Patrick Werr: Direct payments to needy in Egypt may be better than slow subsidy reform

Egypt has taken bold steps to reform its expensive and poorly targeted subsidy system. Unfortunately the plan is running into turbulence, with the government and the poor beginning to feel the heat. Perhaps it’s time to brainstorm for some different ideas.

One concept that has worked elsewhere, most notably Iran, is to slash spending on subsidies, then use part of the savings to transfer cash directly to a broad swath of the people to help them weather the storm as the economy adjusts.

On Sunday, Egypt’s planning minister, Ashraf Al Arabi, told a news conference that the deep devaluation of the currency in November had raised the cost of the government subsidy programme beyond the targets set with the IMF, according to Al Mal newspaper.

Egypt secured a US$12 billion loan agreement with the IMF in November after hiking fuel prices to reduce its subsidy bill. It promised the IMF it would raise fuel prices even more – or take other measures to offset extra costs – if the Egyptian pound were to fall more than expected or if global oil prices were to rise.

Most of Egypt’s subsidies go to energy and much of that is imported from abroad.

And indeed, the pound has weakened far more than the IMF or Egypt had predicted, to about 19 to the dollar from the earlier 8.88, while the price of a barrel of Brent crude has jumped to $55 from about $46.

Because of this, Mr Al Arabi said, Egypt would propose a delay in further subsidy cuts, especially for electricity and fuel, when an IMF team comes to town, probably late next month.

He warned that the devaluation and higher fuel prices were hurting the private sector and suggested that Egypt would propose other measures instead.

The government had projected that energy subsidies, which this year cost 91 billion pounds (Dh17.97bn), would fall to 56.3bn pounds by 2017-18 and 23.3bn by 2019-20.

But the weaker pound and higher international oil prices have apparently thrown that off.

Egypt’s subsidy bill is huge. Last year, the government spent 138.7bn pounds, or 28 per cent of all its revenue, on its various subsidies, including its enormously expensive bread programme.

The problem with delaying cuts is that subsidies are a very inefficient way of helping the poor.

This is especially true with fuel subsidies: it is mainly the wealthy who own cars, and the wealthier people are, the more petrol their cars tend to consume.

Perhaps it would be much better just to give people cash and let them decide how to spend it by themselves.

It would make their economic choices more sensible. When petrol is artificially inexpensive, people are more likely to buy bigger cars and live farther out of town. If natural gas is cheap, investors will put their money into energy-intensive industries that if left to the market would be uneconomical.

If bread is almost free, people will feed it to their chickens, goats and rabbits at great cost to the state.

In 2010, Iran, facing problems not so different from Egypt’s, decided to remove subsidies on energy and foodstuffs.

It put half of the amount saved into the bank accounts of much of the population via monthly payments.

The programme worked well initially but later floundered because the government failed to plan for the eventual reduction of the payments.

In Egypt’s case, where most people do not have bank accounts, the government could transfer small amounts of credit via the smart cards it now uses to distribute subsidised bread, sugar and a host of other consumer items.

It would have to choose how broad a segment of the population would be eligible. The simplest and smoothest but more expensive course might be to distribute the credit universally, without worrying about a person’s level of wealth.

Millions of the 70 million people who carry smart cards are due to be purged from the smart card system, with one recent report putting the number at 40 million.

But because of the many problems and expense in collecting data in Egypt, this means some destitute people would fall through the cracks. Some would go without sufficient food and a few who live at the edge would suffer even further.

However the government decided to distribute the savings, it would save itself a bundle of money from a rapid elimination of subsidies, and the country as a whole would win.

It would tend to transfer wealth out of the hands of the rich and into those of the poor.

And as the economy adjusted, the government, according to a publicly announced schedule, could gradually reduce the amount it distributes through the card system.

Patrick Werr has worked as a financial writer in Egypt for 26 years.

business@thenational.ae

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