Egypt's subsidies: Reform or die
The year 2011 brought a sea of change for Egypt, at least in the political arena. The great dictator fell from grace and there was talk of real political change in the air after decades of autocracy and stagnation. Yet, as Egyptians both young and old look forward to the drafting of a new constitution and fresh elections that will hopefully usher in multi-party democracy, a less talked about issue is gathering storm on the horizon.
The economy is facing severe liquidity crunch and the government has had to seek assistance from International Monetary Fund (IMF) in meeting a part of its $11billion deficit. As expected, the IMF has put forth conditions that specifically target subsidy allocation. Given that the country spends nearly a tenth of its GDP on subsidising a wide range of goods ranging from fuel imports, transportation and food, it is hardly surprising that IMF has set its sights in this area. Egypt's economy has contracted by nearly 1% since the "revolution." With unemployment spiralling to dangerous levels and sustained food inflation coupled with a decline in foreign exchange reserves primarily due to reduced foreign tourism, the balance of payments is now sitting squarely in the red with a deficit that has crossed the $18 billion mark.
However, snipping the enormous subsidy package is easier said than done, especially in light of the fact that subsidies are an institutionalised facet of Egypt's economy. Initiated in large-scale in the early '70s as a direct response to price rises of essentials, the subsidy basket since then has mushroomed to envelop a wide range of commodities that go far beyond cooking oil and flour. The fact that subsidy on fuel alone constitutes approximately seventy percent of all subsidies means that any subsidy reform poses a nightmare scenario for current policymakers, especially with national elections in the offing. Yet, reform is mandatory, for a major chunk of these subsidies help only in lining the pockets of unscrupulous business entities and not the end consumers. For instance, if one takes a closer look at the liquefied petroleum gas (LPG) for household scenario. As most Egyptian households lack piped gas connections to their homes, portable LPG canisters are used. These the government supplies for 2.75LE (Egyptian pound) per unit, the bulk of which finds its way into the black market and is then resold through distributors and dealers at an estimated retail price averaging 80LE. Hence, on the one hand, the costly framework of subsidies is failing to help its intended customers and the rampant corruption that exists in the state structure aids a coterie of enterprising, albeit, illegal syndicates to make windfall profits of 2,800% or more, and that too on a single canister of LPG.
The above represents just one facet of the subsidy basket. Logic dictates that the time for reform is here. Yet, any hint of reform causes the inevitable pandemonium on the streets. But the sad reality on the ground is that there is no recourse to overhauling the system of subsidy without causing pain and suffering. This is evident in the Eurozone with countries ranging from Spain to Italy having to swallow the painful pill of reform that has inevitably landed hard on subsidies -- leading to cuts in social benefits and subsidies. And as stated before, scaling back subsidies is easier said than done. Twice, the government has backed off from taking crucial decisions. First the decision to stop subsidies on natural gas supplies to industry that were to become effective from January 2012 and second, the plan to introduce ration cards to supply LPG to the poorest sections of society.
What is obvious is that any sudden crash course on subsidy reform is simply not feasible, for a change of this magnitude that affects the greater majority of the population will lead to widespread discontent and civil disobedience. Dr. Isobel Coleman, named by Newsweek in 2011 as one of the "150 Women Who Shake the World," sums up the Egyptian policy quandary on subsidies well when she states: "Egypt's brewing crisis also presents an opportunity to tackle a subsidy problem that has been decades in the making.
An effective subsidy reform programme should be phased in, focusing first on the most costly and inefficient fuel subsidies and only later addressing food and cooking subsidies, perhaps when certain economic metrics (say, a resumption of GDP growth in excess of 5 percent annually, or declining unemployment) are met. It should couple subsidy cuts with carefully explained direct cash transfers to households and other reforms to stimulate economic activity, such as an expansion of credit to SMEs, reductions in bureaucracy for starting new businesses, and formalisation of the informal economy. Any subsidy reform programme should also be matched with a public awareness campaign to explain the myriad benefits, including reductions in corruption, wasteful energy consumption and pollution, and improvements in efficiency."