The Egyptian Initiative for Personal Rights (EIPR) published a position paper entitled "A full shift to cash subsidy would increase poverty and threaten food security", contributing to the discussion called for by the government around its proposal to shift from in-kind to cash subsidy. The government had earlier tasked the National Dialogue with discussing the proposal.

The paper explains how the shift from commodity to cash subsidy poses a real threat to millions of Egyptians whose living standards have already been deteriorating due to a quick succession of price hikes, while the existing supply subsidy system provides them with a minimum of basic commodities that protect them from the risk of hunger. The shift to cash subsidy, especially in light of high inflation, would erode the value of any cash support provided by the government, and would fail to meet the minimum food needs, resulting in increased poverty, inequality and food insecurity among the lower classes, in addition to putting more pressure on the middle classes.

The idea of a full shift to cash subsidy has already been on the table for years, but applying it under the current economic conditions will compound its negative effects on beneficiaries and the economy as a whole, and will not achieve the goals the government hopes to achieve. EIPR believes that any economic policy that does not contain an increase in the in-kind subsidy component at the present time, against the backdrop of unprecedented inflation rates that are likely to rise further, cannot achieve the minimum level of food and social security, which the government puts on top of its economic priorities. The paper elaborates on the reasons for that.

The paper outlines why the government’s objectives cannot be achieved through this transformation. The official narrative stresses that the move aims to alleviate the burden on the state budget, ensure the sustainability and efficiency of subsidies, and ensure that subsidies will reach those who deserve it. Nevertheless, the shift from in-kind to cash subsidy ignores priorities of achieving food security, exposes citizens to more impoverishment, and increases  inflationary burdens which in turn will raise the value of the subsidy required to be allocated -- in a vicious circle that will only end up multiplying burdens on citizens and on the public budget. The current socio-economic situation requires the government to increase spending on both in-kind and cash subsidies, while putting in place measures and policies that can bridge the gaps and plug holes from which the subsidy leaks to the undeserving.

The paper further explains that subsidies, whether in-kind or cash, are one of many tools available to the state to be able to provide and ensure basic constitutional rights of its citizens. The provision of these rights requires the state to direct the economy towards providing sufficient jobs, fair wages, and social protection to its population that market forces do not naturally provide, especially in a country where more than one third of the population (at least) falls below the poverty line.

The paper reviews the advantages and disadvantages of both in-kind and cash subsidies, explaining that in-kind subsidies are mainly characterized by their relative resilience in the face of rising consumer prices. More than 60 million individuals currently benefit from this system. Despite the modest value of subsidy provided to each household in light of  successive waves of food price hikes, the provision of basic commodities at subsidized prices provides a minimum of food security, which ensures that the lowest-income citizens have access to the bare minimum of necessary calories. This preserves the general health of the population as a basic right, and also preserves their productive capacity, and enhances their abilities to face successive price hikes.

While the government aims to alleviate the burden on state finances by switching to cash subsidies, the total cost of in-kind subsidies does not really represent a significant burden on the public budget, as it does not exceed 0.8% of Egypt's GDP. Moreover, its share of all state spending classified under subsidies in the budget does not exceed 21%. Nearly half of the EGP 636-billion subsidy budget this year is allocated to support economic and export activities and to pay off some government debts.

Meanwhile, the value of the cash subsidy currently provided by the state to the poorest families, which benefits about 21 million citizens, is rapidly eroded by  price hikes and  currency devaluations. In fact, there is no mechanism for increasing the cash subsidy or pegging it to the inflation rate. Cash transfer values have always remained below the official poverty line even after increasing them more than once over the past two years. It is currently below the extreme poverty line (the hunger threshold) if it is calculated while accounting for the impact of inflation according to official numbers over the past few years. This means that cash subsidies are not even able to provide basic food security.

The paper presents several recommendations that can contribute to the protection millions of people against the backdrop of severe economic squeeze:

1. The government must continue providing subsidies in both commodity and monetary forms, especially in light of the decline in the living conditions of a significant percentage of Egyptians in recent years. This requires expanding the forms of subsidies and not reducing them or converting them to a sole monetary form that is subject to rapid erosion against the backdrop of high inflation rates that are still likely to rise further.

2. Increase the allocation of food commodities subsidy to match the increasing risk of impoverishment that threatens large segments of citizens. This will go some way towards reducing  social inequality that results from this and that has serious socio-political repercussions. 

3. Improve data updating processes, new beneficiary inclusion mechanisms and monitoring tools in order to improve the system's efficiency and minimise waste and leakage.

4. Expand the allocation of cash subsidies and link their value to the poverty line and the official inflation rate, ensuring that citizens receive their minimum basic rights. Both types of subsidies contribute to reducing the number of poor people and maintaining social and political stability.

5. Work quickly to improve the tax structure through some quick-fix measures, including the immediate activation of the capital gains tax on the stock exchange; increasing the efficiency of implementation and collection of the real estate tax; and increasing the progressivity of the income tax in line with increasing rates of social inequality. Achieving a measure of tax justice helps finance the required expansions in support systems to protect vulnerable groups. It is one way to address chronic crises in state finances, bearing in mind that tax revenue does not exceed 12.5% of Egypt's GDP – a very low level compared to similarly sized or developed economies.

6. Addressing the problem of ever-growing public debt is the key to alleviating  pressure on the budget, in addition to reducing interest rates which can provide some fiscal relief.

Read the full paper from here