulting from falling oil and commodity prices. The PM Addresses Parliament -------------- ¶2. (U) In an April 6 speech to the Egyptian Peoples Assembly, Egyptian Prime Minister Ahmed Nazif discussed the current global economic situation and the role of the GOE in mitigating the impact of the financial crisis. Nazif pointed out that while many countries were facing negative growth rates, Egypt's economy continued to expand. He added that Egypt has been helped by its strong reform program and solid banking system. He admitted that the financial crisis was having an impact on the overall economy, and GDP growth was expected to slow to four percent this fiscal year (which ends June 30, 2009). ¶3. (U) Nazif told the Assembly that Egypt is facing many fiscal challenges. Suez Canal revenues have decreased by almost 20% during the last seven months, and revenues from customs duties, sales tax and income tax are all declining, which impact the GOE fiscal situation. He expects the declines to continue in the coming fiscal year, and the GOE is projecting a reduction in revenue and spending levels in the new state budget for FY2009/10. GOE Spending and Fiscal Issues -------------- ¶4. (U) Nazif discussed how private-sector employment and investment are also being negatively affected, but argued that the government is determined to take actions to diminish the impact of the slowdown. Looking at the forthcoming budget, Nazif foresees expenditures in FY 2009/10 of LE323 billion (US$57.68 billion) and revenues of LE224 billion (US$40 billion),leaving a deficit of LE100 billion (US$17.86 billion). This compares with expenditures of LE344 billion (US$61.43 billion) and revenue of LE277 billion (US$49.46 billion) planned in the current fiscal year. Nazif said that Egyptian President Hosni Mubarak has promised a wage increase for public-sector workers this year. Despite overall smaller spending amounts, the draft budget proposal increases spending on wages from LE77 billion (US$13.75 billion) in FY08/09 to LE86 billion (US$15.36 billion). Nazif affirmed that bread subsidies and the price of subsidized "baladi" bread (LE.05, or US 1 cent per loaf) will remain the same. ¶5. (U) According to Nazif, the GOE is planning to increase the education budget by a third from LE36 billion (US$6.43 billion) to LE48 billion (US$8.57) and the health budget from LE13 billion (US$2.32 billion) to LE15 billion (US$2.68 billion). Nazif explained that the new expenditures would be partially financed through costs savings in the government's subsidy program as a result of lower global commodity prices. The new budget will result in an increase in the budget deficit from 6.9% to 8.4% of GDP. ¶6. (U) The government, Nazif stated, is also encouraging private investment and is planning to establish 52 industrial "mega projects" with investments totaling 114 billion pounds (US$20.36 billion). Education -------------- ¶7. (U) Nazif stated that improving the education system in Egypt is vital for Egypt's development. Egypt's population is rising quickly, and the government must plan to provide suitable education for the coming generations. He added that improving the quality of education and vocational education in particular is necessary to help workers develop the skills required for the Egyptian economy. ¶8. (U) The prime minister reported that during the last ten years, the GOE has built 14,000 new schools, and it plans to establish an additional 3500 new schools in the next few years (3000 will be built by the state and 500 by the private sector). According to Nazif, the GOE is focused on improving the quality of Egyptian education through physical improvements to schools and upgrading IT equipment along with improving curricula and education management. Nazif made special note of the work by the Egyptian First Lady, Suzanne Mubarak, in launching a program for maintaining and upgrading 100 existing schools. COMMENT -------------- ¶9. (SBU) Comment: The contours of the draft budget first started becoming public on March 25 once President Mubarak began discussing the draft budget with his cabinet. This year, the GOE has started its discussion of the budget earlier than in the past, partially as a result of the constitutional amendments adopted several years ago which require a longer consultation period with the parliament. The fiscal year starts July 1, and between now and then we expect to see Finance Minister Boutros Ghali testify several times before parliament, but the broad outlines of the budget will likely not change. ¶10. (SBU) The planned nominal reduction in overall expenditure and revenue is remarkable. It will be interesting to see if the GOE succeeds in reducing expenditures as far as is planned, given that so many budget costs are fixed, and there are mounting social pressures to "respond" to job losses which have begun to materialize. Revenues remain the wildcard in the current economic downturn, as it is quite difficult to predict the timing of the global economic recovery. The budget deficit decreased slowly from 9.6% to 6.8% of GDP over the past four years, and this will mark the end of that trend. If revenues fall faster than anticipated, it is possible, as some analysts are already projecting, that we could see a deficit as high as 9.5% of GDP, which would exceed the level of 9.2% that Finance Minister Boutros Ghali inherited in 2004 when he committed to reducing the deficit to 3% by FY10/11. ¶11. (U) The cost of subsidies in the new budget will be LE58 billion (US$10.36 billion),which if accurate, would be less than half of LE134 billion (US$23.92 billion) budgeted in FY08/09. Both of those numbers will depend on world oil prices. The prime minister did not specifically address the additional LE15 billion (US$2.68 billion) for investment that Boutros Ghali has said would be part of the FY2009/10 budget. SCOBEY