x Abu Dhabi, UAESaturday 22 July 2017

Egypt to re-evaluate subsidies for the poor

Egypt's government is evaluating plans to restructure its food and energy subsidy system, which critics say is wasteful and inefficient.

People wait to buy subsidised bread at a government kiosk in Cairo. Egypt's poor heavily depend on bread.
People wait to buy subsidised bread at a government kiosk in Cairo. Egypt's poor heavily depend on bread.

CAIRO // Egypt's government is evaluating plans to restructure its food and energy subsidy system, which critics say is wasteful and inefficient. Among the reform plans under review, one of the most likely proposals would transform the country's "in-kind" subsides, which reduce prices for such products as bread and cooking fuel before they reach the market, to a payment system that would directly reward poor Egyptians with cash handouts.

If the government decides to adopt the proposed reform - it is already running pilot programmes in several governorates - once-subsidised commodities could face more cost-efficient market principles, say the programme's proponents. In a country in which nearly 44 per cent of the population lives on less than US$2 a day, any change to the subsidies scheme will be controversial and closely watched. Although few Egyptian economists would leap to defend the status quo, many say the new plans are part of the Egyptian government's broader proposals to introduce market-based economic principles to Egypt's state-dominated economy.

Such plans, some economists say, may come at the expense of the country's impoverished millions. "It's part of a wider range of thinking. With the free market economy, the government is getting away from production by privatisation and so on, and also getting away from anything that has to do with the distribution of goods," said Ibrahim el Eissawy, an economist at the Institute of National Planning. "This is wrong, especially when you speak of bread. Bread is a basic need, and the poor depend heavily on bread."

Perhaps the most compelling proposal to change existing subsidies is a plan that would give each impoverished Egyptian more than 13 Egyptian pounds (Dh9) every month to compensate them for a lack of bread subsidies, which the government would withdraw under the plan. Such an idea would replace a system under which subsidies are built into each product's price and from which all consumers stand to benefit, whether rich or poor. For example, anyone can now purchase a subsidised loaf of bread for five piastres - far less than the 20-piastre market rate.

The advantage of a cash-directed system, say the idea's supporters, comes from its target: money leaps straight from government coffers into the hands of those who need it most. "I could say that the rich people benefit more than the poor people" under the current system, said Ali Lotfi, a former Egyptian prime minister and finance minister. Particularly when it comes to such energy subsidies as the one on imported butane cooking gas, wealthy Egyptians can reap substantial rewards, he added. The Egyptian government purchases each gas cylinder for 40 Egyptian pounds and sells it to consumers for less than three pounds.

"I am a rich man. I need three or four [cylinders] per month. So I take almost 150 pounds per month. The poor family takes one [cylinder] and they take about 30 to 35 pounds," Mr Lotfi said. That may indeed be wasteful, but the main problem with directed cash welfare payments, Mr el Eissawy and other opponents of the plan said, was that the government knew nothing about Egypt's poor. "To give direct cash subsidies requires that you should know who deserves these subsidies. This is very difficult," Mr el Eissawy said. "So it is not easy to identify, say, 40 million people in Egypt as deserving subsidies. This is bound to be a very costly process."

That process has already begun. Officials with the ministry of social solidarity, which manages government subsidies, launched pilot automated food distribution programmes in a handful of governorates in 2006 and 2007. The project, which uses a digital "smart card" to monitor consumer purchases as well as store inventories, is now operating in 19 governorates around the country. By June, the ministry hopes to have distributed cards and installed card-readers in grocery stores throughout Egypt's 29 governorates, said Noha Kaptan, an information and infrastructure adviser at the ministry.

Some economists said that in reality the monumental task would make the inefficiencies of the current system look puny. "Until now, you have not been able to cover all of the Egyptian population with a national identity number, which means that there are people out there who you hardly know anything about and most of them need the subsidy, so how can you reach them?" asked Gouda Abdel Khalek, an economics professor at Cairo University.

As for complaints about the rich pilfering subsidies meant for the poor, Mr el Eissawy said the rock-bottom quality of government-subsidised food products meant that those who can afford better buy better - something economists call "implicit targeting". If the pro-private sector government of Ahmed Nazif, Egypt's prime minister since 2004, hopes to make profound changes to the subsidies regime, he better expect to work slowly, Mr Lotfi and Mr Abdel Khalek said.

Successive Egyptian governments have tried to roll back the country's post-Second World War subsidies for decades, such that today's Egyptian receives only 40 per cent of the assistance he took in the late 1970s, Mr el Eissawy said. Bread prices are among the few issues that can rile Egypt's laid-back population. In 1977, some of the largest riots in modern Egyptian history focused on rising bread prices, and last year a spike in imported food costs around the world forced the government to increase food subsidies.

"I don't know what's going on in the minds of these people. I coined a term and called them the 'market cult'," Mr Abdel Khalek said. "They look at the market and they preach the word at a time when everyone around the world is rethinking the market system." mbradley@thenational.ae