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Egypt Struggles to Sustain Subsidies

Egypt's new government has launched a plan to alleviate poverty, but many doubt its ability to finance the projects.
A man offers money to buy bread at a bakery in Cairo March 17, 2013. The spectre of steep food price inflation driven by a weaker pound is of particular worry to President Mohamed Mursi as he grapples with spasms of unrest two years after the uprising that toppled Hosni Mubarak and was itself partly driven by a sense of mounting economic hardship in a country long steeped in poverty. REUTERS/Mohamed Abd El Ghany (EGYPT - Tags: POLITICS BUSINESS FOOD) - RTR3F42I

CAIRO — Two and a half years after the Jan. 25 revolution deposed Egyptian President Hosni Mubarak in the name of social justice, the state has faced many challenges to realize the hopes of Egypt’s poor, who have become more numerous as a result of continued political turmoil.

The Egyptian transitional government, which took office after the June 30 demonstrations and the ouster of President Mohammed Morsi, has announced a package of urgent economic measures as part of it reform program to support the poor and bring about structural changes to achieve social justice and economic growth. Public-school students have been exempted from paying tuition. The prices of subsidized commodities have been reduced from 10% to 15%, and 15,000 job opportunities have been proposed.

“We know that we cannot resort to quick remedies to address the problems of the poor. The government is working under great challenges to fund new programs to achieve social justice. The government’s internal debt has reached 1.7 trillion Egyptian pounds [$246.6 billion]. About 27% of the state’s annual budget is allocated to servicing the public debt. Only 73% of the budget is available for government spending. We are currently considering programs designed to help the poor as a matter of priority,” Deputy Prime Minister for Social Justice Hussam Issa told Al-Monitor in an interview.

“We are currently not considering allocating money to subsidize unemployment. That’s almost impossible, given the burdens on the state budget. Also, we are definitely not considering eliminating subsidies because it would be tantamount to political suicide for us. We believe that the solution lies in revitalizing the economy, stimulating the private sector to undertake projects that would benefit the citizens in the governorates of Upper Egypt and the Sinai, and in implementing a series of short- and medium-term measures that improve the Egyptian citizens' situation,” Issa added.

According to the latest UN report, the rates of poverty and hunger in Egypt have risen in the last three years with 13.7 million Egyptians, or 17% of the population, living below the poverty line. They suffer from malnutrition and lack access to state resources.

Despite the clear signs of economic decline last year and the poor’s continued suffering, the government remains optimistic about securing enough food and fuel, and will continue subsidizing the commodities needed by the poor. The government asserts that it has enough funds and foreign currency to buy wheat and essential commodities.

"Despite the financial burdens faced by the government, no decisions have been issued affecting the support system, which is set at 30 billion pounds [$4.35 billion] annually and that is aimed at serving ordinary citizens, helping them to obtain a loaf of bread and services at prices that are affordable on a low salary. There are no problems in the wheat balance and we have enough for the next six months,” Egyptian Minister of Supply and Internal Trade Maj. Gen. Mohammed Abu Shadi said in an interview with Al-Monitor.

"The government will take exceptional measures to limit prices on consumer goods, to prevent rising prices and a monopoly. It has also put in place programs to financially assist poor families," he added.

According to a report by the government’s Information and Decision Support Center, the rise in poverty and illiteracy and the deterioration of health services are the main obstacles to the government’s attempts at development. The report showed a rise in poverty in farming communities and revealed that about 1,000 villages in Upper Egypt have very poor access to clean water, sanitation and education services.

An official source who is responsible for economic issues in parliament told Al-Monitor that the drop in financial resources for the state treasury will hinder the government’s ambitious plans designed to help the poor. The source said that the state needs additional funding sources that it can spend on projects geared to support the poor and achieve social justice. The value of these projects are estimated at 22 billion Egyptian pounds ($3.2 billion). The source ruled out “the possibility that income taxes will be raised because that may increase the burden on those with low income at a time when the economy’s growth rate is declining.”

According to statistics by Egypt’s Central Bank, Egypt is suffering from a high budget deficit after its external debt reached $45 billion and its internal debt reached  $243 billion.

Despite the state’s limited resources, Prime Minister Hazem el-Beblawi announced on Sept. 18 his sudden decision to raise the minimum wage for workers in the government and the public sector. Starting in January, the minimum wage will be raised from 730 Egyptian pounds ($106) a month to 1,200 ($174). The new rate will cost the government an additional 1 billion Egyptian pounds ($145 million) a month, according to an estimate by the Ministry of Planning. That presents new challenges for the government in securing the financial resources to pay government employees.

“Social justice and tackling poverty doesn’t mean increasing the minimum wage, as the government has done. There must be justice in opportunities and in providing education, health and social services that would allow the Egyptians to achieve a dignified life,” said Alia Mahdi, an economics professor at Cairo University, to Al-Monitor as she criticized the state’s approach to addressing poverty.

“Raising the minimum wage to 1,200 Egyptian pounds now will cause serious economic problems because it will increase inflation and affect the low- and fixed-income workers who don’t work for the government, as well as those on salaries. [It will also] lower purchasing power due to the high prices,” Mahdi said. She added that the government’s insistence on applying that decision to private-sector employees will increase unemployment because employers will face higher production costs, which means higher prices. She advised the prime minister to be honest with the people about the reasons for that decision and how it would be funded.

Egyptians are still hoping that this government will be able to achieve their dreams and lift them from below the poverty line. But the greatest obstacle to the current government’s ambitious programs — for which the funding sources have not been identified — is the heavy burden it inherited from the governments that followed the January 2011 revolution.

Ayah Aman is an Egyptian journalist for Al-Shorouk specializing in Africa and the Nile Basin, Turkey and Iran, and internal Egyptian social issues. On Twitter: @ayahaman

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