Mona El-Fiqi examines ways in which the system of subsidies can be streamlined to better target those in need Minister of Social Solidarity Ali El-Moselhi announced on Monday that funds earmarked by the government for subsidies on foodstuffs and basic goods and services could increase and that the government will not cut the sums currently disbursed. The announcement comes amid increasing calls for squeezing government spending in this area and for easing the way in which subsidies are delivered. While few would question the role of subsidies in helping alleviate the distress of society's poorest and most vulnerable members demands are being voiced for a more efficient way of targeting those most in need. To that end, El-Moselhi said this week that a database of families in need of subsidies was being prepared. Critics argue that leakage of subsidised items to non-target groups places an unsustainable burden on the treasury, and that the current system leads to price distortions within the market. Direct and indirect subsidies to commodities and some services cost the treasury LE18 billion in 2004/05, or 14 per cent of total public expenditure. LE15.5 billion is spent on directly subsidising bread, food commodities and medicines, with the rest of the figure made up by indirect subsidies of public utilities and transport. Energy subsidies also take up some LE20 billion. Bread accounts for 60 per cent of the total of all food subsidies and is available to all citizens, regardless of income. Access to other subsidised foodstuffs is by ration cards, which come in two grades. Green ration cards, from which 32.5 million benefit, provides comprehensive access to the full range of subsidised foodstuffs while the red versions, issued to 7.5 million, provide partial subsidies. Hamdi Abdel-Azim, professor of economics and a former dean of the Al-Sadat Academy for Administrative Sciences, argues that the success of the subsidy programme in combating the worst effects of poverty -- Egypt's National Planning Institute estimates that 30 per cent of the population lives on or below the poverty line -- must now be refined and new mechanisms be introduced to ensure that the support reached those most in need. A recent study by the Egyptian Centre for Economic Studies (ECES), estimates that the provision of subsidies to 12.6 million families -- i.e. 50.5 million people -- helped in reducing poverty rates from 20.2 per in the mid-1990s to 16.7 per cent in 2000. Access to subsidised bread kept 730,000 people above the poverty line in 2000, and subsidised food commodities provided 40 per cent of the calorie intake of the poor. But the downside of the current subsidy programme, the study continued, is that it has led to market distortions. Provision of electricity and other fuels at subsidised rates has encouraged manufacturers to set up energy- rather than labour-intensive processes and allows otherwise failing businesses to continue making profits. The study also points out that the current subsidy programme leads to a misallocation of economic resources and excessive consumption. But the government is trying to do something about it. A weekly report by Prime Securities issued this week says the government has approved a proposal to increase electricity prices for commercial and household consumers by a maximum of five per cent starting this month. Subsidised electricity costs more than LE3.6 billion annually. The proposal, however, leaves out the price increase on low-income households that consume less than 200 kw/hr per month. Although poverty rates in rural Upper Egypt increased from 29 per cent in 1995 to 35 per cent in 2000 the lion's share of subsidies -- "almost 70 per cent of the subsidised food commodities," says the study -- go to urban dwellers. This is not the only example of inflexibility within the system leading to social injustice. While it is generally accepted that the poorest 40 per cent of families should receive between 50 to 80 per cent of total subsidies in Egypt the richest 60 per cent of Egypt's receive two-thirds of all subsidies, and the poorest 40 per cent one-third. Only 35 per cent of subsidised bread is consumed by the poor, with 48 per cent bought by those who do not need to be subsidised. The remainder is lost during the course of the marketing process. The figures for education are equally disheartening, with 22 per cent of the budget allocated for education going to the richest 20 per cent of population while only 15.6 per cent of the budget reaches the poorest 25 per cent. The seemingly anomalous figures are a result of the poorest children receiving only primary education, on which the government spends comparatively little, while the children of the rich often benefit from far more expensive university studies. The study stressed the urgent necessity of formulating a subsidy policy that irons out such growing anomalies, and balances social justice with economic efficiency. It suggests two possible solutions: "the government should opt for a mixture of methods that attracts reasonable social, administrative and financial costs in targeting subsidies towards the poor," or else switch to a cash transfer system under which the payment of cash subsidies would be made conditional on children actually attending school and regularly visiting health care units. Azim favours a coupon-based system, in which those most in need receive coupons redeemable in the market. It is a mechanism, he says, that allows citizens a choice of product and has the advantage of supporting market stability since the government will redeem coupons from traders at the market price. In a survey conducted by the Cabinet Information and Decision Support Centre the majority of respondents said they would prefer quotas of rice, sugar, cooking oil and tea to be increased at the expense of other, less popular products, including beans. Respondents also suggested that subsidised butagas cylinders should be restricted to household use whereas currently they are available to businesses such as restaurants.
