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Monday, 20 November 2017

On prices, subsidies, pensions, and exemptions

Ziad Bahaa-Eldin , Friday 30 Jun 2017
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State media warmly welcomed recent government decisions increasing some pensions and subsidies, seeing them as an expression of the state’s concern for poor and low-income Egyptians, and an effort to mitigate the impact of inflation, and calm resentment in the street.

But others in the remaining independent media questioned those decisions , arguing they would do little to stem the constant increase in the cost of living, and that with forthcoming price rises the government will simply be giving with one hand while taking with the other.

The measures offered relief in six areas: 1) a per-person allotment increase on ration cards from LE21 to LE50 per month for the first four individuals in the family, while raising the price of sugar and oil; 2) a LE100 increase in monthly benefits under the Karama and Takaful conditional cash transfer programs; 3) a 15-percent increase in insurance pensions; 4) approval of a periodic and exceptional bonus for civil servants; 5) a higher income tax exemption for low-income payers; and 6) a three-year moratorium on the agricultural land tax.

According to the finance minister, the said decrees will cost LE75 billion in next year’s budget. He further added the government still intends to reduce the budget deficit to about 9 percent, in order to meet the targets agreed with the IMF under the ongoing economic reform program.

That the state responded to the soaring cost of living, instead of ignoring it, is itself a good thing. And no matter how meager the sums involved, for the poor they make a real difference that can’t be denied. But the state media managed to ruin this positive step with its usual hyperbole. Hailing the modest relief as a quantum leap in the standard of living for the poor, the media called the measures a “holiday gift” from the presidency and a demonstration of state munificence. The truth is that ultimately the state is spending the people’s money, paid in the form of taxes and fees or future public debt.

At the same time, the measures will have only a limited impact, coming after price increases last year of 33 percent and 40 percent for food, according to some estimates. Add to this impending energy and electricity price hikes and that the most optimistic government projections for inflation this year are at 25 percent, and it becomes clear that the cost of living will continue to rise and the recent measures are not enough to put this listing ship upright.

Finally, though the measures targeted low-income Egyptians, within this extremely broad category they inevitably favor state employees and workers in the formal sector at the expense of unemployed youth or informal and temporary laborers. It’s hard to reach these latter groups through the conventional channels of pensions, bonuses, and tax breaks because they exist outside the system, though they do benefit from in-kind and cash subsidies. Protecting these groups, then, requires providing jobs in the formal economy.

It’s a difficult act to pull off. Serious, responsible demands that the state provide additional support for the poor must be based on a realistic understanding of the nature of our limited resources. But even within this framework, there are three areas where the state can act to insulate citizens against the fallout of the inflation that has severely eroded their standard of living. First, it needs to create a climate that fosters investment and rapid youth employment; this hasn’t happened yet, despite draconian economic decrees and successive legislation. Second , it can regulate the market and combat flagrantly monopolistic production and distribution practices, which inflate prices to levels that cannot be explained purely by economics. And third , it must reconsider public spending on national mega projects so that we don't continue to pour money into useful and not-so-useful ones without an proper studies or accountability.

The recent measures are a positive step, but the continued reliance on bumps in pensions and subsidies can do just so much. These will have only a temporary, limited impact as long as they’re not paired with genuine reform in investment, employment, and distribution that addresses the causes of poverty rather than its effects.

 

*The writer holds a PhD in financial law from the London School of Economics. He is former deputy prime minister, former chairman of the Egyptian Financial Supervisory Authority and former chairman of the General Authority for Investment.

A version of this article was published in Arabic in El-Shorouq newspaper on Monday, 26June.

 

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