Egypt Subsidies: Need of Reforms

Ahmed Ghoneim, 17 Feb 2015

Subsidies are a core pillar of Egypt's socioeconomic system and an integral part of the historical social safety net. Total subsidies increased from LE 84.2 billion to more than LE 134.96 billion between 2007/2008 and 2011/2012, representing respectively 29.8 per cent and 28.7 per cent of the total public spending. By 2011/2012, subsidies represented 8.8 per cent and 81 per cent of GDP and the budget deficit respectively. (MOF 2013).

 

The majority of the subsidies—on average 75 percent of all subsidies provided—go to fuel. In absolute terms, it is more than the amount of governmental fiscal allocations for health and education (Handoussa 2010). The second-highest subsidies, in terms of value—at around 15 percent—go to baladi bread, followed by subsides allocated for ration cards, at around 5 percent. Fuel and fuel subsidies amounted to 5.8 percent and 1.5 percent of GDP, respectively, during 2005–10 (IMF 2010). The remaining subsidies are provided as cash transfers and other allocations.

 

The main criticism of subsidies is their inefficiency. For example, fuel subsidies are highly regressive. For gasoline, the World Bank finds that 93 percent of the benefits go to the highest quintile (Fattouh and El-Katiri 2012). In times of crises, black market and smuggling phenomena increased dramatically when selling of subsidized Egyptian fuel took place in neighboring countries that made use of the price differences (Open Oil 2013). Likewise, the food subsidy system suffers from lack of coverage, incorrect targeting, waste, and leakages.[1] Nearly 70 per cent of the population receives ration cards but 19 percent of the most vulnerable population are excluded (IFPRI and WFP 2013).

 

Lack of political will, the absence of reliable information and data on the poor, a high correlation between subsidy and poverty level,[2] proliferation of the informal sector, and the existence of rooted corruption have prevented subsidy system reforms up to recently. Yet some partial reforms have been undertaken; smart cards for fuel consumption were introduced, the price of natural gas for heavy industries was gradually increased, and the baladi bread subsidy now targets the consumer rather than the producer. Such reforms have been piecemeal, however, and have not significantly helped overcome the negative impact of subsidies on macroeconomic conditions to achieve social justice. Lately in 2014, the authorities have taken bold steps towards reducing the fiscal burden of subsidies by notably increasing significantly the prices of fuel.

 

References

 

 

[1] According to El-Laithy and Armanios (2011) and following the system adopted by the Ministry of Social Solidarity in identifying the poor who deserve a ration card, 23 percent of the people who are eligible for a ration card according to Ministry of Social Solidarity criteria do not have one, whereas 64 percent of the people who are not eligible do have one. World Bank (2010) argues that around 28 percent of food subsidies (LE 5.5 billion) in 2008/09 did not reach intended consumers, with baladi bread accounting for 68 percent (LE 3.7 billion) of the leakage and cooking oil 20 percent (LE 1.1 billion) (see El-Laithy and Armanios [2011] and World Bank [2010]).

[2] The food component of the consumer price index represents more than 40 percent.

 

Ahmed Ghoneim is a professor of economics in the Faculty of Economics and Political Science at Cairo University. He is a research fellow at the Economic Research Forum for Arab Countries (ERF) in Egypt, and at the Center for Social and Economic Research (CASE) in Poland. 

 

The views expressed here are solely those of the author in his/her private capacity and do not in any way represent the views of neither the Arab Development Portal nor the United Nations Development Programme. 

Ahmed Ghoneim Ahmed Ghoneim

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