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Subsidy-less
Published in Al-Ahram Weekly on 17 - 12 - 2014

The persistent budget deficit is one of Egypt's chronic problems, with economic logic saying that the only way to reduce it in the absence of increasing revenues is to slash expenditure.
While this has been planned for a long time, fears of public unrest delayed the step and exacerbated the problem. But the 2014-2015 budget witnessed a reduction in energy subsidies as a way to reduce expenditure, pushing the prices of fuel, electricity, transportation and food upwards.
This added to the financial burden faced by Egyptian households, already struggling to make ends meet, despite the introduction of a minimum wage at the beginning of 2014. A new nationwide system of subsidised food distribution was introduced in an attempt to absorb the resulting inflationary shocks.
Egypt cut its fuel and electricity subsidies in July. This came after years of ballooning deficits and spiralling subsidies that consumed up some 20 per cent of the budget. The reduction in energy spending by LE40 billion in the 2014-2015 budget resulted in a deficit of 10 per cent of GDP, compared to 12 per cent in the previous year. According to the reduction, the price of 92 octane gasoline became LE2.60 per litre, up 40 per cent from its previous price. The fuel used by most taxis and microbuses, 80 octane gasoline, rose by 78 per cent to reach LE1.60.
The fuel price increases came less than a week after electricity tariffs were raised. The new electricity pricing is part of a longer-term plan to eliminate all power subsidies within five years. Money saved from energy subsidies, according to Prime Minister Ibrahim Mehleb, will benefit the delivery of other key services as it will add LE51 billion to state coffers.
INFLATION GOING UP: The country's rate of inflation stabilised and even fell in the first six months of the year. In June it hovered around 8.20 per cent, the lowest rate in twelve months. But inflation was rising again by the second half of the year, reaching 10 per cent in early January.
Food prices went up by 10 per cent after the increase in fuel prices in July because of higher transportation costs. The meant greater burdens on family expenses since the average Egyptian household spends 46 per cent of its income on food, according to studies conducted by the Central Agency for Pubic Mobilisation and Statistics (CAPMAS).
The reduction in energy subsidies triggered the inflationary increase in July and back-to-school expenses pushed inflation further to reach 11.8 per cent in October, its highest value since November 2013.
In good news, monthly core inflation rates, which exclude volatile food prices and subsidised goods, showed a slowdown in both October and September. According to analysts, the temporary effects of the back-to-school season on inflation and the inflationary pressures from lifting subsidies in July have now been contained.According to a report issued in April by the International Monetary Fund (IMF), Egypt's inflation rate has been structurally high and has risen over the past year as a result of pass-through from exchange rate depreciation, supply shortages and recurrent wage increases.
FOOD RATIONS: Holders of the old paper ration cards have now been provided with plastic smart cards with more benefits. Eighteen million families, a total of 69 million beneficiaries, now have access to 20 subsidised commodities including meat and poultry. Ration cardholders are currently entitled to LE15 worth of these commodities each month instead of the fixed ration of subsidised rice, sugar and cooking oil under the old system.
Under this system, a cardholder was entitled to two kg of rice, two kg of sugar and one litre of cooking oil at subsidised prices each month. The cost of one kg of subsidised rice was LE1, cooking oil was LE3 per litre and sugar LE1.25 per kg.
The new system offers cardholders these products at prices almost like those on the free market, where one kg of rice now costs LE4, one kg of sugar costs LE4.5 and each litre of cooking oil ranges between LE8 to LE10. These commodities, in addition to another 20 products, can be purchased with points that can be saved on the card.
According to official statements, the new system aims to encourage a more diversified diet, harmonise commodity prices with those on the market and fight corruption. The government endorsed the new system, while offering discounted commodities at state-owned groceries in parallel with its decision to reduce energy subsidies that pushed up prices in the second half of the year.
Funds allocated for food subsidies increased to LE31.6 billion in the 2014-2015 budget, compared to LE30.8 in the 2013-2014 budget, yet they still represented four per cent of total expenditure in the 2014-2015 budget compared to 4.2 per cent in 2013-2014. In an attempt to reduce the consumption of subsidised wheat, Egypt also introduced a nationwide smart-card system for the distribution of subsidised bread. The new system entitles a cardholder to five loaves of bread per day for five piasters (LE0.05) per loaf. This is compared to LE35 per loaf for unsubsidised, slightly larger, loaves.
According to figures from the Ministry of Supply and Internal Trade, the old system of bread distribution wasted between 20 and 25 per cent of the state's bread subsidies budget, which amounts to LE21 billion.
Moreover, the old system allowed bakery owners to appropriate subsidised flour and sell it on the black market at higher prices. The government has now stopped providing bakeries with subsidised flour. Instead, it reimburses them with the difference in price of the flour used for subsidised bread by analysing data gathered from smart cards.
Some consumers have complained that five loaves are not enough for three meals a day, but most have seen the quality of the bread improve. Another benefit is that consumers not getting all their quota of bread can redeem their points and use them to buy other commodities.
RESTRUCTURING WAGES: January 2014 marked the first month when a minimum wage of LE1,200 for state employees was applied. For years, labour activists had demanded reasonable monthly minimum and maximum wages as a way of realising social justice. Setting a minimum level for salaries was not an easy task as the Supreme Council for Wages debated whether to put it at LE800 or LE1,000. A final decision was taken by former prime minister Hazem Al-Bebelawi's cabinet in 2013, setting the minimum rate at LE1,200 per month.
But non-stop hikes in prices led many to be against the decision, believing that the set minimum monthly income for public employees was too low. Research conducted by CAPMAS said that a five-member family needed LE1,620 per month to meet its basic needs. The report came out before the new price hikes on the back of the energy subsidies reduction in July 2014.
The maximum wage in the public sector is set at 35 times the new minimum wage, with a ceiling of LE42,000 per month. The minimum and maximum wage rates apply to those working in the governmental sector, municipalities, national authorities and state-owned services and economic institutions, or almost six million employees out of a total of 24 million workers.
The maximum wage ceiling has been criticised by those employed in high-earning jobs in the public sector and in the banking industry. The Central Bank of Egypt and other public-sector banks issued statements saying that the new maximum wage could deter young bankers from working in the public sector.


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