Egypt decides to cut subsidies

Egypt embarks on a painful process of adjusting to lowered bread subsidies and the end of subsidies on natural gas.

al-monitor A woman with a tray of bread on her head buys vegetables near a bakery in Cairo, March 17, 2013. Photo by REUTERS/Mohamed Abd El Ghany.

Topics covered

poverty, natural gas, imf, food prices, egypt, deficit, abdel fattah al-sisi

Jul 27, 2014

The Egyptian government has finally come to a decision on its subsidy policy. It will cancel natural gas subsidies and lower bread subsidies by 13%, though the final policy changes will depend upon the 2014-2015 fiscal year balance sheet. In the last fiscal year, the cost of natural gas subsidies reached nearly $1.12 billion. The price of gas used by freight trucks is being raised by 175%, and the price of gas used by cement, iron and durable good factories is being increased by 30-75%. The lowering of bread subsidies has decreased their total cost to $2.6 billion from $2.98 billion in the last fiscal year.

There is no doubt that these decisions represent progress in the political management of the current economic situation. The enormous costs that the state bears because of subsidies on goods and fuel have increased the burdens on the state and budget deficit. This has led to borrowing and increased public debt. These price hikes — which are being accompanied by 40-63% increases in petrol and diesel prices — will alleviate the financial burden on the Egyptian government. If they are not canceled for political reasons, these price increases will perhaps also help rationalize consumption in a society long accustomed to state subsidies.

Historians note that subsidies on food and basic goods have been part of the Egyptian economic system since the Fatimid era. As Egyptian political systems have succeeded, the feeling that the government is ethically bound to provide bread, food and basic goods like fuel at affordable prices grew more inherent. Following a series of financial crises that have befallen the Egyptian government in recent decades, attempts have been made to remove or lower subsidies sufficiently to lower the public budget deficit. Protests against these policy changes, however, have led to their reversal.

In 1975 and 1977, popular and worker demonstrations erupted when Anwar al-Sadat's government considered including changes to subsidy policy based on the advice of the International Monetary Fund (IMF) and the World Bank. Similar protests took place in 1986, in the era of former President Hosni Mubarak. Sadat attempted to restructure the economy and free it from the loans that had accrued in the era of President Gamal Abdel Nasser, as a result of weapons purchases and military expenses incurred by Egypt’s intervention in Yemen and its confrontation with Israel. However, Sadat’s philosophy of economic openness did not achieve its goals of rationalizing state economic activities, decreasing public spending, lowering subsidies or rationalizing employment in the public sector.

Analysis suggests that in previous decades, goods subsidies were among the most important challenges facing fiscal policy reform in Egypt. As per capita food consumption rose, importation of foods such as wheat, corn and rice amounted to 50 kilograms [110 pounds] per capita per year in the 1960s. It decreased to 20 kilograms [44 pounds] in the 1970s only to skyrocket to 150 kilograms [331 pounds] in the 1980s.

It seems that previous policies failed to direct goods subsidies to the poor and those in real need. Reticence to reopen the subsidies file has complicated attempts at fiscal reform in Egypt, especially after many Egyptians saw subsidies as an acquired right. The new Egyptian government will likely be more able to face the expected protests against the reduction of subsidies — especially fuel subsidies — and price increases.

At the same time, there is no doubt that the crisis of poverty in Egypt must be faced and that the private sector must adopt a philosophy of continuous job creation. This will not be accomplished without the identification of projects that are substantive, profitable and capable of employing the youth who pour into the labor market each year. The government of President Abdel Fattah al-Sisi and international financial institutions like the World Bank and the IMF regard the treatment of Egypt’s poverty crisis as important. They consider it a prerequisite of the stability necessary to raise Egyptians’ living standards and provide sufficient employment opportunities.

Reports suggest that the poverty rate in Egypt has risen in 2014 to 26.3% of the population, or the equivalent of 24 million people. Egyptians suffering from extreme poverty — those who live on less than $1.25 per capita per day — represent 4.4% of the population, or nearly 4 million individuals. How can poverty be dealt with in an overpopulated country with limited natural resources without the development of investment mechanisms, the implementation of economically beneficial projects and the liberation of the state from debt and an entrenched and dysfunctional bureaucracy?

Creativity will be key in formulating new economic policies to adapt the economic openness to the private sector and encourage suitable poverty-fighting policies. Economic reform will also require changes to the present education system to meet the demands of economic change. Education expenditure must therefore be increased. Moreover, any economic reform demands a supply of qualified workers capable of handling modern technologies and contemporary management systems. The government must also devote attention to health care and the elimination of the endemic diseases from which Egyptians still suffer. Clearly, the tasks this economic reform process requires of the government will be complex and will demand both thoughtfulness and decisiveness.

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