The government is seeking to fully transition from a commodity subsidising system to a cash subsidy system and tasked the “National Dialogue” with discussing the transition with civil society to develop a clear plan for the state and the government on how to implement this transition ‘if it proves feasible,’ as Prime Minister Mostafa Madbouly has said.

 We view the move to drop commodity subsidising as a real threat to millions of Egyptians whose living standards are already deteriorating under the pressure of successive waves of price hikes, while the ration subsidy system - currently in place - provides them with a minimum of basic commodities that protect them from falling below the hunger line (the extreme poverty line). Therefore, switching to cash subsidies, especially against the backdrop of persistently high inflation, will lead to the rapid erosion of the value of subsidies, resulting in increased poverty and inequality, as well as exerting more pressure on the middle classes.

Although the idea of a complete shift to cash subsidies has been on the table for years, implementing it in the current economic conditions multiplies its negative effects on beneficiaries and the economy at large. It also does not help to achieve the government's financial and economic goals.

Official statements indicate that this move aims to “reduce the burden on the state budget, ensure the sustainability and efficiency of subsidies, and that subsidies reach those who deserve it”. In fact, the shift from commodity to cash subsidies sacrifices food security considerations and exposes citizens to further impoverishment, without achieving the government's goals. Rather, the government should endeavour to increase spending on all forms of subsidies, while putting measures in place to close the gaps through which they leak to the undeserving. 

EIPR believes that any economic policy that does not contain an increase in the in-kind subsidy component at this particular moment, against the backdrop of the unprecedented inflation rates that are likely to rise further, cannot achieve the minimum level of food security and social security, which the government places on top of its economic priorities.

1. Commodity Subsidising: Advantages and disadvantages

Whether commodity or monetary, subsidies are one of the many tools available to the state so it can provide basic constitutional rights to its citizens. Providing these rights requires the state to perform its essential function of directing the economy towards creating sufficient job opportunities and providing fair wages, as well as providing diverse types of social protection for its population. Such protections are not naturally provided by market forces, especially in a country where one third of the population - at least - falls below the poverty line.

More than 60 million individuals currently benefit from the state's commodity subsidies through ration cards. The ration card system allows 69.9 million citizens to receive subsidised bread at the rate of 5 loaves per person per day, for 20 piasters per loaf. It also provides 62.2 million individuals with subsidised basic commodities, with each individual on the card receiving EGP 50 worth of commodities per month, up to a maximum of four individuals on each card. Anyone exceeding the four person limit is entitled to receive EGP 25 worth of commodities per month. This means that a family of four receives EGP 200 worth of subsidised goods per month. 

Although this amount is modest in light of successive waves of rising food prices, the provision of basic commodities at subsidised prices by the government provides a minimum level of food security, ensuring that low-income citizens have access to the necessary calories, preserving the general health of the population as a basic right, as well as preserving their productive capacity and enhancing their ability to cope with rising prices – especially food prices.

- The current system was borne out of an earlier systematic change in 2014, in which the subsidising system transitioned from pure commodity-based subsidies to semi-monetary subsidies. This experience, despite some positive aspects, clearly demonstrated the negative impact of inflation on the amount of basic commodities beneficiaries receive. The subsidy provided was linked to a predetermined monetary value each beneficiary is entitled to, receiving goods equivalent to this value only. Whereas previously, they were guaranteed to receive a specific amount of goods directly, which provided for the bare minimum of food security (such as oil, rice, and sugar). This change decreased the amount of goods that beneficiaries receive because of rising prices, while the cash amount remained constant. Nevertheless, under this system the state is still obligated to provide some goods at subsidised prices to beneficiaries.

- As for bread, subsidies and bread rations have been reduced in more than one way. First by reducing the number of beneficiaries, then reducing the weight of the single loaf (more similar to a slice or a unit of peta-like bread), which was reduced three times in just ten years to from 120 grams to 90 grams as a means of cost reduction. Then finally the price of one loaf of bread  was raised last summer by 300%. Nevertheless, it still provides a buffer for large swathes of Egyptians, especially the poor, as they primarily rely on bread for their daily dietary needs.

- A survey by the International Food Policy Research Institute (IFPRI) shows the extent of the population's reliance on subsidised commodities as a buffer against rising prices. The research was conducted on a sample of 6,000 poor or poor-adjacent households in different regions within Egypt (from October to November 2022). It focused on changing consumption patterns after the pound devaluation in March 2022, and on determining the main coping mechanisms adopted by these households. The survey found that households reduced their spending significantly on non-subsidised food item groups after the succession of price hikes. In other words, their main staple was subsidised goods.

Official data confirms that food subsidies protected 3% of citizens from falling below the poverty line in 2019/2020, and about 10% of the population was protected from falling below the poverty line as a result of state subsidies for butane, electricity, and food together, according to data from the Income and Expenditure Survey (2019/2020). 

On the other hand, the state-supply (rations) system provides easy access to large segments of society, access that can be utilised in times of crisis to deliver goods and services to people, which was of great importance during the Covid pandemic after the implementation of the curfew and the restriction of travel between governorates. During the pandemic, many countries have resorted to implementing a food voucher system to ensure the provision of a minimum amount of food to families to preserve public health.

** In contrast to these advantages, the ration subsidy system has many disadvantages, mainly that a portion of those who are eligible do not receive the subsidy, while some of those who are ineligible benefit from the system, in addition to waste in the production and distribution system, and the leakage of part of the subsidy outside the system.

This requires efficient updating of the databases and clearer definitions of the categories of eligibility for subsidies and its criteria. Efforts have been made in this area over the past years, resulting in a decrease in the number of beneficiaries of ration cards from 71.6 million individuals in April 2016 to about 62.2 million in July 2024. Still, the measures taken to update the criteria and the database also involved excluding some beneficiaries who were in need. The government has set sound criteria to exclude those who are not eligible, such as owning a car or travelling abroad, and by applying these and other criteria, the reach of subsidies to the poor can be improved.

2. Commodity subsidising does not burden the budget

Even if we accept that the government's goal in switching to cash subsidies is to alleviate the burden on state finances, the total cost of subsidies does not, in fact, represent a significant burden on the public budget, as it does not exceed 0.8% of Egypt's GDP.  Commodity subsidy’s share of all state spending under the subsidy allocation in the budget does not even exceed 21%. Nearly half of the current year's EGP 636 billion subsidy budget is allocated to support economic and export activities, and to the repayment of some government debts.

Although the allocations for food subsidies appear to be increasing over the years, the purchasing power of these allocations is decreasing due to the steep devaluation of the local currency. The cost of food subsidy programmes in Egypt was estimated at 21.1 billion EGP in 2008, and the average exchange rate of the pound against the dollar that year was 5.5 EGP per dollar, meaning that the cost of subsidies was equivalent to $3.83 billion. The total cost of food subsidies now stands at 134 billion EGP, equivalent to about $2.85 billion at the current official exchange rate. This decline has accompanied an increase in Egypt's population by more than 30 million people during this period.

The heaviest burden on the budget is actually the repayment of local and foreign debt instalments and interest, which alone amounts to nearly two-thirds of total expenditures (62%). This burden reduces the space available in the budget for spending on everything that affects the lives of citizens and helps develop the economy, including wages, subsidies, purchasing goods, investments, among other things. The ratio of debt interest to GDP has exceeded the ratio of wages, subsidies, education and health combined.  

3. Cash Subsidies: benefits and drawbacks

The state provides cash support to the poorest families under the ‘Takaful and Karama’ programmes, in addition to the social security payments, and these cash transfers are included in a single budget item allocated 40 billion EGP. These transfers cover 5.2 million families. Their allocations account for 6% of the total subsidy budget, while their share of GDP does not exceed 0.2%. 

Families benefiting from the Takaful pension receive 736 EGP per month, in addition to a per-pupil grant ranging between 75 and 125 EGP, with a maximum of three pupils per family. This means that a family of five receives a maximum of 1111 EGP per month under this programme (equivalent to about $23 per family per month). Karama provides 708 EGP per person, with a maximum of three family members (2124 EGP). The Social Security Payment provides 535 EGP per person, increasing to 745 EGP for a family of four or more (up to 2980 EGP).

- The value of the sums provided through the cash support programmes are eroded with rising price levels and currency devaluation, while there is no rule to increase them or link their value to the inflation rate, and they have always remained below the official poverty line even after being increased more than once over the past two years. Currently they stand below the extreme poverty line if it was calculated with the impact of inflation in recent years accounted for, which means they are unable even to provide food security.

- The national poverty line was 857 EGP per month per person in 2019/2020, according to the last published income and expenditure research.  The average family size in this research was four members, which means that a family needed EGP 3428 per month just to remain above the poverty line around that time.

 The Statistics Authority (CAPMAS) has not released the latest data at the time of writing this paper (June 2024), even though it is meant to be published every two years. However, adjusting this amount in-step with the escalating inflation rates over the past 4 years - since the latest figures were published-  and in accordance with official inflation rates released by the government; the poverty line for a family should be set at around 7180 pounds per month. This is to enable a family to meet its basic needs of food, housing, clothing, education, health services, and transportation. The extreme poverty line, the line that if someone fell below he or she would be considered unable to provide basic food needs, was 550 EGP per person (i.e. 2200 EGP per family) in the 2019/2020 income and expenditure research. By applying the same calculation accounting for official inflation figures from 2020, the edge of extreme poverty becomes 4420 per family per month in March 2024. However, if we calculate the extreme poverty threshold (minimum food needs) based on food price inflation alone according to changes in the food basket prince index  since 2020 (an increase of 171%); the extreme poverty threshold becomes 5962 EGP per household. Thus, the gap between the cash subsidies provided and the requirements of basic food needs is actually enormous.

- Following the devaluation of the pound from 8.9 EGP to 16 EGP to the dollar and the increase in government goods and services prices in 2016, the number of poor people increased by about five million. Although updated data on poverty rates is not yet available, it is expected that the number of poor people has increased even more than before during the recent waves of inflation. Especially since the purchasing power of the pound has seen a much more steep deterioration over the past two years with its price dropping from 16 to about 48 pounds per dollar. This means that millions more will be in dire need of subsidies to meet their basic needs.

** Those in favour of expanding the cash subsidy or replacing the ration subsidy altogether, argue that it is better targeted, ensures that the subsidy reaches the most deserving , and that it provides more freedom to the beneficiary to choose the goods they want.

Empirical evidence does not suggest that targeting is better in this system, as the system excludes a large segment of the poor who are eligible for subsidies to begin with. This system also benefits a group of people who should not be eligible for subsidies. The cash subsidy system requires a constantly updated information network and continuous evaluation processes that drain resources through a large bureaucratic apparatus of government employees in charge of constant evaluation -- the cost of which will increase as it expands to all eligible citizens. 

Data indicates that the number of beneficiaries of this programme is less than one-third of the beneficiaries of the ration subsidy, and it took 10 years of implementation to reach current levels of coverage. How quickly can all beneficiaries be covered in the event of a shift from direct food support to cash, how much will this process cost, and can it keep up with the pace of inflation and price changes, especially the more volatile price of food commodities?

-The freedom of the citizens to buy the goods they want or need is already available under the amended rationing system, which gives the beneficiary the freedom to exchange the value of the subsidy he receives for many diverse goods.

- The shift to cash subsidies, on the other hand, opens the door to several potential problems in the distribution of financial resources within households, including the hoarding of subsidy amounts by older and more powerful individuals within the network of social relations;  the lack of access for children.  Emergency expenses related to education and health may lead many to spend food subsidy amounts on things other than food, thus exacerbating the issues associated with meeting the most basic feeding needs of the poor in Egypt.

- Although the programme was initially conceived as an attempt to provide cash support conditional on health care and educational attendance, this conditionality has become very weak in application over time. Thus diluting one of the main benefits of conditional cash support: improving the capabilities of children in poor households and ensuring their education and health.

4. Inflation-enforced blockade:

Over the last two years, consumer price inflation has risen dramatically, putting pressure on living standards, making it harder for the majority of Egyptians to cope, pushing more and more people below the poverty line and putting large segments at risk of hunger. In the context of high inflation and frequent devaluations, the implementation of a cash subsidy system is dangerous, as the real value and purchasing power of the money that beneficiaries will receive will decrease in record time, while the amount of the cash subsidy is re-evaluated and changed very slowly and usually in a manner that is quite disproportionate - such is the case in most direct cash subsidy systems - to the inflationary impact of frequent devaluations.

As for the state and the economy, it represents a loss on more than one side. Making the subsidy sums available in cash to individuals, subject to disposition as the individuals see fit, means abandoning the government objective of providing a minimum level of food security, as increasing pressures may lead households to direct spending on other items instead of food. On the other hand, providing commodity subsidies in the form of cash to buy contributes to inflation because the state will leave the beneficiaries to the market instead of providing goods at subsidised prices, which may create a vicious circle the coping mechanisms with price inflation contributing to inflation. This is especially the case with food items since many basic food commodities depend on imports and their prices are decidedly linked to the pound's exchange rate.

On the other hand, the government promises to change the value of cash subsidies in line with inflation. If it commits to doing so, the subsidy allocations will increase rapidly, placing a huge burden on the budget and eliminating any possibility of reducing expenditures, thus defeating the purpose of switching to cash subsidies in the first place. Inflation reached 35.3% nationwide in 2023 and averaged 29.2% through nine months of 2024. 

Poorer groups are disproportionately affected by food price inflation, as they allocate a larger portion of their limited income to food consumption. CAPMAS divides the population into ten segments according to their spending, and to facilitate comparison between their living standards. The latest version of the CAPMAS Income, Expenditure and Consumption Survey, the one mentioned above that was released four years ago, shows that the poorest segments spend a larger proportion of their income on food and drink items than the highest segments of society. The lowest income segment allocates a whopping 47% of their expenditure to food items. The proportion is slightly lower in the second and third quintiles below the poverty line, but still close to half of expenditures.  

The proportion of spending on this item gradually decreases in the middle brackets to account for about a third of spending, then decreases significantly in the top two brackets, with food and drink accounting for only 26% of spending in the ninth bracket and 20% of spending in the tenth bracket, the highest income and spending brackets. The poorest groups are not only affected by rising prices due to their generally limited incomes, but also because the most expensive goods in the latest inflationary waves were food commodities, which led the increase in the general consumer price index over the past two years, This trend culminated in October of 2023 with food inflation reaching 71%, making Egypt the country with the highest food price increases in the world that year, according to World Bank data.

Recommendations:

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.