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