Egypt’s state budget this year shows just over LE 150 billion in social and economic subsidies; a figure that constitutes more than 30% of the entire budget and is considered by many to be cash not well spent. At a time when every pound counts, economists have been building up pressure to adopt much-needed reform of subsidies.

Much of the country’s subsidy bill is directed toward energy — some 65% — and food subsidies, constituting approximately 15% of the entire bill. Amr Adly, who is an academic in political economy and the director of the social and economic justice program at the Egyptian Initiative for Personal Rights (EIPR) explains that expenditure on energy subsidies is reaching dangerous levels
“The country spends around LE 95 billion in energy subsidies per year or almost 20% of the entire budget. This is more than double what is spent on education and four times what is spent on health care,” he says.

The problem, however, isn’t just about how much is spent but rather how it is spent and who are the main beneficiaries. Adly says that there are four main categories that the subsidy goes towards, namely: industry, transportation, electricity and households.

“Around 25% of the energy subsidy or around LE 24 billion goes to the industrial sector. This a productive and profit generating sector that shouldn’t be subsidized to begin with,” says Adly. “Fuels such as oil and natural gas are subsidized for use in energy intensive industries such as steel, cement, aluminum and fertilizers’ industries.”

Energy intensive industries are those where the cost of energy constitutes more than 30% of the cost of production. Therefore, providing these factories with cheap energy allows them to reap huge profit margins.

Adly refers to a government study published in 2007 that showed that 70% of the energy subsidies under the industrial category is allocated to approximately 40 factories.

“A lot of these are cement factories that are owned by names like Lafarge and Holcim. The government is actually subsidizing multinationals,” says Adly.

Facts like this raise many questions about the economic and social impact of these subsidies. Adly explains that any subsidy program has to fulfill one of two objectives ­­­— either it is economically efficient or leads to some degree of social justice.

“Subsidizing cement producers for example, hasn’t led to a reduction in cement prices in the market. And even if it did, it is considered a wrong approach since we are not supposed to subsidize the cement consumer,” says Adly. “Is the government supposed to subsidize Talaat Mostafa Group? Or buyers in Madinaty? Of course not.”

A report issued by the World Bank shows if energy subsidies are scrapped from the state budget, the poverty index will rise only by 1.4%. Adly says that this is not surprising because in any country that subsidizes energy, the usual beneficiaries are those who consume energy the most.
“Energy consumption increases with the rise in living standards. I’ll only consume gas when I have a car. If my house has air conditioning, a dryer and a washing machines, I will be consuming more energy. On the other hand, if I live in the slums I won’t be consuming as much,” he explains.

It is obvious that energy subsidies are biased in favor of the rich, and in a country struggling from rising social demands and a widening budget deficit, it’s only logical to consider reform.

An official at the Ministry of Finance who preferred to remain anonymous due to the sensitivity of the subject, says that there is now a movement towards restructure the energy subsidies. However, he points out that subsidies cannot be simply abolished across the board.
“When we talk about abolishing subsidies we must consider each product and its uses. There are six main products that are sold at subsidized prices. Diesel fuel that is heavily relied on in transportation constitutes the lion’s share of the bill standing at LE 45.8 billion out of the total LE 95 billion,” says the official.

This subsidy has a direct implication on the price of goods and so canceling it is very sensitive because it will have a ripple effect across many sectors. Other products include butane cylinders which are considered a vital fuel for many homes.
“There is a consensus now that steps need to be taken, however every time we start taking these steps people panic about the consequent price hikes,” says the official. 

AP

Food subsidies are a minor share of the bill.
 

Adly agrees that canceling such a scheme with this magnitude especially with regards to diesel will not come without consequences, and needs to be replaced with some sort of direct cash handouts to the poor. He points out that the government should at least start with the portion that goes to the heavy industries.
“There is almost LE 15 billion that can be easily spared without incident, and pressure needs to be applied to make it happen. Currently however, the people in power are not interested in doing so,” says Adly.

The Ministry of Finance official explains that the pressure is building up out of urgency. The budget deficit and the drying up of revenue resources is leaving no other option but to cut costs and the first target is subsidies.

“I think right now there is a great degree of acceptance amongst the business community. They understand that this is logical and so resistance to it is waning,” he says.

He also points out that apart from abolishing energy subsidies for certain fields, the government is also looking at the efficiency of the system and trying to minimize leakages.

“There are estimates that around 20% of the subsidies goes to waste due to leakages in the system. Some subsidized products are smuggled and sold in the black market or even shipped to Gaza.”
The issue is more chronic in the case of food subsidies. The smaller share of the subsidy bill of 15% — or approximately LE 22 billion — goes toward rationing commodities such as wheat, 30% of which is lost to inefficiencies in the system.

“With regards to food subsidies, the focus is currently on curbing the leakages and maximizing efficiency in terms of storage and distribution,” says the official. “The relatively low cost and huge social impact makes it impractical to start thinking about abolishing it now.”

Although Egypt can’t expect any savings from food subsidies in the near future, it is becoming more likely that the country’s energy bill will have to be trimmed sooner rather than later. When asked about the timing of such a move, the official answers: “I think there is a great possibility that we will witness some degree of reform in energy subsidies during the current fiscal year. It simply can’t wait any longer.”

At press times, the new cabinet had announced its plan to cut part of the energy subsidies in an effort to curb public spending and as part of wider austerity measures. However, no details were provided as to the timing or which categories or products would see the cut.bt