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Stressed out about subsidies
Published in Al-Ahram Weekly on 24 - 01 - 2008

Subsidies are the centre of many stressful conversations among nearly all social classes. Reem Leila leafs through a study on the issue
While Egypt's extensive subsidy programme has been relatively effective as a social safety net, it is also expensive and poorly targeted to the needy. The National Council for Women's Governorate Committee (NCWGC) recently conducted 155 meetings with 13,374 participants across the country to discuss the matter, and issued a report on what Egyptians really think about subsidies. On 16 January, Minister of State for Administrative Development Ahmed Darwish, head of the Shura Council's Economic Committee Ibrahim Khallaf, and former prime ministers Ali Lotfi and Abdel-Aziz Hegazy sat down to thoroughly discuss the findings.
Food subsidies are perceived as vital in promoting political stability and providing some legitimacy to a political system where civil liberties are limited. Based on people's opinion, the NCWGC report revealed that 64.3 per cent of participants believe that the government is applying imported economic policies. "By freeing prices and phasing out subsidies, these foreign policies will give the private sector and rich businessmen the upper hand in economic decision-making and development efforts," stated Ibrahim Rehan, member of NCWGC.
The report concluded that subsidies on energy should remain in place because raising them would lead to an automatic increase in the prices of basic services and foodstuffs, and a subsequent "crunch in the vast majority of Egyptians' purchasing power". According to the report, the government's efforts to reduce prices proved futile because all the means of production by which prices could be controlled were privatised. The survey illustrated the dilemmas facing policymakers contemplating food subsidy reform in developing countries where such a step could spark political unrest. The paper argued that even in cases where food subsidy reform is a highly politicised issue, there still are some pragmatic policy steps which can be taken to make the system more efficient and better target the poor.
According to NCWGC's findings, some 48 per cent of the population live below the poverty line, namely their income is less than $2 per day. Gradually lifting subsidy from goods -- especially strategic ones such as oil, bread, sugar, and rice -- will also lead to gradual aggravation of poverty in the country. Lifting subsidies could add extra millions for the poor class which can barely meet its needs. More than 85 per cent of those surveyed believe that the cash subsidies which the government claims it will allocate to the poor will be a drop in the ocean and take the form of humiliating and low-quality goods and services.
The report further revealed people's fear about the negative effects of "inefficiency" in implementing the subsidies system. Also, that 88 per cent of those interviewed do not trust the government and believe that it lacks the proper tools to implement the cash subsidy. The majority generally preferred receiving subsidised products and services over a cash subsidy, especially that they were skeptical that the government will be able to ensure recipients will not squander their monthly cash allotment. Furthermore, the report noted that by changing the deeply-rooted subsidy system in one leap, the government could cause a sudden and severe increase in consumer prices. Price jumps could result in serious distortions and inflation of the cost of products and services, because the market simply lacks the flexibility to process such a change.
Altogether, many Egyptians do not feel reassured about the future of subsidies at a time when people can barely make ends meet on their salaries. Defending government policy, Darwish stated that out of the 17 million families in Egypt, the government has already finished assessing the overall financial and social status of 3.5 million families. By June this year, some 11 million families will be evaluated and the rest by the end of the year. According to him, this assessment will help the government choose the right subsidy system which guarantees that the right people benefit from the programme.
The key concern of decision-makers, continued Darwish, is to prevent the lower middle-class and low-income families from falling below the poverty line as a result of canceling subsidies. While subsidising these segments of society has ensured a great deal of political stability, he added, economic critics now favour lifting the subsidy from the middle-income class and redistributing it to extremely poor people.
Since one in five Egyptians is classified within that segment of poor people, they are the first to be entitled to the subsidy which goes to the middle class and an unlimited number of mediators. The official believes that many items on the subsidy list need to be reassessed, such as the subsidy to exporters which has reached LE2 billion ($363.6 million) annually, as well other subsidies that go to higher-income individuals. "We must ask ourselves, is the passenger car more entitled to state subsidies than the woman who supports her children in slum areas, villages and governorates of Upper Egypt?" stated Darwish.
Despite support for abolishing the price subsidy and replacing it with a monetary aide, Darwish argued that there are still concerns about randomly subsidising poor masses. This is based in fears regarding the impact of such subsidies on the country's investment climate and its economic stability. "One in five Egyptian pounds in the recurrent budget goes to subsidies," he explained. "Budget restructuring has focussed on lifting the subsidy on one or two items, as a start, and gradually expanding the exclusion of subsidies on more commodities during a five year period." Some of the generated savings would be used to provide direct cash subsidies to poorer classes, noted Darwish.


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