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Egypt’s subsidy system: questionable corruption, unending problems - Daily News Egypt

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Egypt’s subsidy system: questionable corruption, unending problems

At the beginning of the 20th century, when the world was plagued by famines and world wars, governments enlisted food subsidy programmes to feed their citizenry in these desperate times. Such programmes are still used by government’s all over the world in order to combat poverty and hunger. However, many countries across the world have …


At the beginning of the 20th century, when the world was plagued by famines and world wars, governments enlisted food subsidy programmes to feed their citizenry in these desperate times. Such programmes are still used by government’s all over the world in order to combat poverty and hunger.

However, many countries across the world have stopped providing food subsidies and switched to cash support, after corruption plagued their food subsidy programmes. In Egypt’s case, corruption has been part of the subsidy system from its beginning under former president Gamal Abdel Nasser to current President Abdel Fattah Al-Sisi.

After years of dealing in a fraudulent system, how can the government combat the current level of corruption? Is Egypt’s current subsidy model what the country needs?

Daily News Egypt takes a look at ways to improve the efficiency of the subsidy programme.

 

Khaled Hanafy, former minister of supply and interior trade
Khaled Hanafy, former minister of supply and interior trade

Is Egypt’s current subsidy system a failure?

For over 60 years, Egypt has provided its impoverished citizens with food subsidies in order to help them survive. Yet, throughout its entire duration, the subsidy system has been faced with corruption despite efforts to combat such malpractices.

In February 2014, Khaled Hanafy, former minister of supply and interior trade, tried to implement a new system to end the corruption, but unfortunately he was unsuccessful.

The system he created is still in place until now. How do economists view the system and what changes would they recommend?

Hany Tawfek, an economic expert, said that the current system for subsidies is a proven failure, adding that food subsidies are no longer the default government charity system in most parts of the world.

He believes that having second prices for any product opens the door for corruption, allowing a third party to intervene between the government and the poor.

Mexico and Brazil, for example, put a halt to their food subsidies programmes in order to end the unwieldy corruption.

Tawfek said cash support is a better option for families who are below the poverty line and do not have any source of income. However, such families must meet a few conditions. Children in these families must apply for education and must receive health care from the designated government health facility.

They must also apply for government-run or private programmes that train assist them with job hunting, Tawfek said.

Tawfek believes that the current system, which relies on ration cards, in not the best method to be able to tackle subsidy distribution, as they lead to the same types of corruption by which a third party is able to intervene.

Hanafy’s programme implemented in 2014 distributed subsidies via electronic cards, which contains EGP 21 per month—which increased recently by EGP 3 up from EGP 18 following the flotation of the Egyptian pound—to purchase food products such as rice, sugar, and cooking oil.

The current system, which relies on ration cards, in not the best method to be able to tackle subsidy distribution (Photo Public domain)
The current system, which relies on ration cards, in not the best method to be able to tackle subsidy distribution
(Photo Public domain)

I don’t believe that anyone has the power to end the institutional and personal corruption that Egypt suffers from, even President Abdel Fattah Al-Sisi, claimed Tawfek.

Tawfek said that the government is unable to provide more than the current amount, which is worthless, adding that EGP 21 can hardly help feed a family.

He believes that the main problem is the small amount of taxes that the government collects, explaining that in any given country taxes represent around 25% of its income. According to Tawfek, in Egypt’s case, that would add up to EGP 750bn, but unfortunately Egypt collects only EGP 350bn, which represents just 12% of its income.

The government must reorganise Egypt’s tax system in order to increase its total income, which would assist the company with being able to support the poor with subsidies.

 

Inflation rate, economic woes provide obstacles to reforming subsidy system

On 28 November, the Egyptian Center for Opinion Research (Baseera) said that one in every three Egyptian families are willing to forgo their ration card, according to a recent survey.

Eight in every 10 Egyptian families has a subsidy card. Lower Egypt has the highest number of subsidy card holders with 89% of its residents being card holders, while Upper Egypt follows with 80% of its residents benefitting from subsidies.

every Egyptian believes in the importance of governmental subsidies
every Egyptian believes in the importance of governmental subsidies

Approximately 20 million people hold ration cards, a number that is likely higher than the amount of people who qualify to receive ration cards. With such a large segment of the population receiving some form of subsidies, some economists ponder whether the system in place is best equipped to tackle the needs of Egypt’s impoverished.

Omar El-Shenety, the managing director of Multiples Group, said that every Egyptian believes in the importance of governmental subsidies, whether that comes in the form of cash or food. However, the problems lie in the absence of a database that regulates who is receiving subsidies in order to make sure they are going to the right people.

He believes that the current number of people who receive ration cards is way higher than the amount that should be receiving them.

He said the current database is inaccurate, and that there are people from the middle class receiving ration cards who should not be.

On the other hand, El-Shenety does not think switching from food to cash is the best idea given current economic circumstances. “The government cannot implement a full cash subsidy system for the poor,” El-Shenety said, adding that it is not possible to implement such a thing given the current high inflation rate.

He believes implementing cash subsidies and getting rid of food subsidies would increase the inflation rate, which is already at its highest levels. El-Shenety explained that Iran switched from a food subsidy programme to one that distributes cash and witnessed an increase in the inflation rate, which is something Egyptians cannot afford.

It is like what happened with floating the Egyptian pound, he said, explaining that all experts believed that the price of the pound against the US dollar could not cross EGP 13 per dollar. But the flotation mechanism creates an unrealistic higher price of currencies, which would be further exacerbated if the government provided cash support.

The problem is that if the government stopped subsidising food products, they would be offered at their fair, although higher, prices, which would increase the inflation rate, he noted.

El-Shenety sees that the current subsidy system is a better system for Egypt for the time being, given the current economic problems.

The Egyptian government must create an improved, transparent database for those who truly are considered poor and need ration cards; otherwise, nothing is going to solve the problem with subsidies, he said.

By clearing up the database and removing people who are not entitled to ration cards, it would be possible for the government to increase its support for the poor, he said.

 

The current unemployment rate in Egypt stands at 12.6%, according to the Central Agency for Public Mobilization and Statistics.
The current unemployment rate in Egypt stands at 12.6%, according to the Central Agency for Public Mobilization and Statistics.

Informal economy, budget deficit make providing unemployment benefits difficult

Many countries provide unemployment benefits for their citizens who want to find jobs, but cannot.

Such benefits often provide a safety net for both the government and recipients, in order to avoid from members of the populace falling too far below the poverty line. In Egypt, the number of citizens slipping into poverty has been increasing. With the recent increase in prices over the past couple of months, the poverty rate is likely to increase at an even quicker pace.

The current unemployment rate in Egypt stands at 12.6%, according to the Central Agency for Public Mobilization and Statistics.

Aliaa El-Mahdy, former dean of the economics and political science college at Cairo University, said Egypt would be unable to provide unemployment benefits at least for the next 10 years due to the lack of knowledge and concrete information regarding the unemployed and their demographics.

She believes that a major part of this is due to the informal economic sector, which presents an obstacle to Egypt being able to provide unemployment benefits.

“It would be impossible to know whether a person applying for these benefits has any other source of income or not,” she noted.

El-Mahdy emphasised the importance of bringing the informal sector into the formal economy. She believes that the government is working on creating a database to help the government plan for the upcoming period. However, she does not believe the government has taken the steps necessary to fold the informal sector into the formal economy.

According to some unofficial studies, Egypt’s informal economy is estimated to be worth more than EGP 2tn.

Reham El-Desoky, a senior economist at Arqam Capital investment bank in Cairo, said if the government provides unemployment benefits, it would mean that Egypt’s unemployed would have less an incentive to look for jobs.

She believes that young people who are suitable for a variety of jobs have refused available job opportunities without fair reasons, emphasising that unemployment benefits must only be provided to those unable to find a job, and only for a short period of time.

El-Desoky also believes that the government also has too large a budget deficit, which would prevent them from providing such a thing.

 

 

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