Fighting poverty: Money is not enough

Bissan Kassab , Friday 2 Mar 2018

A recent study has shown that cash subsidies may not be the solution to the financial woes of Egypt’s lower-income groups

government-run supermarket
File Photo: Egyptians wait for subsidized food commodities at a government-run supermarket in Cairo, Egypt on October 18, 2016 (Photo: Reuters)

“Money is Not Enough” is the title, and conclusion, of recent research into the impacts of cash subsidies on Egypt’s lower-income brackets.

The study, published by the Egyptian Initiative for Personal Rights, an NGO, was prepared by economic researchers Mohamed Gad and Hasnaa Mohamed. Cash subsidies among Egypt’s poor remain limited, the study found, “which reflects the absence of the state’s political will over recent decades to expand on this policy.”

Conditional and unconditional cash transfers are still insufficient, according to the study.

“Ministry of Social Solidarity data reveal that only 15 per cent of the population benefit from cash transfers, while the latest estimates reveal that poverty rates stand at 27.8 per cent and could have increased in recent months. By contrast, the two leading experiments in the field of conditional cash transfers in Brazil and Mexico covered approximately a quarter of the population in each country,” the study said.

Experts expect a rise in “poverty rates, with some speculating they could reach 35 per cent of the population. The head of the Central Agency for Public Mobilisation and Statistics told the media he expected the economic reforms to push the poverty line from LE482 to LE1,000 per month, which would mean the fall of a large group below the new poverty line amid weak economic growth and stagnant incomes,” the study explained.

The two researchers believe Egypt is lagging behind sister countries in the Organisation for Economic Cooperation and Development (OECD) in its cash transfer programme. Egypt spends 5.5 per cent of its GDP on such programmes compared to 12.4 per cent in other OECD countries.

The government’s cash transfer programme, called Takaful and Karama (Solidarity and Dignity in Arabic) is efficient in targeting the country’s poorest villages. However, a lack of policies to develop the countryside and Upper Egypt restricts the programme’s positive results, Gad and Mohamed wrote.

Except for the LE200 million set aside annually in the budget to develop Upper Egypt, the state has not announced a clear policy on its development. The study says that the government does not spend the allotted sum for developing Egypt’s southern governorates.

The contradiction between the role of cash transfer policies in limiting poverty and wider socioeconomic policies that may actually increase it extends beyond the success in eradicating poverty on a geographical basis.

“In-kind transfers have not kept up with the rise in food prices,” the study explains.

It also says that the system of food subsidies has long had structural flaws because of rising costs due to inflation. In the light of its heavy dependence on food imports, it has been difficult for the state to expand the beneficiaries base, “a fact that has endangered the food diet of poorer people and subsequently their health,” the research says.

“Where cash transfers are meant to help the poorer strata generate a monthly income, the state’s economic policies should also encourage employment to lift the burden off the subsidies programme,” the study adds. However, disappointing employment policies in addition to external factors have sometimes decreased job opportunities, lowering the quality of work and limiting wage increases.

The inflation which resulted from the floatation of the pound in November 2016 has been linked to economic policies that have had a direct impact on the efficacy of cash transfer programmes.

The research highlights inflationary pressures that have eaten up almost 60 per cent of the value of the pound and pushed private-sector employers to increase wages in 2017 by 20 to 25 per cent.

The government decided in fiscal year 2017/2018 to increase its employees’ annual raise by 14 per cent of gross salary for those subject to the Civil Service Law and by 20 per cent for those not subject to this law.

Pensions had seen an exceptional increase of 15 per cent, and Takaful and Karama cash transfers had increased by LE100 per beneficiary, the study said.

However, “these increases in wages are still less than the annual inflation rate, which exceeded 30 per cent in the middle of 2017. The burden of inflation increases on the poorer strata because of the rise in the cost of food commodities, which recorded a 40 per cent increase at that time,” the study says.

The authors add that “the bracket less affected by inflation, a result of reforms recommend by the International Monetary Fund, and at times even benefiting from it, has been expatriates whose wages are earned in hard currency.

The Gulf states have played an important role in protecting a section of Egyptian workers from the shock of the depreciation of the pound because they have paid wages denominated in foreign currencies.”

Cash transfers cannot cover the majority of the poor, but the government has depended on them as a “selective” support system to cushion the effects of the inflation that came with lifting subsidies on water, electricity and fuel.

This has become clearer since 2014, meaning that “the social policies of the last few years have been drawing closer to the liberal approach, which encourages the notion that social benefits be related to earnings with less emphasis from the state on redistribution,” the study says.

Previously, “state utilities [which provided subsidised commodities and services] included energy production and distribution, the water and sewage systems, and public transportation services, in addition to the state’s presence as a major player in healthcare, education, housing and the production and distribution of subsidised staples, among them food items,” it said.

“In this system, the cash transfer programmes, which depend on offering benefits to selected groups based on income levels, have played a marginal role compared to other forms of universal subsidies given to all members of society.”

The study said that the state has been moving from universal to selective benefits in order to concentrate its resources on the poor, but the authors believe that the lifting of subsidies, especially on fuel, has resulted in high inflation rates.

“The rise in fuel prices has been reflected in the cost of transportation and hikes in the prices of food commodities. The depreciation of the pound in 2016 was in sync with the lifting of subsidies on fuel and electricity, resulting in their price increases in 2016 and 2017, with the aim of decreasing the burden of paying for imported petroleum products.”

“This has resulted in inflation rates that have not been seen before over the past 30 years,” the research said.

*This story was first published in Al-Ahram Weekly

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