Although subsidisation is mainly to blame for the growth of the budget deficit in recent years, food subsidies will be increased substantially this year. Gamal Essam El-Din reports In its first annual conference last month, the ruling National Democratic Party (NDP) strongly recommended that the government allocate an additional LE1.6 billion towards food subsidies in this year's budget. The party conference defended this additional allocation as a necessary measure to protect citizens from the vagaries of economic liberalisation and the recent surge in prices precipitated by the falling value of the Egyptian pound. This policy represents a major step back from the NDP's earlier economic philosophy, as espoused by its eighth congress in 2002. Until this year's conference, the NDP had called for rationalising subsidies as a necessary step towards reducing the budget deficit. Subsidies were to be gradually phased out and replaced by other, less burdensome policies aimed at enabling poor citizens to increase their incomes. The dramatic turnaround in the NDP's position was affirmed by its chairman, President Hosni Mubarak. During a visit to the Governorate of Qena in Upper Egypt on 16 October, President Mubarak explained that several factors, in particular a rise in the global prices of food crops, led the government to approve a LE1.6 billion increase in food subsidy expenditures. Finance Minister Medhat Hassanein announced on 14 October that the budget for 2003/2004 was being adjusted to allocate LE1.6 billion more to direct commodity and service subsidies. Subsidies in the budget take direct and indirect forms. The direct subsidies, primarily allocated to essential food supplies, housing and transport, increased from LE6.7 billion in the 2002/2003 budget to eight billion pounds in the 2003/2004 budget, raising the proportion of expenditures on direct subsidies from 4.7 to five per cent. Last week's allocation, according to Hassanein, will increase the direct subsidies to LE9.6 billion (or 6.6 per cent of the budget). Indirect subsidies are estimated at LE16.7 billion, including provisions for below-cost or reduced-cost sales of butane gas, diesel and electricity. On top of the LE26.5 billion total allocated for consumer subsidies are social subsidies, mainly in education and health. Including these with the figures for both direct and indirect subsidies, subsidies for 2003/2004 are a whopping LE81.1 billion, or around 55 per cent of fiscal expenditures. The NDP's old guard accept the increased budgetary allocations for subsidisation as a natural part of the populist ideology and obligations of the NDP. These leaders strongly believe that subsidisation is a matter of national security for Egypt and political security for the NDP. Although President Mubarak reaffirmed the NDP commitment to protecting limited-income citizens, he warned that "there will come a time when we will never be able to provide all of these subsidies. I want to ring alarm bells on the issue of subsidies because with the current runaway growth of population, the government will by no means subsidise all things to all people in the near future." President Mubarak also pointed out that the growth of subsidies will immediately translate into a greater budget deficit. The budget deficit for 2002/2003 reached LE42 billion, 6.5 per cent of GDP, or 10.3 per cent including the loans from pension funds. This is a sharp rise from the last two years -- from 6.7 per cent of GDP in 2001/2002 and 7.4 per cent of GDP in 2002/2003. Greater subsidisation is widely blamed for at least half of the recent growth in budget deficits. The rest is accounted for by assorted factors such as declining state income, greater spending on employee salaries, financial mismanagement and pervasive corruption. President Mubarak's warnings about long- term subsidisation are supported by a new camp of NDP reformists, or the "future generation". This camp is led by Gamal Mubarak, the 39-year-old son of President Mubarak and chairman of the influential NDP Policy Secretariat, and comprised mainly of young, pragmatic businessmen and economists. Ahmed Ezz, a member of the NDP's Secretariat-General and chairman of Parliament's Budget and Planning Committee, Hossam Badrawi, the chairman of the NDP's Businessmen Committee and chairman of Parliament's Education Committee, and Mahmoud Mohieddin, chairman of the NDP's Economic Committee, are the foremost proponents of this school. The "future generation" pragmatists argue that the reluctance of several governments over the last 25 years to find a coherent solution for the problem of subsidies has made it difficult to tackle. This camp also strongly believes that previous governments opted for more social subsidies at the expense of fiscal prudence and rational spending. Ahmed Ezz, addressing Parliament's Budget and Planning Committee last May, said that a quarter century of experience has shown that these subsidies not only strip the country of economic efficiency and aggravate the chronic budget deficit crisis, but also fail to serve their original purpose. Opposed to Ezz are a number of private- sector businessmen, notably Mounir Fakhri Abdel-Nour, spokesman of the liberal Wafd party. Abdel-Nour believes that the NDP's slogan should be changed from the "Rights of Citizens First" to "Subsidise or Die". "Subsidisation is now a major NDP policy and it is not expected to relinquish it in the near future. To the NDP, tampering with this essential policy at a time when prices are rising all the time could cause a broad social upheaval," Abdel-Nour said. Due to the importance of the subsidisation issue to economic and fiscal reform, the opposition has asked repeatedly that a special conference including a wide spectrum of economists be organised to debate its different aspects and find a radical solution to it. Hassanein, addressing Parliament last May, acknowledged that the government has been slow to reform the subsidy system. "Ahead of drawing up the 2002/2003 budget, [the government] was in fierce debate over the subsidy system. The government is determined that this system be a basic part of the second generation of fiscal reforms aimed at achieving greater liberalisation of the Egyptian economy," Hassanein asserted.
