The government's plan to reform the subsidy system is running into fierce opposition. Mona El-Fiqi investigates A ballooning budget deficit, estimated at 10 per cent of GDP in the 2004-2005 budget, has compelled the government to reconsider its subsidy policy. The programme, in place since the 1952 Revolution, subsidises the cost of some food products and other basic consumer commodities, as well as services such as education and transportation. Prime Minister Ahmed Nazif has been holding a series of meetings to discuss the subsidy programme provided to low-income individuals. One plan is to revise the lists of ration cards beneficiaries so as to exclude people who are not in need of subsidies. Around 40 million citizens benefit from the ration cards, only one aspect of the subsidy system, which provide basic food commodities at below-market prices. Though the government's new plan for restructuring the subsidy remains to be studied by the Ministry of Finance, consumers are already panicking. "Our income does not satisfy our family's essential needs now, so how can we manage without subsidised commodities and services," said Safaa Ahmed, a government employee and mother of three children. Many consumers interviewed by Al-Ahram Weekly explained that subsidised food products provided by the ration cards help their families afford their basic needs. "How can poor people get by if the government cancels the ration cards?" asked Saadiya Ibrahim, a grandmother of 10. Consumers have been feeling the pinch of rising prices during the past two years, and with the looming threat of a subsidy restructuring, many accuse the government of violating its repeated promises since its appointment in 2004 to keep the interests of low- income citizens as a priority. "We do not trust the government anymore, because the recent increase in bread prices, for example, completely contradicts the government's famous statement that there will be no change in bread prices," said Ahmed. "It would not be a step on the right track to cancel the ration cards particularly after adding seven essential food products two years ago," added Maysa Mahmoud, a teacher at a private school. However, government officials argued that reconsidering the subsidy is an attempt to guarantee that the subsidy allocated in the country's budget goes to the needy, while discouraging the misuse of subsidised products. Abdel Fatah El-Gebali, advisor to the minister of finance, explained that the government's new plan to restructure the subsidy seeks to close the loopholes in the current subsidy programme without abandoning the principle of providing a safety net for lower-class citizens. Moreover, El-Gebali said that the subsidy should be applied for a limited period of time, not indefinitely, as happens under the current system. The government, according to El- Gebali, is carrying out a long-term plan to increase the economic growth rate and reduce poverty rates, allowing the phasing out of subsidies. "This would be a perfect solution for the subsidy problem but it needs time," El-Gebali added. In the meantime, the government is undertaking a study into the possibility of replacing the programme with a cash subsidy. While this is the solution supported by many neo- liberal economists, who argue that this will eliminate market distortions while providing equivalent levels support for the poor, this plan also presents the huge bureaucratic challenge of determining who qualifies for the subsidies. One of the problems in the current subsidy system is that large amounts of subsidised products are misused or wasted. El-Gebali explained that the subsidised bread is often used as feed for poultry and livestock since it is cheaper than fodder. Moreover, another problem is that some grocers sell the subsidised food products which are allocated for the ration cards at higher prices. The result is clear distortions of prices and the appearance of a black market. The current programme includes both direct and indirect subsidies for a variety of commodities and services. El-Gebali explained that the direct subsidy, which cost the government LE15.6 billion in the 2004/2005 budget, supports basic food commodities, transportation, pharmaceuticals and housing loans. The indirect subsidy covers the difference between a product's cost price and its selling price to consumers. El-Gebali added that this indirect subsidy applies to petroleum products, including gasoline and natural gas, which cost LE23 billion in the present fiscal year. Subsidies for the cost of electricity add another LE3 billion, while institutions such as Egypt's Railways Authority and Cooperative Authority for Construction and Housing receive another LE3 billion to keep their services below- cost prices. Finally, LE9 billion goes to the healthcare sector and LE25 billion is spent on subsidising education. While restructuring the subsidy programme is a much-needed step for the government, it is a controversial issue even among economic experts. Goda Abdel-Khaleq, head of the economic committee at the Al-Tagammu opposition party, argued that due to the high unemployment rate and low wages, the subsidy programme must continue to allow all citizens their basic needs of education, food, clothing, housing and healthcare as guaranteed by the constitution. Commenting on the possibility of changing the current subsidy system into a cash-based system, Abdel-Khaleq claimed that this step would exacerbate inflation, which is estimated to be 12 per cent. "Giving people money instead of commodities and services, will cause an imbalance between supply and demand in the markets." To overcome problems facing the current system, Abdel-Khaleq recommended that the government improves the subsidies' efficiency with better targeting of the needy. Abdel-Khaleq added that the government should separate bread production from its distribution, in order to prevent bakery owners from selling the subsidised flour at market prices, a step which would end the problem of bread lines. Under Abdel-Khaleq's proposed system, each bakery would have to produce a defined amount of bread according to its quota of subsidised wheat flour, while a separate distribution chain sells it to consumers. "Unless the government provides people with bread at reasonable price with some dignity, it is asking for political trouble," Abdel-Khaleq asserted. Moreover, Abdel-Khaleq argued that the government's figures for the subsidies' costs are misleading, since some items -- such as the Export Development Fund, and the money allocated for paying the interest rate differential -- should be excluded from these calculations, since they do not benefit poor people.
