SEATTLE — In the 2016-17 financial year, Egypt spent 3.3 percent of its GDP on fuel subsidies and 1.4 percent on food subsidies. These sizable outlays are intended to help the poorest of its population, but in fact tend to aid the better off.
Energy and food subsidies are not a new phenomenon in the Egyptian economy. Subsidies in Egypt, and other price controls, have been used in Egypt since the 1920s. However, the government’s renewed focus on repairing an ailing economy has drawn attention to both the efficacy and equity of subsidies. Historically, the primary aim of these subsidies has been to assist the lowest income part of the population. In actuality, the benefits go disproportionately to higher income households.
Subsidies in Egypt Struggle to Target Poorest Egyptians
Energy subsidies in Egypt are an example of this. Price controls on fuel allow all motorists, wealthy or poor, to fill up their cars and pay only 59 percent of the cost. Since the poorest of the population cannot afford cars, the majority of fuel subsidies flow to the relatively more prosperous. The top 40 percent of the population receives about 60 percent of the energy subsidies, while the bottom 40 percent receives only 25 percent of these subsidies. Urban inequality of petrol subsidy distribution is even more pronounced. In the cities, the top 20 percent of the urban population gets eight times more than the bottom 20 percent.
Food subsidies are also widely used in Egypt. Citizens can afford to buy loaves of bread for a mere tenth of its cost. Again, these subsidies in Egypt are intended to protect the poorest citizens from price rises. In practice, the subsidies on bread reach as much as 70 percent of the population. The people truly in need of such assistance, however, only make up 30 percent of the population, and yet this is a benefit the majority of the nation receives.
While not perfect, the removal of such programs without an accompanying social protection component to replace it would be devastating to the poorest Egyptians. The welfare effect of removing the fuel subsidies specifically would be most disruptive for the neediest Egyptians, since a greater share of their total income is spent on energy costs.
Cash Transfers Offer More Direct Benefits to Those Most in Need
Alleviating the costs to the most vulnerable would require a plan to replace the current subsidy scheme. One recent trend gaining traction has been the shift towards direct cash transfers.
Following Brazil’s lead, conditional cash transfer programs could replace the large financial commitments of subsidies in Egypt. Since 2003, Bolsa Familia, a direct cash transfer scheme for the poor, has already reached more than 46 million Brazilians under the poverty line. Households receive a modest benefit of about $55 a month on average, depending on their income. In this way, those most in need of assistance are targeted, and on a far more progressive basis than subsidies alone.
Switching to a similar direct cash transfer scheme in Egypt could provide better assistance to the poor than existing subsidies. In 2013, the Cato Institute, a Washington think tank, estimated that incomes for the bottom 25 percent could more than double in Egypt with a simple switch away from food and energy subsidies.
Though promising, this does not mean a transition away from subsidies would be swift. Previous governments have tried to rid themselves of food subsidies with almost immediate public discontent and social upheaval. In the late 1970s, former Egyptian Prime Minister Anwar Sadat attempted to eliminate subsidies on flour, rice and cooking oil. Riots broke out across the state, and hundreds of thousands of poor Egyptians vehemently protested the end to basic food staple subsidies. After hundreds of injuries and scores of deaths, the government reversed the proposed reductions.
Finding the balance for Egypt will be difficult. At least for now, there is one element of subsidy reform that should garner universal support: directing any possible future savings towards the truly poor.
– Nathan Ghelli