Inefficient subsidies harming Egyptian economy

Article Summary
Egyptian government subsidies are wasteful and often have an adverse impact on the poor.

The Egyptian Center for Economic and Social Rights stated in its 2013 report, "Highlighting Rights," that Egypt's inefficient subsidies program is detrimental to more equitable forms of intervention and is disproportionately beneficial to the more prosperous segments of society. The center presented this information in an appearance before the United Nations Committee on Economic, Social and Cultural Rights.

According to the center's 2009 estimates, the richest quintile benefited from 60% of the country’s fuel subsidies. In contrast, social protection schemes unrelated to subsidies — such as cash transfers, microcredit and health insurance — amounted to only 0.11% of total subsidies. This is a very small percentage compared to other countries in the region. However, despite the inefficiency of support systems in the country, their removal would increase impoverishment. Instead, the government should restructure the social protection framework so it can reach those who are most in need.

Many expert recommendations have emphasized two imperatives: the need to forgo the current subsidy system and the need to find ways to not harm the poor in the abandonment of the system.

Haphazard decisions

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In reality, when it came to the poor, the government did not expend the effort hoped for when subsidies were reduced, as evidenced by the woeful repercussions engendered by state decisions in this regard. For example, in terms of fuel, the government adopted a subsidy cut, which was accompanied by a 78% increase in the price of 80-octane fuel and a 64% increase in the price of diesel (used in public transport and by low-cost cars). In contrast, the price of 95-octane fuel (used in high-end cars) only rose by 7%. Despite the new resolutions, no new information emerged to clarify the confusion concerning the Fuel Smart Cards system introduced in 2013.

Contrary to rumors about this system, smart cards failed to be used as a means to directly support the poor and to scale subsidy cuts based on consumption rates. It also was not used to control black-market sales and prevent fuel smuggling. In fact, procedures to disseminate those cards have not been finalized, and they have yet to be activated. According to Hossam Arafat, head of the Petroleum Product Division, “Smart cards currently have no role to play. Once the scheme is finalized, these cards will play a big role in monitoring the fuel market.” However, the timeframe for the completion of this framework remains unknown. Thus, it seems that the decisions were precedents born out of data that should have been better interpreted.

The government’s paucity of information relating to consumer data and consumption rates in various regions may have been the reason behind the lack of insight that accompanied the adoption of those decisions. The measures neither helped the poor nor inhibited black-market activity. In addition, the government did not even endeavor to implement serious oversight mechanisms that would prevent runaway increases in the cost of transportation and goods, which rose more than the increase in fuel prices.

The state did, however, implement “hotlines,” an obsolete measure that the government often resorts to when it lacks adequate alternatives. The prime minister also met with some public transport drivers, whom, it was reported, he asked not to violate adopted ride tariffs. This raised further questions: How can that meeting be classified? Can it be incorporated into price-control efforts, or was it merely a media ploy to demonstrate the government’s intent to act?

Evasiveness is the way

When it comes to consumer staples, the government issues evasive statements to assuage the shock from its new decisions. A surprise headline read: “The new subsidy program will make chicken available to citizens at a cost of 75 piasters (10.5 cents), and a kilogram of red meat shall cost a single Egyptian pound (14 cents). In fact, the new program will make a wider array of goods available to citizens.” Yet a blind eye was turned toward the reduction of subsidized rations to one-third of their previous levels.

People used to receive approximately 5 kilograms of staple goods (oil, sugar, rice). The new scheme only allows for 2 kilograms chosen out of a wider range of substitute goods. Moreover, chicken and red meat do not constitute a staple good for people in need of subsidies.

In its quarterly publication (July/September 2013), the Egyptian Food Observatory revealed that oil, rice and sugar were the staples most charged by the “most needy families” on their ration cards. The report also stated that the allocated subsidized rations of these goods were inadequate, whereby 74.5% of families resorted to the open market to meet their needs for oil, and 79% of families did the same when it came to rice, while 67.9% had to buy sugar. This highlights the projected suffering that those families will face as a result of the new scheme.

The Egyptian Food Observatory also revealed that consumption of animal protein fell among needy families to less than once per week, while one-third (34.9%) of the study sample “abstained” from eating meat for an average of 5 months. One-fifth of families (18%) abstained from eating dairy products for four months on average. 

The monthly income of 89.8% of the “most needy” families was not sufficient for them to make ends meet. They supplemented that income with financial and foodstuff advances, resorted to less expensive staple goods and reduced their consumption rate. The only foodstuff that 94% of families agreed was priced within their means was local bread. Though the government had just raised the price of bread sevenfold, from 5 to 35 piasters (less than 1 cent to 5 cents). Bread was still among the goods covered by ration cards, which 17% of the most needy families do not have, the report determined.

Low wages in return

To compensate for the hike in prices, government employees and pensioners received a 10% incremental raise on their base allowances. The raise complemented the minimum wage increase for state employees pursuant to the prime minister’s Decision No. 22 of 2014, which raised the minimum wage to 1,200 Egyptian pounds ($168) as of the beginning of 2014. However, as a result of the complicated Egyptian salary system, the reality on the ground was different. Class-six state employees, and even some class-three employees, earned less than the aforementioned 1,200 pounds due to the slew of tax and insurance deductions levied on their salaries.

The Egyptian salary system, though underdeveloped when compared to other modern systems that define wage as “all that is earned by a worker,” is also replete with a great deal of fraud and concealment of facts. In this regard, state employees remain the smallest and most pampered class of workers. The implementation of the minimum does not affect the largest portion of workers, who are found in the private sector.

The private sector escapes the state’s control (informational and legal) and often disregards its laws. Job descriptions are stretched to include “everything demanded of the worker.” Employers often cancel worker vacations and abrogate their right to periodic raises and the minimum wage. On the other hand, the non-public private sector, which employed an estimated 40% of the total workforce in 2007, constitutes a parallel hell where employee suffering is compounded, their rights usurped and their incomes reduced as a result of state neglect.

All the while, the unemployed remain forgotten. Their numbers have risen to 13.2% as of the first quarter of 2013. The young generation accounts for the largest portion thereof, as, according to official state statistics, the unemployment rate among their ranks exceeded 25%. The condition of workers in Egypt therefore indicates that the rise in prices has spread to affect people with already empty pockets.

Plenty of supporters

Despite those facts, some people, including some of the poor, have lauded the belt-tightening scenario as the only way to recovery. This class is eager for clear signs that the new track is the correct one. They believe that it is necessary to “endure in order to survive,” while realizing on a subconscious level that reactions toward economic decisions have been politicized and polarized among those who support or oppose the regime. Their rights are often taken hostage for the attainment of political gains, whether by the regime or the opposition.

In contrast, others demand alternatives and strive for the adoption of less damaging policies. They submit proposals, offer concessions, demand to be informed of possible results and ask for participation in the decision-making process, while insisting on government oversight and accountability.

Despite the momentum that contrasting viewpoints have acquired, the government only took note of those blindly endorsing its decisions. It relied on them as it drew strength and boldness from their support. However, outcomes for those who wagered on the government are pending until further notice, and their imagined results remain in limbo for an indefinite amount of time. Will the government pay them back for their loyalty? Does victory await them, or additional disappointment?

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Found in: poverty, egypt, economy, development
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