Sunday,19 August, 2018
Current issue | Issue 1169, (24 - 30 October 2013)
Sunday,19 August, 2018
Issue 1169, (24 - 30 October 2013)

Ahram Weekly

What to do about subsidies?

The issue of the subsidies on basic goods and commodities in Egypt has plagued successive governments, and it seems a solution is not in sight, writes Hayat Yehia

Al-Ahram Weekly

In this country, everyone complains about the subsidies that exist on many goods and commodities, the government more than most. These subsidies have been called a scourge on the budget, an impediment to development, and a backdoor for corruption. But apparently no one dares to do anything about them, mostly because the public backlash would be so fiery that ministers fear that they would lose their jobs if they tackled the problem seriously.
However, there is little doubt that something must be done, even though no one seems to know how Egypt can kick a habit that has lasted for decades without wrecking the country’s social fabric and penalising those who cannot fend for themselves.
Life for many people in this country would be unimaginable without subsidies. In fact, lives have been lost in the battle over them. Take, for example, Abu Ali, who died recently in a fight over a bottle of subsidised gas. He had lined up at his neighbourhood gas bottle store, hoping to come back home with a gas bottle at the official price of LE4, a fraction of its cost on the black market.
However, when the store eventually opened, the crowd went mad. The ensuing melee, caused no doubt by the fact that there were more buyers than there were bottles, turned violent. Abu Ali didn’t make it home alive.
Mahmoud, a teenager, also died fighting for subsidised bread at a government-run bakery. Again, there were more buyers for the loaves of subsidised bread, selling at five piastres (slightly less than one US cent), than the supply available.
The issue is particularly important because some commentators have claimed that the 25 January Revolution that ousted former president Hosni Mubarak more than two years ago was more about bread than it was about democracy and freedom from oppression. While the revolution put senior members of the former Mubarak regime behind bars, including former prime minister Ahmed Nazif and some of his ministers, this did not end the bread or fuel shortages, nor the country’s need to restructure its gigantic subsidies programme.
In fact, the shortages of foreign currency that followed the 25 January Revolution made things worse. As the economy floundered amid the political strife, the amount of flour delivered to bakeries was cut back. Some bakeries went bankrupt, while those that survived had longer lines of customers, some of them often only too ready to fight to get to the head of the line.
Politics aside, such economic problems may also explain why the nation erupted yet again on 30 June 2013. When people cannot buy bread at affordable prices, and when motorists have to line up for hours to fill their tanks, governments are in trouble. As a result, Egypt, unable to gear up its economy at a time of high expectations, had two revolutions in some 30 months.
Revolutionary zeal, however, can backfire. The more revolutions there are, the fewer tourists will be ready to visit the country, the more investors will leave, and the less money there will be in everyone’s pockets. Since Mubarak’s ouster in early 2011, the country’s foreign reserves have experienced a steady drop, reaching a record $14 billion low in June 2013.
Fortunately, since then a generous aid package from Saudi Arabia, the UAE, and Kuwait has brought the reserves back up to $18.7 billion.

ONE-QUARTER OF THE BUDGET: Nevertheless, over recent years LE1 out of every LE4 spent by the government has gone on subsidising essential goods and commodities. Last year, the government spent one-quarter of its nearly LE820 billion ($115 billion) budget on giving the nation cheaper food, housing and energy. Egypt imports much of its fuel from abroad, selling it on the local market at a loss. It buys nearly nine million tonnes of wheat every year, which it again sells far more cheaply to bakeries around the country.
This all puts pressure on the country’s budget, which is now running a deficit of LE240 billion ($35 billion), or nearly 14 per cent of GDP. As a result, it is now the turn of the transitional government of Prime Minister Hazem Al-Beblawi to face the music.
If the government doesn’t get its budget in order, it will be accused of financial carelessness. But if the cabinet cuts back on the subsidies in order to balance the budget, it could face the same kind of popular backlash that governments in this country have dreaded since the 1970s.
In April 2013, Ashraf Al-Arabi, then planning minister in prime minister Hisham Kandil’s cabinet, summed up the situation. “There has been a clear drop in investment and economic growth rates, with investment having plummeted to below 15 per cent [of its usual level]... and economic growth running at two per cent,” Al-Arabi said.
The former planning minister went on to note that one out of eight people in the country were unemployed and one out of every four lived under the poverty line. Things have not improved since then, and, following the ouster of former president Mohamed Morsi in July, the continuing protests and a newly-imposed curfew have helped to push the inflation rate up to almost 11 per cent in August.

POVERTY GOING UP: Despite the subsidies the country has been providing, the problem of poverty hasn’t gone away. The reason, says Anwar Al-Naqib, economic adviser to the Al-Biblawi government, is that the subsidies don’t always go to those for whom they are intended.
Some economists argue that 40 per cent of the subsidies on bread are consumed by people who don’t really need them, and 60 per cent of the subsidies on fuel go to the wrong people.
Ali Meselhi, social solidarity minister in the former Nazif cabinet, voiced this view back in 2010. Speaking only nine months before the 25 January Revolution, Meselhi said that “the subsidies benefit the rich more than the poor.” He was particularly critical of the way the subsidies were distributed, saying that most of the subsidies given to bakeries, mills, food producers, and wholesale traders benefited company owners rather than consumers.
The government was subsidising gas bottles by LE13 billion annually, with another LE11 billion going on bread and LE6.7 billion on miscellaneous food commodities. The way the subsidies were being managed was “absurd”, Meselhi said.
The governments that ruled Egypt before the 25 January Revolution often spoke of the subsidies as a burden that needed to be lifted, the tone of their discourse being arrogant, as if the subsidies were an optional and underserved gift to the nation.
In September 2010, Hamdan Taha, the then deputy minister for social solidarity, speaking before a parliamentary committee, blamed citizens for the shortage of subsidised gas bottles in the country. “Those who are clamouring day and night about the gas bottles forget the times when people in this country used to cook with dung and straw. They are overusing gas because the bottles are so inexpensive, cheaper even than a packet of Marlboro cigarettes,” Taha stated.
While the post-January Revolution governments have also been unenthusiastic about the subsidies, they have generally been more careful about what they say. Under former prime minister Hisham Kandil, when the government was desperate to obtain a loan from the IMF that would make the cancellation of fuel subsidies a condition for signing the deal, cabinet members kept saying that the subsidies were not “in the country’s best interests”.
IMF officials have concurred with this opinion. According to Masood Ahmed, IMF director for the Middle East and Central Asia, Egypt’s reliance on imported fuel makes it vulnerable to rises in import costs and, by implication, to possible public discontent. Arab countries that followed inflationary policies were at a greater risk of political instability, he said.
Al-Beblawi’s government, eager to reduce the subsidies in order to free up money for the country’s under-funded health and education sectors, has been arguing that the funds used for the subsidies could be put to better use in creating jobs.
While government rhetoric is less arrogant than it was before 2011, the problems remain the same. Indeed, the 25 January Revolution was not the first uprising in which the nation took to the streets to demand lower prices on essential goods and commodities.
In January 1977, former president Anwar Al-Sadat faced a major uprising due to price hikes on basic goods, including bread. The president was forced to abrogate his government’s decision to cancel the subsidies on the same day that it was announced. He also had to enforce a dawn-to-dusk curfew in Egypt’s major towns and cities until things had calmed down.
Al-Naqib said that subsidies-induced turmoil was still a risk for the country. “The government is still unable to address the issue of subsidies in a professional manner that would reduce the subsidies’ burden on the economy without causing a humanitarian crisis of the type recently seen in Sudan. The public, meanwhile, views the subsidies as a right, not an option. They want their bread subsidised, regardless of its quality.”
When the Sudanese president recently abrogated the subsidies on petroleum products in his country, riots erupted in which more than 150 people have died in clashes with the police and more than 1,000 have been arrested.
For many commentators, the present crisis over subsidies in Egypt has been reminiscent of a saying attributed to former president Gamal Abdel-Nasser in the 1960s — “always look out for the workers”. This later became a popular chant during the labour protests against Sadat and his government in 1977.
The chant chronicles the problem of the subsidies, from the time they were introduced by Nasser’s socialist government in the 1960s to the time they were seen as a burden by Sadat’s free-market advisors. It was during Sadat’s time that the nation made its voice heard on the matter.
Since 1977, no one has been able to address the matter in a sensible way, according to Al-Naqib. For him, the problem started with the dictatorship of Nasser, with governments since his time being ready to offer subsidies as a bribe to the people and to persuade them to accept the absence of democracy.
Governments that knew their policies would be discussed and critiqued in a democratic way would think twice before plunging their nation into a subsidies-dependent condition that was hard to tackle and unsustainable, he said.

PROPOSED SOLUTIONS: Handing out subsidies in monetary form was one of the options considered by the pre-January Revolution governments. To make sure that the subsidies actually reached their intended beneficiaries, officials devised plans to give the subsidies in cash to those deemed to be in need of help.
Wael Ziada, head of research at the Hermes financial group, said that this could be an appropriate solution, especially if the system was adjusted regularly for inflation. But Manal Metwalli, a professor of economics at Cairo University, disagreed. “There is no market regulation in the country, which is the reason why prices keep going up, sometimes for no reason. This is not something that can be addressed by the price-fixing the government has introduced of late,” Metwalli said.
In an attempt to curb the recent increases in prices, the government has tried to fix prices for 15 basic foods, including tomatoes and beans. However, it seems that this has been ineffective in combating the problem of inflation.
“A kilo of okra has been set at LE9 by the government, but it was only LE8 before the price-fixing,” complained one shopper.
Metwalli said that price-fixing was hard to implement because the market was unregulated and the government had not addressed the real reasons for the rises in prices.
Al-Naqib said that the economy, which suffers from low production and increased demand, was not conducive to price stability, explaining why he was against monetary subsidies to replace those on goods and commodities.
“The monetary subsidies system may have worked well for Mexico, but this doesn’t mean that it will work in Egypt, since circumstances are different,” Al-Naqib explained. For Metwalli, the subsidies issue cannot be addressed while high rates of poverty persist. Before cutting back on subsidies, the government would need to pursue policies leading to job creation, incentives to investment, market regulation, and improved wages, she said.
Some say that the government’s decision to set a minimum wage of LE1,200 ($170) a month has been a good start. However, it is not yet clear whether the private sector can also be persuaded to apply the same minimum wage.
Al-Naqib believes that the solution to the subsidies issue should be through determining the end-users and their consumption patterns. However, in order to pinpoint the people who need the subsidies most, the government will need to collect more data, he said.
“These data are not available. The government is spending billions of pounds per year on subsidies, but no one knows who exactly benefits from any of them,” he said.
Some economists have proposed that the price of flour be left to the market to decide. The government should sell the flour to the bakeries at market prices, then buy the bread and sell it to citizens at the subsidised price, thus eliminating the possibility of bakeries selling the flour on the black market, they say.

FUEL SUBSIDIES: Al-Naqib said that when it come to subsidising fuel, the problem started with the General Organisation for Petroleum, the agency that monopolises the supply of fuel to the local market in Egypt. “No one knows the amounts that are subsidised and how they are distributed,” he said.  
The subsidies are crucial, as they take up more than one half of the country’s entire subsidies allocations, reaching a total of LE130 billion ($18.5 billion) in the 2012-2013 financial year.
In a recent television interview, Finance Minister Ahmed Galal said that the country was addressing the problem of subsidising energy through two stages. In the first stage, petrol stations would receive fuel through a smart-card system that would reduce the possibility of fuel being sold on the black market. This first stage was expected to save the country about LE20 billion ($3 billion), he said.
During the second stage, which would be phased in over four more years, consumers would end up by paying the full market value of the fuel they used.
Because only 100 factories are now believed to be using up most of the fuel subsidies that are in place, the government plans to abolish these subsidies for some of the most fuel-intensive industries, such as fertilisers and cement.
The Kandil government drew up plans to phase out fuel subsidies to factories over a four-year period, but the Federation of Egyptian Industries, which speaks for business interests, then asked the government to extend this period to six years, which the government refused to do.
Since the end of the Kandil government, these plans are now unlikely to be enforced, officials admit. “I don’t think that this is going to be implemented at present, for no one dares to put this plan into action and no one wants to take responsibility for the decision,” said a source in the Ministry of Industry, speaking on condition of anonymity.
The same source said that liberalising the price of fuel for factories would likely increase inflation and undermine the government’s popularity. Successive governments have not dared to liberalise the price of fuel for factories, although some of these factories, including a few that are foreign-owned, have made tremendous profits because of the subsidies.
The Kandil government did cut back the subsidies on gas bottles sold to consumers shortly before it was dismissed from office. As a result, the prices of domestic gas bottles increased from LE4 to LE6, with those of commercial bottles going up from LE6 to LE12.
“This step didn’t have a dramatic impact, despite the uproar that accompanied it, simply because people were used to buying the bottles at several times the official price anyway. When fuel was in short supply, household gas bottles sold at LE60 and commercial gas bottles at more than LE100,” the owner of a chicken farm who uses the gas to heat his chicken coops said.
According to Meselhi, brick producers, chicken farms, foundries, and farms using irrigation pumps, as well as the catering business, use most of the country’s gas bottle production, and they were the reason for the shortages in September 2010.
Gas bottle production had increased 20 per cent over the previous eight years, he said, and the government’s subsidies on gas bottles had increased from LE4.2 billion to LE11 billion over ten years. The reason the government was subsidising each gas bottle by LE50 was because prices had not changed for almost 20 years, he said.
Egypt consumes nearly 14 million gas bottles per month.
Before the 25 January Revolution, successive governments developed the habit of increasing the prices of gas and electricity without notifying consumers. “Suddenly, my electricity bill for my small house in which there is not a single air-conditioning unit doubled. I used to pay less than LE40, but the bill is now over LE120. The bill for natural gas has gone up from LE9 per month to LE25. I am angry because I haven’t increased my consumption and the government didn’t announce the price rise,” said one employee at the Ministry of Agriculture.
Metwalli said that if the government has to reduce the subsidies, it should start with energy for houses or for other sectors that have no ripple effects, in order to avoid causing economic turbulence.
“The government must be honest and transparent with the public when it comes to subsidies, so that the public will be able to understand what is going on,” Metwalli said.
For the time being, the government seems to be reducing subsidies in at least one sector — housing. The last government reduced the subsidies for housing to LE400 million in the fiscal year 2013-2014, down from LE700 million the previous year and down again from LE1.5 billion the year before.
But when it comes to food, fuel, and other basic goods, no government has yet been ready to tackle the subsidies issue in a well-informed, transparent and humanitarian manner.

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