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Subsidies in perspective
Published in Al-Ahram Weekly on 28 - 10 - 2010

In its bid to reform the subsidies regime, Egypt needs the right tools and a clear vision, reports Sherine Nasr
Subsidy reform is now making headlines. According to Minister of Social Solidarity Ali Meselhi the details of how to manage the process of redistributing subsidies are now in the making. In two weeks' time, a plan will be presented to the prime minister for approval. Meanwhile, new major guidelines for providing subsidised butane cooking cylinders have been laid out and will come into effect next January.
While the government remains adamant in its quest to rationalise subsidies and to target those who need them, a clear vision on how best to perform the task has yet to be formulated. In mid-October, for example, Meselhi was quoted by the daily Al-Akhbar as saying that the needy will be given coupons to provide for their monthly rations of basic goods, including rice, oil, sugar as well as butane cooking cylinders.
A few days later, Minister of Finance Youssef Boutros Ghali made it clear during his meeting with the Shura Council's Economic Committee that the government is currently studying a new scheme to gather both in-kind and in-cash subsidies so that the beneficiaries can either acquire their monthly rations of basic goods or cash in their value through smart ration cards.
To date, the government has mainly provided subsidies in three main categories, namely baladi or traditional Egyptian bread, ration cards and butane cooking cylinders.
According to the latest announcements, a family of three will be entitled to one cooking cylinder per month. A family of four or more will have the right to obtain two cylinders. A survey is now being conducted to define the beneficiaries, 80 per cent of whom have already been identified and have been issued their regular ration cards. Those who have not been issued a ration card will equally be entitled to coupons once they register their names with the supply office nearest to their homes. Coupons cannot possibly be forged as they carry the signature of the Ministry of Finance.
According to Meselhi, gas coupons will be sent by mail to the beneficiaries once they have been printed and released by the Ministry of Finance. This planned procedure, however, has drawn plenty of criticism. "Send them by mail? The minister cannot be serious," said Cairo University professor of economics Heba El-Leithi, who added that a great many of the neediest beneficiaries live in villages and may not even have an identifiable address.
At present, 26 million cylinders are being distributed. Once the coupon system is settled, extra cylinders will be available at market price. This all sounds very good, but once it comes into practice, will it be as neatly applied as the plans suggest? "I doubt it," said El-Leithi. While the economics professor agrees that subsidies should be better rationalised and targeted, "I believe the administrative costs for applying the present plan will definitely be higher than the savings it may ever yield."
Statistician and Director of the Social Contract Centre Sahar El-Tawila could not agree more. While cash subsidies may provide a more efficient way to run public resources, they should be organised with a number of conditions. "It is a prerequisite to have an excellent targeting mechanism in place. However, that is not currently the case," said El-Tawila, who added that the actual administrative cost of running such a programme is usually very high.
Further, El-Tawila underlined that it is also equally important to recruit a large number of government employees to supervise the implementation of the process and to have a tight follow-up system focussed on the target plan. "In short, the government has to make sure it acquires the right tools, mechanisms and have human resources in place before it goes on with its subsidy plans," El-Tawila added.
Among the problems that could ensue is the one suffered by Mariam Gamal, housekeeper and mother of two. "Because of an error in my name as registered in the official records, I have been denied a ration card. To say that I will easily be entitled to acquire coupons is hard to believe," Gamal said.
The current schemes to mix subsidies in- cash and in-kind seem to have ignored earlier surveys that have been conducted to investigate the opinions of beneficiaries on how best to serve them.
"We have found that people are not enthusiastic about the idea of switching from in- kind to cash subsidies because there is a long culture of mistrust between citizens and the government, one that goes both ways," said El-Tawila.
According to El-Leithi, in most cases people were adamant on the importance of in-kind subsidies. "Their rationale was that inflation will eventually erode the value of in-cash subsidies, and they will be left hungry," said El-Leithi, who added that subsidies in kind, albeit minimal, have helped provide the most vulnerable with some degree of food security.
Earlier suggestions to better rationalise subsidies included a plan to improve the quality of subsidised goods offered by regular ration cards, to introduce new items believed to be vital to better health such as powder milk and beans, while removing altogether dispensable goods such as sugar and tea.
El-Leithi underlined that experts have long warned against plans to minimise subsidies in kind. "Studies have shown that almost nine per cent of the lower middle class will surely fall below the poverty line if this happens," she said.
However, it is the most vulnerable who will immediately be affected. Monitoring and evaluating the status of the poorest 151 villages in the country as the first phase in the government's initiative to develop the poorest 1,000 villages has revealed that 84 per cent of households in these villages live below the national poverty line, while 66 per cent of the rest live in extreme poverty and therefore below the food security line. These villages are located in six governorates including Assiut, Qena, Sohag, Sharqiya and Beheira.
"Because these households live in extreme poverty, they are in great need of both kinds of subsidies, in-kind and in-cash," said El-Tawila. "This is all the more reason why subsidies in-kind for foodstuffs should continue for as long as possible."
El-Tawila added that there are many ways to balance an aching budget other than cutting down on the basic needs of the neediest. "It would be more efficient to cut down on government expenditure or energy consumption, but to minimise subsidies for the most vulnerable classes while subsidising exporters by the millions is simply ridiculous," she said.
In the 2010-2011 budget, some LE115 billion have been allocated to subsidies. About LE20 billion are directed to food subsidies, LE5 billion to support exporters while the bulk goes to subsidising the energy sector with no less than LE67 billion.

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