Under pressure from western powers and international lenders and investors, the Egyptian government is waging a “war on subsidies” that critics say could become a “war on the poor”, who make up 40 per cent of the population.
When subsidies on fuel were slashed by as much as 78 per cent this month, economists predicted a 15 to 20 per cent hike in food prices due to higher fuel costs borne by farmers, who need diesel to pump water from canals into their fields, and hauliers transporting produce from the countryside to urban centres.
In a bid to mitigate the impact of cuts on the needy, the government has added meat, chicken, fish, pasta, lentils, beans and dairy products to the list of subsidised foodstuffs, which already included rice, sugar, tea, flour, oil and bread.
Those eligible receive small cash grants via "smart cards", enabling them to pay less for listed commodities. While prices have been reduced by 30 per cent at 25,000 grocery stores across Egypt, inflation could reduce the impact of the cash grants and list expansion.
Limitations of scheme
The scope of the smart-card scheme could be limited to 25 to 30 per cent of the population in urban centres because Egypt’s 5,000 villages do not have outlets that can be incorporated into the system. Smart cards also require an efficient, clear administration, which Egypt does not have.
Egyptian prices for petroleum products have been among the lowest in the world for decades. Since energy prices have not been raised to meet the soaring costs of crude imports, energy subsidies have amounted to $100 billion (€75 billion) over the past decade. It is estimated that Egypt could save $6 billion to $7 billion a year by eliminating these subsidies.
A plan to raise the price of electricity over the next five years could also cut energy costs substantially.
Main beneficiaries
The poor have never been the major beneficiaries of energy subsidies and may miss out this time round. Eighty per cent of those gaining from cheap petrol and power have been manufacturers, firms, and wealthy and middle-class Egyptians who own vehicles, have electricity at home and work, and can afford to run generators during all-too-frequent outages.
A businessman consulted by The Irish Times said the cuts were long overdue and should discourage extravagance. "I had hoped the cuts would be larger. We waste so much petrol and power."
Critics of the initiatives argue that the government has not properly educated the public about the new measures and that it must introduce complementary legislation to protect wages, particularly for the lowest paid, and counter inflation.
Multinational firms welcomed the cuts in fuel subsidies, which could improve Egypt's prospects of paying for expensive imports of petroleum products. However, Egyptian prime minister Ibrahim Mehleb said savings would be used for health and education projects.
Newly installed Egyptian president Abdel-Fattah al-Sisi, the former army chief, has pledged to reduce the country’s $115 billion budget deficit, the largest in Egypt’s history, from 12 per cent to 10 per cent over the next fiscal year.
According to economists, between 75 per cent and 90 per cent of the budget is spent on subsidies, salaries and interest payments on debt, while the rest is invested in health, education and infrastructure.
The country’s growth rate is 1.2 per cent, while its population is expanding at 2.9 per cent, putting increasing pressure on crumbling infrastructure and faltering services.
The authorities have been compelled to tackle subsidies head on by the economic turbulence caused by the 2011 uprising and Egypt’s need for external financial aid. Previous governments shunned the issue, fearing a backlash.
In January 1977, hundreds of thousands of Egyptians demonstrated against an end to subsidies on rice, flour and cooking oil that had boosted food prices by 50 per cent.
At least 79 people were killed during the "bread riots", which threatened the regime of then president Anwar Sadat, who began the transformation of Egypt's economy from a socialist command model to a free market, a process continued under his successor, Hosni Mubarak, who was ousted by an uprising in 2011.
For the time being, Egyptians seem to be prepared to go along with the new government’s programme. But if they do not soon see improvements there could be mass protests in spite of the harsh crackdown on dissent. Sisi has called for temporary sacrifices and promised benefits within two years. He has to deliver by this deadline.
Analysts argue that economic reforms must be accompanied by political and institutional reform if the country is to succeed. So far, Egypt’s post- Mubarak rulers, dominated by the army and remnants of the Mubarak era, have ignored the uprising’s demands for “bread, freedom and justice”, and refused to carry out reforms.
As one commentator said: “The regime was decapitated when Mubarak fell, now the regime is growing a new head.”