Egypt maintains subsidies despite deficit

Sunday 08/05/2016

Cairo - The Egyptian government might be keeping the lid on public anger at ris­ing prices by subsidising food for the poor but the policy is draining the treasury at a time when revenues are decreasing, economists say.

“Keeping food subsidies in place complicates our financial problems even more,” said Basant Fahmy, an economist and member of parlia­ment. “We need to help the poor, but also avoid increasing the budget deficit.”

Egypt’s budget deficit is expected to top $24 billion by the end of the fiscal year, which ends in June.

President Abdel Fattah al-Sisi has allocated $240 million in extra sub­sidies for the poor to counteract a surge in food prices.

Food prices rose dramatically be­cause of a sharp rise in the exchange rate of the US dollar, the main im­port currency. In recent months, the Egyptian pound has lost almost 30% of its value, compared to the US currency.

Sisi said he ordered the govern­ment and the army to mitigate the effects of the rise in the value of the dollar by subsidising food for the poor. Accordingly, the govern­ment and the army will sell food to the poor for 30% less than market prices.

The army sends truckloads of meat, fish, poultry, cooking oil and butter across Egypt to sell at subsi­dised prices. Supermarkets owned by the government also sell food at reduced rates, with the aim of sof­tening the effects of the weakening of the pound.

Economists question whether Egypt is on the right economic track and say maintaining the subsidies will make things worse. In the 2015- 16 budget, Egypt allocated almost one-quarter of its spending on food and energy subsidies. That figure is to rise in the next budget.

“We must get out of this unending cycle of spending on our food more than what we have in our pockets,” Fahmy said. “To do this, we need to seriously restructure the subsidy system and increase production.”

Egypt has been trying to bridge the gap between revenues and spending by borrowing from local and international sources. Nev­ertheless, total domestic debts reached $261 billion in the third quarter of 2015, according to the Central Bank of Egypt. Foreign debt reached $48 billion in June 2015, the Central Bank said.

Sisi is the first Egyptian president to address the subsidy issue in four decades. His predecessors used to keep afloat by subsidising food for the poor.

His plan is to significantly slash fuel subsidies until 2019. In 2015, the state subsidised energy by $6 billion, down from $7 billion in 2014. Sisi wants to bring energy subsidies in the new budget down to $3.5 billion.

Nevertheless, food subsidies in­creased in the 2015-16 budget to $3.4 billion, from $3 billion in 2014- 15.

This increased the budget defi­cit and a continuation of the food subsidy policy will mean that Egypt will have little money in its coffers as revenues from tourism, the Suez Canal and exports are falling, econ­omists said.

Egypt, heavily dependent on im­ports, has $16 billion-$17 billion in foreign currency reserves, almost half of what it had before the 2011 revolution.

To prop up reserves, Sisi depends on aid from oil-rich Gulf allies and borrowing from local banks and international institutions. Econo­mists say, however, he cannot keep feeding his people by borrowing and “begging”.

“The government said before that it would take painful measures to reduce the budget deficit,” Khaled Qassem, an independent econo­mist, said. “Why has not it taken these measures yet?”

Some measures have been taken. The government reduced electric­ity subsidies in the 2015-16 budget from $3.1 billion to $2.5 billion. It re­duced water subsidies to $100 mil­lion from $170 million.

However, when it comes to food, Sisi is apparently stuck: He cannot slash food subsidies or he will put the stability of the government in danger.

Food riots have become common in recent years.

“The regime cannot keep living by taking aid from the Gulf and then subsidising food for the poor,” Qas­sem said. “If it wants to really live, it needs to increase production, re­duce dependence on imports and get rid of this heavy subsidy bur­den.”