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Who bears the brunt of the economic reforms? - Daily News Egypt

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Who bears the brunt of the economic reforms?

President Al-Sisi pledged to protect vulnerable social classes against the impacts of the economic reform

Amid the continuous waves of economic reforms undertaken by the Egyptian government since 2016, starting with the flotation of the Egyptian pound in November 2016, to more severe measures as the government buckled down to secure the $12bn loan from the International Monetary Fund (IMF). This includes the restructuring of the subsidy system, which resulted in cutting spending on fuel and electricity subsidies in June, in addition to the imposition of the value-added tax (VAT) and increasing the interest rates, with the high inflation of 30%. Whether the aim is to take firm steps towards reducing the state’s budget deficit or enhancing the overall conditions of the economy, the result is a bunch of unexpected financial burdens Egyptian citizens of which all segments and classes have to bear the brunt. While some classes remain more burdened than others, the question that must be answered is: who really pays for the burdens of these economic reforms?

The state of the poorer class and its social protection

Although all three social classes in Egypt, upper, middle, and lower have felt the financial impacts of the ongoing reforms one way or another, a closer look would show that the government has relatively paid more attention to the most vulnerable class, the lower class, through a bunch of measures and programmes. For instance, the Egyptian government launched a programme called “Takaful Wa Karama” (Solidarity and Dignity), with the third phase of the project launched in late October 2016 by the Ministry of Social Solidarity, financed by the World Bank with $400m. The programme’s main aim is to improve the lives of underprivileged Egyptian families and unemployed citizens.

Takaful offers healthcare to children from their birth until age 18, on the condition that both parents are unemployed. Parents receive EGP 325 per month. If they have children in elementary school, the child receives EGP 60 per month, EGP 80 if in the preparatory level, and EGP 100 if in the secondary level. Karama programme aims to provide financial support to people aged 65 and above.

In 2015, the Ministry of Defence’s Public Services of the Armed Forces Device opened several mobile sales outlets in several neighbourhoods in Cairo, Giza, Qaliubiya, Gharbeya, and several other governorates with the aim of selling products such as meat, poultry, and dairy products for lower prices to citizens in an attempt to counter the increased prices of these goods in the market. In addition, about 88.6% of Egyptian families are covered by the food subsidy card system, which was introduced by the government mid 2014. 95.4% of the families in rural areas are covered by this system and about 80.5% of them in urban areas, as the data of the Central Agency for Public Mobilization and Statistics (CAPMAS) show. About 96.1% of Lower Egypt families benefit from the new subsidy system, compared to 72.5% in urban governorates.

These attempts to socially secure the poorer class are part of President Abdel Fattah Al-Sisi’s pledge to protect the more vulnerable classes amid the reforms.

It is worth mentioning that a report issued by Beltone in 2015, under the name “Income, Expenditure and Consumption”, showed that nearly 30% of Egyptians are living below the poverty line, and the percentage is continuously increasing, according to the report. 57% of Upper Egypt’s rural residents are unable to meet their basic needs, compared to around 20% in rural Lower Egypt. The increased percentage of poverty is highly connected to the level of education these individuals have received. Beltone estimated that 40% of illiterate citizens are considered to be on the poverty line, compared to only 7% of those who have a university degree.

The middle class, unprotected and decaying

The middle class in Egypt is considered the largest of the country’s socioeconomic classes, comprising of doctors, police officers, university professors, engineers, and lawyers in the upper part of it, in addition to government employees and low-income workers in the lower part of it. The middle class in Egypt is aspiring to join the upper class, but is constantly caught up in the fear of falling into the lower class, being underprivileged in terms of social protection amid the reforms and spending its money on its own education, healthcare, and property, without much financial support to help. For instance, a broad segment of the middle class was exempted from supply commodities after the latest filtration of ration cards—a facility middle-class individuals relied upon heavily to save for better education and lifestyle. In addition, the recent removal of fuel and electricity subsidies has added more financial burdens to the citizens belonging to that class, causing it to diminish and leaving a vast portion of it exposed to the risk of falling into the lower class.

For instance, the most recent subsidy cut which was implemented on 29 June targeted diesel and butane cylinders (LPG). Both of them form a large part of the subsidy bill and also benefit the lowest-income earners in the country. On the other hand, the prices of 92 octane and 95 octane gasoline have witnessed less hikes, and they benefit the higher classes of society. The hikes targeted the most subsidised types of fuel—in an attempt to reduce the burden on the state’s general budget, which means that citizens who depend on this subsidisation are the ones most affected.

“Despite the government’s current efforts, social conditions remain a concern; inflation caused by the currency floatation, energy subsidy reform, and other food price shocks significantly affects the Egyptian households, especially the poor and the vulnerable segments of the population as well as the middle class,” the World Bank stated.

In the first decade of the 21st century, the middle class was vastly expanding across countries of the Middle East except in Egypt and Yemen, according to a study conducted by the World Bank. In Egypt, the middle class declined from 14.3% in the mid-2000s to 9.8% by the end of the decade. The World Bank’s policy research paper stated that those who belong to the middle class live on more than $4.9 per day, a limit deemed to leave individuals reasonably secure from falling into poverty. During the same period, Egyptians considered prone to poverty, living on $2-$4.9 per day, declined from 65.5% to 61%, while the percentage of individuals living on less than $2 increased from 20.2% to 29.2% at the end of the decade.

Swiss Credit Suisse Research Institute’s “Global Wealth Report” for year 2015 said that there is an “unfair distribution of wealth” in Egypt. It said that size of the Egyptian middle class dropped by nearly 48% during the period between 2000 and 2015, and it now forms as much as 5% of the total Egyptian population.

These data create concerns for the middle class, and whether leaving it unsecured with similar programs provide to the poorer class may be causing it to gradually vanish over the time with the severity of the economic reforms.

The upper class safe from unpleasant surprises 

Egypt’s upper social class’s wealth alone is estimated to constitute more than 48% of the total wealth in Egypt, according to data from the Egyptian Initiative for Personal Rights (EIPR). This class is not subject to much pressure financially even with the severe economic reforms.

The Egyptian government had a plan to impose a capital gains tax; however, the decision was delayed. Members of parliament (MPs) have also rejected the government’s idea to impose an incremental income tax on citizens. MP Yasser Omar said that imposing such a tax contradicts the decisions made by the Supreme Council for Investment and would create a state of instability.

Heba El-Laithy, professor of statistics at the Faculty of Economics and Political Science of Cairo University said that the financial burdens resulting from the economic reforms must be equally distributed on all citizens of all classes through well-enforced laws. She wondered why the decision to impose incremental taxes was delayed and overlooked. “There was also a decision to impose taxes on the profits of the stock exchange. This decision winded up being postponed for another three years, which results in further unfair distribution of burdens and wealth,” she said.

The right way to address the issue of poverty and the difficult economic conditions can only be through providing more jobs, creating social justice, and improving the quality of services offered by the government to its citizens overall, according to El-Laithy. “Drastic solutions are necessary because, despite the government’s efforts, conditions are still worsening,” she said.

According to a report by Chris Jarvis, the mission chief for Egypt and an adviser at the International Monetary Fund’s Middle East and Central Asia Department, there are social protection measures set to take place and are mainly targeted to help the most vulnerable groups. These measures are put forward by the Egyptian government with the help of the IMF. They include increasing food subsidies, expanding Takaful and Karama to help reach a larger number of citizens, expanding the social pension budget to become 1.7 million households, in addition to increasing subsidies for infants’ milk and some children’s medicines.

Even though the government is trying to counter the effects of the economic reforms, groups of Egyptians citizens will continue to suffer. Will the government be undertaking a group of new protective measures to support the middle class stuck between the relatively protected poor class and the safe-from-sudden-changes upper class? Will it be able to continue to keep the lower class safe and eventually distribute the financial burdens equally?


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