Moody's expects higher budget deficit despite introduction of VAT

Tuesday 06-09-2016 10:35 PM

Moody's Investors Service

CAIRO, Sept. 6 (Aswat Masriya) - After the Egyptian parliament passed the value added tax bill, Moody's forecasted that Egypt's budget deficit will increase to 12 per cent in fiscal year 2016/2017 compared to 9.9 per cent as predicted by the government.

The House of Representatives approved the VAT bill at a rate of 13 per cent, lower than the government's proposed 14 per cent rate, on Aug. 29.

The VAT is a general, broadly based consumption tax assessed on the value added to goods and services, according to the European Commission. It is set to replace the sales tax and broaden the tax base in an attempt to reduce the budget deficit.

In its statement on Monday, Moody's said that the lower tax rate and the higher number of exempted goods and services "will result in a revenue shortfall of EGP 12 billion, equal to one third of the VAT revenue increase assumed in the current budget for fiscal 2017."

However, Moody's stated that the VAT is credit positive, as Egypt's low tax receipts would gradually increase thus supporting its fiscal consolidation efforts. In addition, the shortfall in revenues will be made up in fiscal year 2017/ 2018 when the VAT rate increases to 14 per cent. 

The implementation of the VAT will also "unlock external funding from multilateral sources such as the World Bank and the African Development Bank," Moody's added.

Regarding inflation, Moody's said that the VAT will exacerbate already high inflation amid widely discussed currency devaluation.

Egypt's urban consumer inflation rate rose to 14.8 per cent in June from 12.9 per cent in May, according to the state's official statistics agency. The rate remained unchanged in July.

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