News of a package of procedures aimed at restructuring the subsidies system stirs controversy, Mona El-Fiqi reports Last week, Prime Minister Hisham Qandil announced that the government plans to cut spending through a more targeted subsidies programme. The measures will attempt to decrease the growing subsidies bill estimated at LE132.3 billion in the 2011/2012 budget compared to LE84.2 billion in 2007/2008. The subsidies bill represents almost a quarter of the country's total budget. Some 72 per cent of total subsidies in 2011/2012 were spent on fuel products, such as diesel and gasoline. Only eight per cent was used to subsidise bread and only six per cent went to subsidising essential food commodities through ration cards and 36 million butane cylinders per month, according to official figures in 2011. Qandil gave instructions to concerned ministers to conduct a comprehensive study in each sector to reduce subsidies and rationalise the government's expenses. Targets are not static since they depend on what kind of financial support the government will get and how people will react to the measures, the premier said. The announcement raised public suspicions that cutting subsidies is a condition dictated by the IMF for it to approve a $4.8 billion loan to Egypt, a charge denied by experts. Mokhtar El-Sherif, an economic consultant at the Federation of Economic Development Associations, said the IMF has not sought to apply such conditions on Egypt. Supporting the same opinion, Anwar El-Naqeeb, professor of economics at Al-Sadat Academy for Administrative Sciences, said that the IMF has nothing to do with the government's plan to redirect subsidies. "The IMF does not have an agenda for Egypt. If the loan is approved, the government will take it and implement its own plan according to its priorities." El-Naqeeb said. As a first step, Qandil announced the application of a coupons or smart card system in October for the distribution of butane cylinders to ensure that the subsidised gas reaches the poor, a move expected to save LE4 billion annually. Qandil added that cuts to gasoline subsidies are also expected in the coming months. The government's plan includes other sectors, such as electricity, drinking water and bread. These measures are part of efforts to reduce the budget deficit by one per cent in the coming year, but targets would depend on what the population could tolerate. "People can not stand any changes in the subsidy system at the current time," Hashim Mahmoud, an employee and father of three children, said. According to Mahmoud, the majority are unable to buy products at market prices. "So the government should start by reconsidering the minimum and maximum wages before thinking of cutting subsidies," he said. The existence of the subsidies system for more than 60 years in Egypt led most of the citizens to feel that it is one of their essential rights, especially with a 40 per cent poverty rate. While the sales price of subsidised bread is not expected to change, the government plans to revamp the production cycle and to liberalise the price of flour. These two moves would save on waste and prevent the sale of subsidised flour on the black market, officials contend. As for electricity, prices could be raised exempting home usage for low-income categories, which will be determined according to monthly consumption. Mohamed Balbaa, minister of electricity, asserted that electricity prices for homes are stable since 2008. Electricity bills are determined according to consumption categories ranging between five piastres to LE0.48 per kilowatt while its current cost price stands at LE0.26. The total subsidies provided to home electricity are estimated at LE12 billion in 2012/2013 compared to LE10.5 billion in 2011/2012, an increase of 12 per cent. Beneficiaries of electricity subsidies who consume less than 1,400 kilowatts per month represent 99 per cent of total home bills, according to Balbaa. The price of water could also be raised, but only for commercial and touristic establishments. The Holding Company for Water and Wastewater (HCWW) conducted a study to re-evaluate the sales price for 40 per cent of total benefactors. Almost 11.4 million benefactors consume a higher average of water (more than 40 cubic metres per month). Those subscribers are mainly companies, resorts, hotels, factories and a limited number of individuals who own villas and swimming pools in new city complexes. El-Sayed Nasr, HCWW chairman, said the company is committed to providing drinking water for housing usage at a low price, but not for commercial establishments. Factories and hotels gain high profits. For example, Nasr explained that a soft drink factory pays LE2.4 per cubic metre of water while it sells a soft drink bottle at LE1.25. One cubic metre of water is enough to produce 5,000 bottles of soft drink. Although the government has a point when deciding to cut subsidies and experts agree that the move is necessary, application remains a problem. "It's a big dilemma for the government, since it is obliged to cut subsidies to reduce the budget deficit, but it is difficult for people to tolerate unless officials inform the public of the importance of this decision," said El-Sherif. He added that during the coming period subsidies should be provided only to the poor. Targeting the poor is important, yet efficiency of the whole process comes first, according to El-Naqeeb. He said that the great problem in the current subsidy programme is its inefficiency. For example, the weight of a butane gas cylinder according to specifications is 12.5 kilogrammes, but it is sold at only four kilogrammes. This means that it loses two thirds of its weight during the production process and the same applies to bread and other subsidised commodities. El-Naqeeb explained that the government should stop caring for demand but not supply. The government counts how many butane cylinders and bread loaves are produced monthly, but neglects the quality of these products. "If the production cycle is improved, the government can save 70 per cent of the cost of subsidies," he said. Bread for all AWARE of the importance of bread, which tops the list of subsidised commodities, President Mohamed Mursi recently rejected a government suggestion to produce a more expensive version of subsidised bread to be sold at LE0.1 as an attempt to reduce demand on LE0.05 bread. Mursi seeks to improve current bakeries by providing easy loans to help them produce higher quality bread while the government remains committed to selling bread at LE0.05. The government pays LE20 million annually to subsidise bread. On the other hand, Mursi approved that flour would be sold at market price during the bread production process in order to quash the black market for flour. The move will be tested in a pilot project and extended if successful. A committee has also been formed to follow up on the liberalisation of flour prices. The committee has to set a price for flour to avoid manipulation by mills. The government also promised to reconsider the cost price of bread, which it pays to bakery owners and which had not been amended since 2006. This decision gives hope to baladi (popular) bread bakery owners who complained that the cost price was set at LE65 per 100 kilogramme of flour while the government promised in 2006 to revise this price annually to meet increasing prices but that nothing was done since then. To improve the performance of bakeries, it was decided that the Ministry of Petroleum would prepare 1000 bakeries to use natural gas in producing bread. To cover the cost of this transition, estimated at LE60,000 per bakery, the government promised to provide easy loans in cooperation with the Social Fund for Development.
