47. As illustrated in Table 4, Egypt’s spending on subsidies as a percentage of GDP is a multiple of what its peer countries allocate. While the government has moved forward with bold reforms intended to reduce fuel and electricity subsidies beginning in 2014, the devaluation has undercut the intended relief for the budget, and the subsidy bill remains high.

48. The observation that Egypt’s total expenditure level is relatively in line with that of its peer countries while current expenditures (which are primarily absorbed in non-productive or regressive uses such as interest payments and subsidies) are comparatively higher underscores the fact that the country is squeezing investment spending. Indeed, the relevant figures in Annex 2 illustrate that the Egyptian government’s investment spending is well below the level achieved by the comparison countries; this is particularly noteworthy as Egypt’s peers comprise low and lowermiddle income countries. Egypt is therefore not performing as well in allocating resources to investment even when compared to other economically and financially constrained countries.

49. Given the constraints on the Egyptian government’s resource base, government efficiency becomes crucial to increase the effectiveness and efficiency of overall spending – as does strengthening the government’s capacity to utilize the resulting created fiscal space. A wellfunctioning public expenditure management system would allow the expanding fiscal space to be effectively used for priority spending that consequently could produce a positive impact on the 2030 Agenda. Table 4 displays data for the World Bank Government Effectiveness indicator; Egypt’s government efficiency not only appears to be below expectations given its GNI per capita, but it has also exhibited a sharp drop, from the 69.2 percentile in 2000 to the 41.4 percentile. This deterioration can be attributed in part to the social and economic instability that Egypt witnessed following the uprisings and which, among other consequences, adversely affected the operations of government agencies.

50. However, as seen in Annex 2, Figure 2c, the Government Efficiency indicator appears to have improved between 2014 and 2015, suggesting that Egypt has shifted onto the right path as reforms began to be implemented. In this regard, it should be noted that even incremental efficiency improvements can yield substantial payoffs for growth as well as for additional desired outcomes. Thus, notwithstanding constraints on fiscal space, there is tremendous value in reorienting fiscal policy in pursuit of maximizing efficiency and incentivizing higher growth. This would generate higher receipts and perhaps trigger a virtuous macroeconomic circle in which growth and improving public finances mutually reinforce each other and lead to expanded fiscal capacity to meet the SDG goals.

51. The figures in Annex 2 indicate that Egypt is currently under-performing with respect to the three selected indicators for gauging domestic private fiscal space: domestic credit to the private sector (% of GDP); gross domestic savings (% of GDP); and market capitalization of listed companies (% of GDP). Domestic credit extended to the private sector has become limited due in part to the crowding out phenomenon, which is likely a significant factor in constraining the country’s growth performance. The high domestic cost of borrowing as well as the high rate of inflation has curtailed investment appetite; concurrently, banks appear to be unwilling to lend to private sector entities, depriving them of access to the funding needed to grow operations. Fiscal consolidation to reduce the Egyptian government’s demand for domestic bank financing would reduce overheating pressures and allow the Central Bank of Egypt to reverse the recent monetary tightening, creating more room for affordable capital to flow to the private sector.

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