In-kind subsidy or cash subsidy? The question has been repeatedly posed in Egypt throughout the last years. Which is more advantageous for beneficiaries? Which is more advantageous for the government?
Even though the question of in-kind versus cash subsidy has been on the table for many years, no consensus or quasi-consensus was ever reached about it by economy experts or by officials. Yet it became talk of the town ever since Prime Minister Mostafa Madbouly last May announced that his government is considering replacing the time-honoured in-kind subsidy with cash subsidy. This especially applies to subsidised bread and food supplies granted to Egyptians through ‘provisions cards’ or bread cards which would, when replaced with cash, “allow citizens more freedom to get what meets their daily needs and circumstances,” as Mr Madbouly said.
The announcement came simultaneously with the government’s decision to reduce the subsidy on bread, raising the 35-year-long price of a subsidised loaf from 5PT to 20PT. A piastre (PT) is 1/100 of an Egyptian pound (EGP).
Sustainable subsidy
In his press conference last May, the Premier said that the government looks to ensure the sustainability and governance of the subsidy system. “It is expected,” he explained, “that cash subsidy would contribute to correlating consumption of bread or any food item to the individual’s or family’s actual need, instead of them buying above their need simply because it comes at a cheap, subsidised price. [There has been a notorious practice of using subsidised bread as feed for poultry or household animals because it is so affordable].
Under a cash subsidy system, Mr Madbouly said, food consumption will reflect real needs. As far as bread is concerned, this would lead to a reduction in the wheat import bill, saving thus a large sum of money that could be then pumped into the State budget.
Furthermore, the Premier said, cash subsidy sums will be regularly adjusted to account for inflation, global price hikes, or changes in value of market variables.
Finance Minister, Mohamed Maait, says that Egypt imports 5.5 to 6 million tons of wheat to meet its needs, in addition to the local production that is somewhere between 9 and 10 million tons annually.
Dr Maait explained that Egypt produces some 100 billion subsidised loaves of bread a year. “Until 1 June 2024, a subsidised loaf of bread was sold for 5PT, while the actual cost of the loaf is 1.25PT,” Dr Maait explained, pointing out that this means that the citizen used to pay 4 per cent of the actual cost, while the public treasury shouldered 96 per cent. Now that the government has raised the price of a subsidised loaf to 20PT, the citizen pays 15 per cent of the actual cost, and the public treasury 85 per cent.
Committed to needy Egyptians
Economy experts confirm that according to the 2016 agreement with the International Monetary Fund, Egypt is required to switch its in-kind subsidy system to cash subsidy.
For his part, Mr Madbouly denied rumours that the government intends to altogether cancel the subsidies granted to needy Egyptians. The government will remain committed to the subsidy it offers citizens, especially for basic goods that affect their livelihood, Mr Madbouly said. Yet, he said, the government attempts to rationalise subsidies in order for the State budget to sustain them. “The greater the burden of the subsidy on the budget,” he said, “the more it affects the quality of service provided.” He gave as an example the government subsidy for electricity. As its share climbed, the government was forced to resort to intermittent power cuts to reduce electric loads, he said.
“All economists I spoke to confirm that the only way to ensure sustainability of the subsidy system and its accessibility to worthy beneficiaries is to shift from in-kind to cash subsidy,” Mr Madbouly said. He suggested introducing the issue for discussion on the National Dialogue table. The National Dialogue was launched in May 2022 upon a call from President Sisi to address Egypt’s diverse political, economic, and social issues. January 2024 saw the launch of a second round of the Dialogue to tackle challenges facing the Egyptian economy. “Through the National Dialogue, experts may begin serious discussions on the matter, and develop a clear, feasible plan for the State and government on how to switch to a cash subsidy system,” he said.
The government, Mr Madbouly said, aims to reach a general outlook on the issue by yearend. If approved by the National Dialogue, he said, an executive plan will be drawn to take effect as of the 2025/2026 budget.
Subsidy tally
Finance Minister Dr Maait explained the total sum of subsidies during the current fiscal year amounted to EGP529.7 billion (USD11.2 billion). This amount is expected to rise to EGP635.9 billion (USD13.5 billion) during the upcoming fiscal year. The subsidy share of food supplies and bread will amount to EGP134.2 billion. Benefiting from the bread subsidy are 69.9 million Egyptians, whereas 62.2 million benefit from the food subsidy. Cash support offered for the Takaful wa Karama State sponsored programme in terms of pensions, will amount to EGP40 billion. Takaful wa Karama stands for Solidarity and Dignity; the programme provides assistance to people with special needs and the elderly over 65 years old, helping them to provide for their necessary needs, and providing them with social protection.
The petroleum subsidy allocations will reach EGP154.5 billion, Dr Maait said, while the electricity subsidy bill will reach EGP2.5 billion. Another EGP1 billion will go to water companies, subsidy for medicines and infant formula will amount to EGP5 billion, and subsidy going to farmers will reach EGP657 million.
Public opinion
For his part, Daker Abdullah, member of the Egyptian Businessmen Association, commended the government’s initiative to put the issue of in-kind vs cash subsidy on the National Dialogue table. The sessions, he said, will discuss the advantages and disadvantages of each system. He suggested to further discuss the issue within political parties, NGO communities, and business communities.
He also said it is important to listen to the opinion of experts and specialists in Egyptian universities. Despite all the current economic challenges, Mr Abdullah stressed, the government takes into account the living conditions of citizens in any decision related to subsidies. He reminded that throughout the past years since the Covid19 pandemic the government has increased subsidies on basic commodities. Mr Abdullah said that it is pivotal that the media provides all opinions and counter opinions about in-kind and cash subsidy throughout all its channels, visual, audio, and written.
To whom?
Nader Noureldeen, Professor of Lands and Water at Cairo University’s Faculty of Agriculture, provided a very different perspective when he wondered: “To whom would we disburse the subsidy? To the husband, the provider of the family? Or the wife who is responsible for feeding the family? If we pay it to the husband, what do we do if he spends the amount of cash subsidy on his whims? And if it is the wife who cashes the subsidy, what if she leaves the family, gets a divorce, or gets remarried and continues to spend the cash subsidy on herself and not on her children from her previous marriage?” He also posed the question of how to control the spending of the cash subsidy. “What if it is used to pay for school fees or clothes for the children? In this case what happens to the children’s nutrition?” And if the government gives the head of the family a card credited with an amount to be used to buy groceries from any supermarket or grocery store, what if he uses the amount to buy other non-essential commodities? Dr Noureldeen asked, remarking that if in this case the government orders supermarkets or grocery stores to dispense food items only on the subsidy card, “we would be returning to in-kind subsidy”.
The cash subsidy system, Dr Noureldeen said, benefits governments only, while in-kind subsidy goes to the advantage of the poor.
On the other hand, Dr Noureldeen pointed out that disbursing billions of pounds to families as cash subsidy will lead to an increase in financial liquidity in the markets, and thus will lead to higher prices and inflation.
Data base
Professor of Economics at Cairo University Alia El Mahdi who contributed to a field study on the possibility of implementing cash subsidy in Egypt, found that 18 years ago, when the study was conducted, Egyptian families were not in favour of this proposal.
According to Dr Mahdi, the study showed that 85 per cent of families rejected cash subsidy as a substitute to in-kind subsidy, owing to the decline in the value of cash over time. Dr Mahdi believes that if the current government repeats the survey, it will get the same results.
Journalist and writer Mesbah Kotb who specialises in economic affairs, said that the issue of subsidy is an essential part of the administration of any country.
In Egypt, Mr Kotb pointed out, the Armed Forces and the Police occasionally distribute in-kind goods including during the Muslim holy month of Ramadan. In-kind subsidy, he said, has the double benefit of generating better collective public morale and stability. It is very important to ensure that children, schoolchildren in specific, and mothers receive the necessary amount of food to ensure good health, and mental and physical well-being. Also, he said, in-kind subsidy guarantees price stability and the availability of food commodities that can be traded.
“Information technology is yet to be employed in this matter,” Mr Kotb said. We can have a mélange of cash and in-kind subsidies, Mr Kotb suggested; this would give Egypt a strong subsidy system. “Maybe we can merge the Takaful wa Karama programme as a conditional cash subsidy system, with the in-kind subsidy system which offers direct commodities, in one bucket based on a solid information base,” Mr Kotb said.
Watani International
26 June 2024