Reforms Underway in Egypt as Interim Government Addresses Food and Energy Subsidies

7 May 2014 FDI Team

 

The Egyptian Interim Government has begun addressing Egypt’s costly subsidy programmes, with the introduction of a smartcard rationing system for bread. It also plans to increase the cost of energy for Egypt’s wealthier citizens. 

Background

Since the 1970s, successive Egyptian governments have failed to reform the increasingly costly subsidy system, which is crippling its economy. Those that attempted reform faced social instability and mass rioting. Egyptians have remained wary of price increases on food and energy, fearful that spikes in these costs will undermine their food security. The interim government has begun addressing these crippling subsidy schemes ahead of the national election in late May. By announcing minor changes to the gas, fuel and bread subsidy schemes, Cairo has begun laying the foundations for the future government to tackle subsidy reforms and restructure the economy.

Comment

Last month Egypt’s interim government began trialling a new smartcard bread rationing scheme in Port Said. The scheme aims to reduce waste, which is directly related to overconsumption and the diversion of subsidised flour onto the black market. Families in Port Said have already received the smartcards, giving them access to 150 loaves of bread per month at the subsidised rate of 0.05 Egyptian pounds (LE) per loaf. The cost of flour to state-run bakeries has been raised to the market price of LE 286 ($44), in an attempt to discourage the diversion of flour to the black market.

At present, there is no limit on the amount of subsidised bread that can be purchased, encouraging huge amounts of waste and overconsumption. Bread subsidies cost the Egyptian Government an estimated US$3.5 billion every year. If the trial is successful in Port Said, the government plans to roll out the scheme across Egypt by July. The hope is that the smartcard system will reduce waste by 20 per cent, leading to a reduction in wheat imports in subsequent seasons.

The government is also looking at possible reforms to energy subsidies, currently enjoyed by 80 per cent of Egypt’s wealthy citizens. Smartcard tracking of the supply and sale of fuel will be used to monitor distribution and identify where fuel is being siphoned off to the black market. It will also be used to collect data on consumption patterns. In the long-term, reforms are expected to include annual quotas for consumers at the subsidised price, with overconsumption charged at a higher rate.

Electricity overconsumption has led to regular, city-wide, blackouts in Cairo throughout the winter. Maintaining energy supplies to cope with summer demand will prove a challenge for the incoming government, with energy shortages predicted to increase, causing disruptions to businesses and industry. According to the interim government, it has plans to increase the cost of electricity for the wealthiest 20 per cent of consumers in the coming month, with more gradual long-term price increases expected over the next five years. Prices for gas consumption from the energy grid will also be doubled, affecting wealthier households and businesses. Most Egyptians purchase butane gas bottles for their cooking and don’t have access to the grid system. 

Reforms outlined by the interim government will represent only minimal progress towards the sweeping changes required in Egypt’s subsidy systems. Aware that moving too quickly on subsidy reforms is likely to cause renewed social unrest, the government has instead focussed on minor actions, to lay the foundations for future reform. Careful long-term planning to reduce subsidies without threatening the food and livelihood security for Egypt’s poor will be critical in maintaining social and political stability.

Finding this careful balance, between reform and stability, will prove a significant challenge for Egypt’s incoming government. With elections only a few weeks away, former army chief Abdel-Fattah el-Sissi is expected to be the next president. Turning his popular support and national hero status into a political asset, will be of paramount importance in addressing Egypt’s economic woes. Whatever the outcome of this month’s elections, it is essential that reform continues and the next government does not stall on restructuring the Egyptian economy.

Sinéad Lehane
Acting Research Manager
Global Food and Water Security Research Programme

[email protected]

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