The government is set to introduce comprehensive reforms to Egypt’s food subsidy system, with the Board of Trustees of the country’s National Dialogue announcing last week that it will soon begin to discuss the feasibility of replacing the existing in-kind system with a system of cash subsidies for the most vulnerable sections of the population.
Within the framework of its Extended Fund Facility (EFF) loan programme with the International Monetary Fund (IMF), Egypt is committed to cutting the amounts disbursed under its subsidy system, including payments disbursed through food ration cards and fuel subsidies.
For the current fiscal year 2024-25, which ends on 30 June 2025, the government has allocated about LE636 billion for social-support programmes.
The total expenditure on such programmes is estimated to reach LE6.4 trillion. This support includes approximately LE370 billion divided among petroleum product subsidies, for which LE154 billion have been allocated, and food subsidies, which receive LE134 billion. The remainder goes towards subsidising other items such as exports and health insurance.
In his policy statement before the House of Representatives on 8 July, Prime Minister Mustafa Madbouli raised the possibility of replacing in-kind subsidies with cash payments. The move to cut the subsidy bill is part of plans to narrow the budget deficit and streamline public finances.
Commenting on the proposals, economist and former advisor to the Ministry of Supply and Internal Trade Medhat Nafei told Al-Ahram Weekly that policy-makers first need to redefine what constitutes support in order to determine costs that can be classified as such, distinguishing between waste, losses, theft, corruption, and leakage to ineligible recipients.
There is a need to develop standard models to evaluate the efficiency of transitioning to cash-support systems from in-kind subsidies. “In theory, cash support is more efficient and reaches beneficiaries more quickly, but practical implementation hinges on several conditions, the most crucial being inflation rates,” Nafei said.
He said an expansion of cash support could trigger further inflation due to increases in the money supply.
“Given the government’s limited fiscal space, as over 60 per cent of the budget is consumed by debt servicing, the cash support will likely be financed by drawing from the Central Bank of Egypt (CBE) or issuing short-term debt instruments, thus increasing inflationary pressures,” he said, warning that “without mechanisms to compensate beneficiaries for inflation, the cash support will quickly lose its value.”
If the government addresses this by establishing mechanisms that compensate for inflation, the share of such support in total expenditure will likely rise rapidly, he said, adding that the government would not be able to sustain such an increase under its current resource structure.
While subsidies once accounted for 25 per cent of expenditure, that has fallen to about 11.5 per cent in the current 2024-25 budget.
“If the government aims to mitigate inflation’s impact on a cash-support system, the proportion of that support must continuously increase. It is critical to understand that cash support cannot merely involve converting in-kind support into cash without adjustment for inflation, especially as the national currency could devalue rapidly,” Nafei stressed.
If the cash subsidies are not adjusted for inflation, he added, the government will be effectively cutting support or rendering it symbolic, akin to pensions from professional unions that can be as low as LE50 a month (around $1).
Nafei said that the government must clarify the targets of a cash-support system, whether it is to provide assistance or to reduce poverty rates, or to achieve more specific objectives like improving food security for certain essential food products.
Food security is a vital component of national security, he said, and many countries provide support for food products.
The Raskin programme in Indonesia represents a successful Asian experience in this regard, for example, he said. This system provides subsidised rice to poorer people. Likewise, India has a vast network of outlets offering subsidised food products.
“If the aim of providing support is to ensure food security, a complete transition to cash support may not be the optimal approach,” Nafei said.
The government has several support programmes, including one covering food support benefiting around 64 million people through 23 million ration cards that cover essential goods like bread and oil.
Individuals with ration cards receive LE50 per person in cash to spend in designated shops for basic commodities. They are also entitled to five loaves of subsidised bread per person per day. In June this year, the price of bread was increased for the first time in decades by 300 per cent from LE0.05 to LE0.2 per loaf.
Cash-support programmes like Takaful and Karama also benefit over 5.2 million poorer women and children, people with disabilities, orphans and widows. There are also energy subsidies for fuel and electricity, while health support aims to improve healthcare access and reduce medication costs.
Educational support provides free education in public schools and universities, along with school nutrition programmes and aid for talented students and individuals with special needs.
For economist Ashraf Ghorab, the shift from in-kind support to cash support has several advantages. It provides eligible beneficiaries with a monthly cash allowance that enables them to meet their essential needs for goods and other necessities, rather than being limited to predetermined in-kind items that they may not necessarily need.
This approach promotes social justice and economic efficiency, he said.
Ghorab said that in-kind or commodity support can sometimes be manipulated by grocery vendors in rural areas and Upper Egypt, who may raise the prices of certain food items without the consumer’s knowledge, leading to higher costs. The quality of goods can also suffer due to poor storage.
Transitioning to cash support limits abuses associated with the distribution of goods, he said. Furthermore, moving from in-kind support to cash assistance reduces pressure on the public budget and helps decrease deficits.
Ghorab stressed the need for strict market supervision if cash support is implemented to prevent price manipulation by traders, as they may be accustomed to raising prices, sometimes resorting to hoarding to drive up prices and exploit consumers.
Ghorab also noted that it would be preferable for cash support for eligible beneficiaries to be linked to market prices, allowing for increases over time as prices rise. This ensures that families’ purchasing power is not eroded.
He added that cash support improves the efficiency of distribution and ensures food reaches the intended recipients.
* A version of this article appears in print in the 17 October, 2024 edition of Al-Ahram Weekly
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