The Arabist

The Arabist

By Issandr El Amrani and friends.

Subsidies in Egypt

This is a piece I've published a while back but that is not available on the internet. It sheds a little light on why the issue of subsidies, mentioned in this post, is important.

Aside from the occasional protest over regional events, such as the war on Iraq or the Israeli-Palestinian conflict, ordinary Egyptians often take to the streets en masse only in defence of one thing: their stomachs. Since 1977, no Egyptian government has dared an increase in the price of basic subsidised items such as flour, oil, fuul beans, sugar or fuel of the magnitude that former President Anwar Sadat attempted back then, sparking major bread riots. There have been increases in line with inflation and probably above, alongside allegations that government bakeries have shrunk the standard baladi loaf rather than increasing its price. But at the same time, there is a long-standing commitment to subsidies and a widespread acknowledgement that they are not about to disappear.

l, subsidies are a source of concern for government decision-makers, as well as for the economy as a whole. They constitute an expanding burden on the national budget, particularly as the currency devaluation of the past two years takes its toll.

Egypt imports a great deal of its basic foodstuffs, especially wheat. Over the course of the 2003-2004 financial year, Egypt is expected to import over 6.5m tons of wheat from major suppliers such as the US, Russia, Australia, France, Germany and Sweden, even as its currency still attempts to stabilise. Egypt no longer produces the majority of the wheat it consumes and it has become one of the world's major consumers of the commodity -- indeed, according to a recent government study, Egyptians are the world's biggest consumers of this staple commodity, with a per capita consumption of 183kg.

Over the past year, there have been widespread reports of shortages of subsidised wheat, with queues not seen since the 1980s forming up again at bakeries. Some bakers and wheat distributors have also been accused by the press of producing ever-smaller loaves and of substituting lesser quality wheat, siphoning off the subsidised commodity for sale on the black market. In the meantime, consumers are occasionally forced to resort to the non-subsidised bread generally preferred by the more affluent classes. This is much more expensive, being generally priced at LE0.25 a loaf, as opposed to LE0.05 for subsidised bread from private bakeries.

These complaints have revived a long-standing staple of Egyptian politics -- the call for national self-sufficiency in matters of basic commodities. Officials are now floating the idea of increasing the acreage dedicated to wheat production in the country by farming land reclaimed from the desert. As many as 150,000 feddans (one feddan = approx. one acre) of land could be directed towards wheat production through the scheme, officials say.

However, in the long-term, Egypt will have to continue importing a substantial part of the wheat and other staple foods it consumes, analysts say, which is why it must bring the costs of its subsidy programme under control. This has important ramifications for the country's budget deficit, which has grown by a projected 10% of GDP for the 2004-2005 financial year, up from 9.1% in 2003-2004. This is happening despite Egypt's pledge of fiscal austerity in accordance with the structural adjustment programme it began in 1991. Financing subsidies is also affecting public debt, which has also risen dramatically risen in recent years ? up to LE440.7bn, or 108.3% GDP, for the 2003-2004 financial year. This is compounded by the government's practice of borrowing from one state agency to fund another, which has created a widening hole in social security institutions. The government is already facing criticism from both houses of parliament and from the Central Accounting Organisation, a budgetary watchdog, over its spending.

Yet, the government has made clear its commitment to social spending, notably by increasing the allocation to food subsidies, education, health and government salaries -- spending that principally affects the lower classes. The cabinet has particularly focused on tackling the increase in price of food items, deciding that it will reintroduce a ration card system to allow citizens to buy commodities such as lentils and pasta at roughly 30% below market prices at designated government stores or co-operatives. The new scheme, which will cost an estimated LE3.5bn -- "a small price to pay for something that will affect 40m citizens," according to Finance Minister Medhat Hassanein -- severely limits eligibility, notably by prohibiting anyone who has not use their ration cards in over year from participating.

Public reception has so far been mixed, with press reports that many who should be eligible will be excluded and predictions of over-crowded co-operatives making distribution difficult. For the more capitalist-minded, there is also simply astonishment that the government is returning to Nasser-era rationing systems reminiscent of state socialism while it tries to engage in economic liberalisation. Still, the rising price of basic commodities resulting from the devaluation of the Egyptian pound, a mainstay of newspaper columnists and cartoonists during the last two years, seems to have been enough of an incentive for the government to take action. Another benefit of the programme is that it will create several thousand new jobs in the civil service to run it, helping to reduce unemployment -- even if by adding to an already bloated bureaucracy.

Food subsidies are not the only culprits contributing to the budget deficit, though. Egypt has also long subsidised several varieties of fuel, particularly diesel and regular gasoline. This may be understandable in a country which produces oil, but petroleum industry figures are becoming increasingly opposed to what they say is an unsustainable policy. First of all, Egypt's oil production is declining fast and the country will soon be consuming more than it produces. Secondly, most of the oil produced in Egypt, while appropriate for heavy fuels such as gas oil, is not of high enough grade to be made into light fuels, such as kerosene or high-octane gasoline. The importation and subsidisation of these fuels is proving increasingly costly.

Thirdly, an emerging gas lobby is arguing that subsidies are unfair because they slow down the adoption of Compressed Natural Gas, which can be used by vehicles that undergo a LE5000 conversion. Over 55,000 have undergone the change over, giving them access to a type of fuel that is abundant and around half the price of regular gasoline (but only slightly less expensive than diesel). Fourthly, environmentalists say fuel subsidies encourage waste and keep many vehicles, especially taxis, on the road. Were the subsidies to be removed, out of economic necessity many of these would disappear. The pollution these vehicles create -- particularly when ill-maintained and using inferior fuels -- costs an estimated LE15bn per year to the economy, or 5% of GDP, according to the World Bank.

There are signs that the government is tackling some of these problems. In March, it extended a scheme to convert cars to CNG that was previously only available to taxis. In this, the cost of conversion is paid back by instalments through an electronic card motorists use while refuelling. Higher-octane fuels are also being introduced more widely at petrol stations, with energy industry insiders saying the government is planning to slowly substitute high-subsidy fuels for less subsidised ones.

Fuel and energy subsidies to industry and consumers (in the form of butane gas used for cooking) are another expensive and market-distorting form of subvention, although it is difficult to gauge its effects accurately. One Ministry of Petroleum study suggests the supply of cheap raw material -- mostly natural gas -- to power plants and factories tallied up to as much as LE24bn in the 2003-2004 financial year in lost revenue and import aid for the authorities. An argument is made that the policy does nothing to help Egyptian industry in increasing its competitiveness, and that many profit-making companies would actually be in the red if they paid market prices for energy.

Even the most ardent proponents of subsidy cuts, however, recognise that the government cannot reduce these overnight because of the social and economic impact this would have on a large swathe of Egyptian society and business. Whether the authorities are willing to get serious about implementing a medium- or long-term cutback may well be one of the most important economic questions Egypt has to face over the next decade.