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5/1/1986 - Reforming the Subsidy System in Egypt by Dirk J. Vandewalle

INSTITUTE OF CURRENTWORLD AFFAIRS DJV American Research Center Egypt Midan Kasr Doubara Garden City Cairo May REFORMING THE SUBSIDY SYSTEM IN EGYPT Dirk J Vandewaile To tourist break obligatory stops Cairo numerous places walks across July Bridge Zamalek contrast between burrough readily visible There monuments Even usually enthusiastic Blue Guide Egypt admits historical value found among Edwardian architecture recent skyscrapers There another contemporary richness Zamalek however easily discerned hustle bustle downtown Its thoroughfare July street lined numerous shops touting imported European Japanese American items Fruit stalls shops abundance slower Early morning fishmongers pounding great slabs nugget chunks preserve catch Butchers white aprons chopping carving slabs marbled Occassionally venture their shops cutting piece whole carcasses sidewalk racks Little armed sticks delight tourist search pictoresque The clientele Ju street dresses better average Egyptian Ladies impeccable western style hairdos Hermes scarves sally forth stores filled latest consumer durables Prices often Ipatriate population wince Dirk Vandewalle North Africa Fellow Institute Current World Affairs His interest political economy Egypt North Africa particular development strategies Egypt Algeria Libya Tunisia Morocco decades Occassionally women drive butchershops grocery stores order directly recess conditioned while owners shuttle forth provide coffee while their errands taken It perhaps surprising visitor chance across dirty bakery bridge crossed But avoiding space quintessential Cairene condition forces bakers store their wares middle sidewalk Dodging between sesame encrusted loaves plain baguettes blackened trays while careful unlikely carefully manicured finger picking bread The invisible below which respecting middle class Zamalek housewife ventures drawn Mobil station hundred yards north bakery For frills bakery clientele likely galabiyyas scruffy shoes latest Parisian creations displayed further street Customers customary plastic tleir purchases often their bread rolled yesterday AI Ahram Those familiar might guessed Cairo cooperative bakeries providing bread urban highly subsidized prices A bread costs piasters wears The reader might remember first report mentioned butagaz paltry piasters I returning butagaz bottle bread situation temporarily order write about problem subsidies Egypt particular wheat flour subsidies about current battles taking place eliminate determined political opposition The container according Prime Minister Ali Lutfi costs pounds produce piasters roughly times consumer Not there enormous economic subsidizing approximately million pounds there related difficulties As Lutfi remarked recent interview local publications family using bottle month receives subsidy pounds But family Zamalek Heliopolis perhaps times amount effect getting subsidized pounds month The problem course readily recognized economists Subsidies unless carefully controlled often profiting those those The difficult problem discover subsidies benefit those And course where difficulties start countries devised adequate system Two additional problems Egypt highly politic context which subsidy policies formulated statistics exist which possibly improved system could based Egypt system subsidies shape during iorld War II shortages prompted monarchy implement measures would protect country suffering unduly under shortages existed But pointed first report until Nasser period particularly after welfare state exists Egypt being Nasser decision Egyptian should suffer future generations carried strong ideological commitment It legacy considerable burden around Egyptian economy Sadat assassination grown nightmare government political leaders Egypt economic planners alike stood helplessly increasing amounts badly needed foreign exchange devoted Subsidies quickly became sacred Egypt From initial outlay million pounds soared billion DIRECT SUBSIDIES IN EGYPT TO Egyptian pounds current Subsidies Egypt Direct subsidies these three commoditi direct determined frozen All goods population fixed Indirect subsidies water petroleum difference between price which public sector subsidies public reports It estimate supercedes II categories direct indirect wheat flour lentils ities subject rationing Some bsidies fixed monthly quotas however ehold They include sugar edible direct subsidies provided items electricity irrigation The government subsidizes estic production commodity consumers whether individuals obtain figures indirect ector since covered official however their value equals subsidies A recent issue The Middle East Sources John iaterbury The Ecl Nasser Sadat numbers gathered diverse issues AI Ahram AI Abram qtisadi Actual outlays years substantially above planned In example actual outlays estimated surpassed billion pound Times estimated billion pounds annualiy The education services another legacy Nasser considered indirect subsidy particularly concerned direct subsidies report particularly wheat flour subsidies since politically sensitive Over fifteen years average absorbed excess total direct subsidies Of amount wheat alone accounts In years capita share imported wheat increased estimated pounds Between comes United States The annual these direct subsidies billion pound range billion total budget expenditure almost GDP For Sadat professed interest efficient economy would eliminate possible distortions Egyptian economy 1970s amount spent welfare programs consequently consumption actually increased dramatically during office Even education social services neglected during seven years resuscitated Trying explain gargantuan subsidies system sustained during these years takes realm economics political arena The persistence whole subsidies debacle stems social context within which arose From beginning subsidies aimed largely urban remain today Wheat subsidies example traditionally little importance rural population since maize their staple Subsidies milled flour little importance rural population grind their great importance urban middle upper classes whose longer depends overwhelmingly carbohydrates For urban however bread remains vital commodity Government subsidies often literally spell difference between adequate inadequate During Nasser regime capita private consumption increased almost But urban population lagged behind This situation marginally improved under Sadat exacerbated further For Egypt urban Karima Korayem Dis tributincL_D_i osable Income Impact Eliminatincl Food Subsidies EcLY Cairo American University Cairo Cairo Papers Social Science April includes third category disguised subsidies petroleum products cotton could internationally The subsidy difference between export price commodity price local consumers It interesting however wheat gradually replaced maize staple Egypt rural population The explanation seems availability cheap wheat A recent editorial G__m_hk suggested possibility again making bread maize flour So suggestion response throughout 1970s little choice brunt expensive They spent continue spend inordinate amount their income subsidized often their income At their wages continued decline under impact inflation induced infitah Subsidies often analysts these urban social contract between government those among Egypt profited growth economy infitah Although Egyptian policy makers talked there little doubt subsidies being volatile population check Neither Nasser Sadat always successfully managed recent Egyptian history punctuated often violent conflagrations between government workers riots place Helwan Shubra Khayma large industrial suburbs Cairo In violence occurred Muhalla Kubra January Cairo itself partly occupied striking public sector workers Despite first serious attem reduce subsidies place under pressure International Monetary Fund Sadat dismissed Ministers Economy Finance appointed Deputy Prime Minister Abd Munim Qaysuni economist impeccable liberal credentials served IMF Middle East Director Qaysuni pointed Egypt simply could longer afford massive welfare system created His observation subsidies longer reached those originally intended undoubtedly Egyptians Black marketeering greedy middlemen become almost accepted Egypt subject inumerable newspaper articles jokes newspaper cartoons It common knowledge cheap subsidized bread being cattle certain Cairo bakeries extended their profit margins buying bread restaurants highly reduced prices feedlot owner Why urban asked sacrifices As Qaysuny Sadat perceived situation could reasonably budget IMF requirements bring economy under semblance control public sector investment servicing Egypt defense subsidies Debt repayment Soviet Union suspended provided breathing space But absence further alternative Sadat Qaysuni seized weakest constituency links could seemingly contained without major repercussions lifted subsidies selected items Popular reaction uncommon strong violent For first since revolution Egyptian called restore order Sadat himself whisked house Aswan riots spread throughout Well hundred people Muhammad Haykal recounts Autumn Fur_ London Andre Deuts Sadat plane stood ready Abu Suwayr airport family exile Tehran No talked until verified killed serious chance refashioning subsidies system Throughout remainder 1970s Egypt pledged subsidies agreements international creditors clear subsidies sensitive issue seriously consider reductions On contrary series further popular measures taken included raising minimum wages The subsidies reached billion pound further systematic curtail subsidies until It seems clear infitah policies indirectly connected subsidies dilemma By 1970s adverse consequences liberalization becoming visible particularly terms income distribution rapid inflation critici infitah ranged across political spectrum Even ardent infitah supporters urging cleaning operation Lutfi Abd Azim editor Egypt leading economic journal Ahram lqtisadi wrote about economic apartheid pitted against Sadat himself several times denounced those profiting excessively infitah pense To those followed Egypt plight decades there strong sense almost ritualistic effort reduce subsidies Sadat interview mentioned possibility moving direction American stamps system The euphemism these years intended policy palatable rationalization This words however fooled In As Shaab workers newspapers obviously uneducated cartoon characters misuse rationalization their everyda language readership delight That whole subsidy debate taken ominous undertones since death Sadat particularly perhaps surprising The Egyptian economy still committed infitah under Mubarak under greater strains The remittances Egyptians working abroad estimated billion declining increasing numbers return Income Suez canal steadily levelling Drastically lowered prices stagnating production further difficulties And matters worse tourism after spate terrorist accidents region The absence tourists plainly visible throughout country From horse carriage drivers along Zamalek nightclub strip small shopkeepers tourist places Upper Egypt talked complaining about downturn Particularly Upper Eg where major temples tombs located seems suffering A guide recent weather reports national television repeatedly lower actual temperature readings south order scare tourists The Reagan administration attitude toward travelling Egypt until cautious But seeming attempt bolster confidence American public president George Bush visiting Lug coming August To anyone Egypt projected billion pounds The West undoubtedly interest again But there point which largesse based tangible interests becomes absurd defeating With additional million people every months simply maintaining subsidies level requires larger financial commitments At present rates growth Egypt surpass million people Assuming unchanging capita consumption would wheat population The subsidies continued present level_ would staggering While sound alarming readers report particularly since wheat production widely predicted substantially short demand Egyptians unlikely interest these depressing statistics Beyond bread beans there little ruminate about daily But against these statistics attitudes Mubarak Prime Minister Ali Lutfi coherent strategy Until attempted forward whole subsidy debate purely economic terms It obvious their public statements nevertheless remain extremely aware political social issues surround whole subsidy question Undoubtedly amidst current bates reminded bread riots More recently although direct relation subsidies rioting Central Security Force conscripts February refreshed leadership memory little needed nothing rumor provoke violence There seems little doubt however Lutfi government ahead impose rationalization The issue however final shape subsidies policy And might expect relatively little economics political compromise which lessons again reviewed Luxor temperatures routinely hover around degrees visit seems inspired interest pharaonic remains The february riots triggered rumor conscription period Central Security Force soldiers would extended three years The CSF conscripts mostly drafted villages farms Delta Upper Egypt They usually least educated Egypt strong militia often brought major cities guard embassies public places private businesses This coincidence since considered least politicized apathetic their fellow conscripts Their salary incredibly pounds month about their military service usually means considerable income their rural families It against background riots understood As usual midst these serious debates Cairenes found escape dreaming innumerable jokes about Prime Minister All Lutfi government rationalization measures One rigueur respecting party lately centers deert called Umm Aii mother All exceedingly concoction cream dough introduced Egypt during Ottoman period This however government forbidden import called ameesh which traditionally consumed great amounts during month Ramadan estimated savings million pounds In patron restaurant Umm All after having finished The waiter returns minutes later slaps front Umm All reflection course without should You Umm All bewildered client which waiter arcast responds I Umm All Lutfi There central questions raging debate should receive subsidies under system eligibility subsidies determined Although political parties initially supported eliminating least subsidies lately going through politicall inspired volte faces pyrotechnics meant assuage their respective audiences President Mubarak charged Lutfi consulting parties before further changes He anxious point government announce decision after consultations Samir Tobar chairman economic committee Mubarak National Democratic Party talking about opinions people oussef Wail Secretary General party proposed meeting parties leaders Despite several accusing government proceeding unilaterally continue government attempts giving IMF World Bank The Unionist Progressive Party particular argued along these lines M stafa Kamal Murad _A__h_r_ar_ party charged government already According Murad government should tackle government waste anagement appropriations before taking subsidies remains nevertheless support gradual implementation system Ahmed Abu Ismaii chairman economic committee New Wafd opposition party charges system being debated destabilize prices commodities services further In opinion drastic overhaul entire economy needed before As dessert mother caliph Ali Kifner reported New York Times alternative considered Politics makes strange bedfellows several other occassions years Ahmed Sabahi Umma Islamic Partyi Ibrahim Shukry Labour Party found themselves agreement Both insist educational health susidies those working public sector laborers outside public sector poorer farmers Sabahi support proposed subsidy system would specified amounts paychecks effect eliminating middlemen hopefully corruption The Unionist Progressive Nationalist Party being withdrawn negotiations claiming government unwilling proposals consideration These would included straight subsidy imposed heavy taxes luxury goods conditioners gasoline large automobiles But different parties reach agreement central questions actual implementation measure still There first couple practical problems How measure income levels economy where substantial economic activity takes place black market where reliable statistics available Several practical solutions proffered which eligibility They include monitoring electricity consumption ownership ownership houses owning acres But beside conceptual problems scheme Does taxidriver taxis eligibility Is owner houses excluded there greater difficulty determining collect information To anyone familiar Egypt bureaucracy enterprise potential impact immediately conjures visions bribery scale perhaps never before witnessed country already known adept skillful bakshish mention visions lines government ministries should implemented My personal estimation Lutfi government slowly chisel subsidy edifice In considers small matters raising fares piasters little while likely without advance warning populat One government official Ministry Planning bluntly accomp might avoid difficulties earlier experienced At ismail particularly worried about ration system An estimated million families Egypt green ration cards which purchase items which quotas exist sugary edible frozen among others It generally accepted whole system administer system corruption completely infiltrated black market merchants At point government attempted introduce partially subsidized ration cards An estimated 250000 distributed because relatively availability green cards quickly vanished oblivion first consultation political parties undoubtedly continue myself agreement those opposition leaders maintain government negoti lengthen process implementation hoping contain serious opposition meanwhile remain optimistic direct subsidy reduced substantially direct subsidies badly balanced economic iceberg The government example seriously considering reducing direct subsidies favor higher wages But gains productivity achieved production costs ultimately prices commodities again destroying impact initial increases Although question whether government proceed measures within reasonable limit there several problems greater magnitude beyond direct subsidies debate It those government needs urgently tackle rededicate itself reductions being considered maintained problem indirect subsidies dismal performance agricultural sector burea ucracy certainly least alarming population growth All Received Hanover