Reconsidering subsidies

Niveen Wahish and Sherine Abdel-Razek , Tuesday 28 May 2024

Prime Minister Mustafa Madbouli raised the possibility of reducing the subsidies on bread and fuel this week, report Niveen Wahish and Sherine Abdel-Razek

Reconsidering subsidies

 

“As the government, we do not want to weigh people down with additional burdens, but it is impossible for us to shoulder this burden forever,” Prime Minister Mustafa Madbouli said this week, referring to the government’s heavy subsidies bill and hinting at possible reductions in bread and energy subsidies and the potential introduction of cash subsidies.

Madbouli’s statement came while he was inaugurating industrial projects in Beheira and Alexandria governorates on Monday, where he stressed the need to boost local production in order to cut down on imports and save much-needed hard currency.

While acknowledging that Egypt has greater hard-currency needs than its resources can provide, Madbouli said the government was focusing on solving this problem over the next three years.

To achieve a better balance, there is a need to tackle the government’s heavy subsidies bill, Madbouli said.

This year’s subsidies bill comes to LE636 billion, with bread subsidies alone costing the budget LE100 billion, out of which only LE5 billion can be recovered. “The price of subsidised bread will have to increase,” he added, while assuring his listeners that it would still be “largely subsidised”.

Egypt’s bread subsidies programme benefits around 60 million people.  

“The burden of subsidies on the government is undeniable,” Cairo University professor of statistics Heba Al-Laithy told Al-Ahram Weekly. “However, it has a duty to provide staples at reasonable prices.”

Some 35 per cent of people in Egypt are below the poverty line and cannot afford basic needs without help from the government, she noted. However, a better approach could be targeting those who need help the most rather than paying for blanket subsidies, though this could be more difficult administratively, she added.

There are also other forms of wasteful spending that could be streamlined, instead of cutting bread subsidies in particular, she stressed.

Madbouli added that subsidies on fuel and electricity would also have to be revised. The bill for the fuel needed to generate electricity increases every year with surging consumption due to population growth.

The government has been scheduling one to two power cuts a day in order to rationalise the use of natural gas for electricity generation, a plan that the cabinet said would help to save $1 billion annually.

Some 60 per cent of Egypt’s natural gas goes towards electricity production.

Madbouli said that instead of increasing electricity tariffs, the government has opted to cut power. The ministers of electricity and petroleum have been tasked with coming up with plans to end the power cuts by November, the end of the daylight saving, he said.

He added that he had asked the minister of electricity to draw up a four-year plan to phase out electricity subsidies in such a way that the consumption of the most needy would still be subsidised, and covered by the higher consumption brackets.

In 2018, the Ministry of Electricity produced a plan to phase out electricity subsidies over five years. But with the Covid-19 pandemic and then the war in Ukraine, the government halted the plan for a year and a half in order not to burden people with higher bills.

It had born these itself, according to Madbouli.

Reducing the electricity subsidies bill is necessary to ensure the success of the government’s fuel-subsidies cuts. The 2024-25 budget includes LE155 billion in fuel subsidies, compared to LE19 billion in 2021, Madbouli said.

This has happened on the back of several factors, including higher global oil prices and the depreciation of the currency. Oil prices have risen from $54 per barrel in 2020-21 to around $87 today.

The fuel consumption bill stands at $55 billion annually, Madbouli said, with a total of $33 billion worth of fuel products being domestically produced, thus saving hard currency. But using this fuel to generate electricity is a lost opportunity, he added, as that fuel could have been exported.

The remaining $22 billion is owed to foreign partners and to pay for other fuel imports.

Over the past couple of years, the dollar crunch has resulted in the government delaying payments to foreign partners, and this in some cases has affected their work. Madbouli said that the government is intent on paying any arrears, adding that by next week it will have paid between 20 and 25 per cent of the arrears, with the rest being rescheduled with the agreement of partners.

Lowering subsidies has also long been called for by international institutions like the International Monetary Fund (IMF), which has made it the subject of negotiations for the three funding facilities it had provided to Egypt since 2016.

Madbouli’s statements came in the same week that an IMF delegation is visiting Cairo in order to undertake the third review of the reforms associated with its augmented $8 billion loan to Egypt.

On a related note, Madbouli signalled that more fuel price hikes may take place gradually in order to restore the balance between the cost of production and the end price by the end of 2025.

The government’s Fuel Pricing Committee hiked petrol prices by eight to 10 per cent in March and diesel prices by 21 per cent. The plan to increase fuel prices is in line with the commitments Egypt has made to the IMF, as revealed in a letter published as part of the fund’s first and second reviews.

Egypt has applied a quarterly price-adjustment mechanism, known as the price indexation mechanism, on all petroleum products since the beginning of 2019-20.  

“Looking ahead, we will continuously implement in full the retail fuel price indexation mechanism, and in cases where the mechanism suggests a reduction in fuel prices, we will refrain from doing so until the level of fuel subsidies for products covered by the mechanism since 2021-22 has been eliminated,” the government’s letter of intent submitted to the IMF and included in the reviews said.

“We are adjusting domestic fuel prices to make space for better targeted social support,” it added.

In what could be a departure from decades-long social policies, Madbouli also pointed to calls to convert in-kind subsidies on goods to cash subsidies instead. “This seems to be the real solution in the medium term, and the cash subsidies would naturally increase with inflation. It is an issue that will be considered in the national dialogue,” he added.

“By the end of December, we would have a vision of whether this is the best solution or not and how to apply it. If so, we can begin implementing it gradually in 2025-26,” Madbouli said.

However, implementing cash subsidies will not be easy. According to Al-Laithy, a survey about preferences for cash or in-kind subsidies showed that people preferred in-kind subsidies because they guarantee them a minimum of their basic needs.

They believe that the cash subsidies will lose their value over time and do not trust the government to keep its promise to increase them with inflation, Al-Laithy said.


* A version of this article appears in print in the 30 May, 2024 edition of Al-Ahram Weekly

Search Keywords:
Short link: