All about reform
The debate over subsidy reform is no longer about whether or not it should happen, but how, Niveen Wahish
The government is paving the way to reform the Egyptian subsidy system. Although officials repeatedly insist that subsidies will not be done away with, they stress that the system must be restructured.
Chairman of the Egyptian Centre for Economic Studies (ECES) Taher Helmi said supporters of the system as it exists fear lifting subsidies would cause social injustice and pump up inflation. It would also be a daunting task to implement, possibly causing social and political unrest. This analysis came as Helmi addressed a workshop organised by ECES titled "Price subsidies in Egypt: Alternatives for reform".
Meanwhile, Helmi added that supporters of reform believe the system in its current shape does not properly target those who need it and is a burden on government finances.
In fact, as Minister of Social Solidarity Ali Meselhi told the same conference, while a ton of flour costs around LE2,750 on the market, the government gives it to baladi bread bakeries for LE160 so that they can sell each loaf for LE0.05.
And Minister of Petroleum Sameh Fahmi expects LE1 trillion in fuel subsidies in the next 10 years. The increase is attributed to growing consumption, coupled with rising international prices. Fahmi told conference attendees that "subsidies are here to stay for years to come, but only for those who deserve them."
Fuel and food subsidies represent the bulk of total government subsidies, however fuel alone represented around 67 per cent in 2008/2009. Moreover, ECES Executive Director Magda Kandil said the richest one fifth of the urban population currently benefits from 33 percent of fuel subsidies, while the poorest urban quintile benefits from only 3.8 per cent. This is due to the fact that while diesel oil takes up 59 per cent of fuel subsidies to fuel, it represents only 19 per cent of consumption.
However, the decision to lift fuel subsidies is not easy, and a mechanism needs to be in place. Kandil suggested that subsidies should not be lifted on all products equally. She found that raising the price of natural gas and fuel oil affects the lower expenditure quintiles more. Thus she recommended that subsidies on those two items should remain, particularly since they account for only 13 per cent of total petroleum subsidies.
Kandil's suggestions could be adopted by the government on the long term. On the short run the government is more likely to take smaller steps. The idea of distributing butane gas cylinders by coupons is in the pipeline. This means that should families need more than their share of cylinders as allotted by coupons they would make their purchases at the market price.
This step is meant to deal with the misuse of subsidised gas cylinders by businesses such as poultry farms and restaurants. According to Fahmi, brick furnaces use 150 cylinders per hour. The price of gas cylinders is 93 per cent subsidised.
The government needs to think of how to deal with food subsidies too. Some observers have suggested using cash rather than in-kind subsidies. However, Karima Korayem, professor of economics at the Al-Azhar University's Faculty of Commerce, believes that cash subsidies will not go far in light of the continually escalating prices. Korayem added that this could mean an increase in malnutrition as people are unable to secure their basic food needs.
But Meselhi assured said that if subsidies are better targeted they will free up funds to increase cash support. And Santiago Herrera of the World Bank suggested that cash support should be tied to international prices so that the population can gain trust in the reform process.
Whatever strategy the government decides to adopt, David Coady of the Fiscal Affairs Department of the International Monetary Fund says that reform strategies can be strengthened by keeping the public informed of the shortcomings of subsidies. He also said a clear programme must be set out, reallocating some budgetary savings to crucial public investments such as education, health, and infrastructure. He also recommended the development of well- targeted safety net measures to protect the most vulnerable households.