Benefits of restructuring subsidies

Aisha Ghoneimy
Wednesday 1 Sep 2021

Government policies to restructure subsidies have rationalised consumption, improved production, and helped to meet UN Sustainable Development Goals

The decision to restructure subsidies has been a decisive and audacious move that has reflected and assured transparency and the proper governance of policies and strategies planned by the political leadership at critical stages in Egypt’s economic and structural reforms. It has helped to cope with the rapid increase in population growth and contributed effectively to accomplishing Egypt’s Vision 2030 and the UN Sustainable Development Goals (SDGs). 

The gap between supply and demand has been aligned with the growth rate of the population, and the decision to restructure the earlier irrational use of energy and the highly subsidised level of subsidised bread has introduced essential economic reforms. 

Demand-and supply-side measures have been introduced to catalyse the economy. Demand-side management has aimed at influencing the demand for goods and services, in this case by rationalising the demand for energy and bread. Supply-side management has aimed at influencing how demand for goods and services is met through boosting the diversification of renewable energy sources and improving the quality of production of bread at reasonable cost. 

It should also be born in mind that there is no single methodology for applying subsidy reforms, as each country has its own consumption patterns and economic growth rates. The elasticity of demand and supply in the market may also vary from one country to another. 

The importance of restructuring the subsidies stemmed from the need to strengthen the path towards sustainable development for current and future generations. In the meantime, the government has maintained widening and deepening its social-security programmes and direct cash-transfers in order to guarantee that subsidies reach those targeted in the proper way and helping to decrease the budget deficit. 

This is designed to create more incentives for rationalising consumption and improving the quality of production as well as raising productivity. 

From the political-economy perspective, governments across the globe are reluctant to reduce or remove subsidies in order to avoid a possible backlash without providing real and permanent solutions to achieving social equality and maintaining sustainable development. In other words, subsidies are often used as a political tool to attract votes and popular support.

 However, they are a short-term remedy for chronic deficiencies in the distribution of incomes. Their disadvantages are shown in the irrational fiscal burdens that the government bears by supplying electricity, natural gas, petroleum and bread at extremely low prices compared to the value of the Egyptian pound and the real cost of production and distribution, leading to excessive and irrational consumption that could provoke shortages in supply and problems in the quality of production.

In the light of the above, the government has followed transparent and effective policies by implementing radical economic and structural reforms for the sake of human well-being, social equality and long-lasting development for current and future generations. Since 2016, it has kept on the path of well-sequenced economic reforms, implemented according to an adequate timeline and responsive policies and backed by the support of public opinion. 

Reforming the subsidies has been implemented according to a transparent timeline for the gradual removal of energy subsidies since 2016, along with expanding social safety nets to protect poorer and more vulnerable households and individuals. Efforts have been made to create a unified database that targets all beneficiaries that deserve to receive cash and food subsidies, according to their level of income and standard of living. 

The success of the economic-reform programme has showed the effectiveness of the energy subsidies reforms in expanding supply in the energy market and enabling Egypt to become an exporter of natural gas and electricity. These impressive results have led, on the one hand, to diversifying the sources of renewable energy, enhancing the quality of production, and boosting the competitiveness of the energy sector and energy efficiency and conservation, and, on the other hand, to rationalising public expenditure through redirecting subsidies to eligible beneficiaries and enhancing public services in order to put an end to rampant corruption in the informal market. 

Building on such success, the decision to restructure subsidies on bread was necessary to promote the quality of bread production and distribution and to rationalise its consumption, ensuring self-sufficiency in healthy food for all members of society and promoting its economic and nutritional value. The previously exaggerated subsidies on bread, unrelated to the real cost of its production, not only squandered its economic value, but also its nutritional value and led to wasteful consumption. 

The government’s decision to restructure the subsidies system extended to redirecting the money saved to public investment in education, healthcare, transportation and infrastructure, the expansion of social safety nets, and cash transfers. The restructuring of subsidies on bread neither negatively affected the poverty rate nor the inflation rate. Wages, salaries and pensions were increased in the new budget starting from July this year, in order to help ensure more equal income distribution and benefits from the gains of economic development, as well as the provision of necessary social protections for households and individuals. 

The success of the economic-reform programme has contributed to consolidating the resilience and solidity of the Egyptian economy, which has enabled it to move forward towards achieving fundamental and structural reforms.

This shows the critical role played by the state in the economy in regulating, controlling and monitoring the market in order to promote good governance, transparency, social equality and combat corruption and speculation as well as price discrimination. The state helps to boost economic activities amid external shocks, enhancing the business environment and enabling the private sector to contribute to sustainable development projects. 

According to British economist John Maynard Keynes, aggregate demand, measured as the sum of spending by households, businesses and the government, is the most important driving force in the economy, emphasising the fact that free markets do not have self-balancing mechanisms that lead to full employment. Government intervention through public policies to achieve and maintain full employment and price stability can contain market failures amid external shocks through preemptive fiscal-stimulus packages. 

Last but not least, the government has shown its will to make the lives of ordinary Egyptians its top priority in every policy and decision, with the goal of guaranteeing a decent living standard for all, supported by sustainable development. It thus indicates its belief that the development of human capital is the development of the nation’s wealth. 

It should be born in mind, however, that there should still be a periodic review of subsidy ratios, taking into account the real costs of production and distribution. These ratios should be governed by criteria such as the elasticity of the demand and supply of the subsidised products concerned, the number of those eligible for the subsidies, and the rate of actual consumption of the commodity. It should also take into account the rate of inflation, the value of the Egyptian pound and developments in economic and social conditions.

This means that subsidy ratios cannot be fixed, as this can lead to the distortion of prices in the marketplace and the loss of value of the subsidised commodities.

*The writer is a member of staff at the Faculty of Economics and Political Science at Cairo University.

*A version of this article appears in print in the 2 September, 2021 edition of Al-Ahram Weekly

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