Egypt subsidies face an overhaul

The Egyptian government cannot continue with its expensive subsidy regime that is "like a cancer" to the country's economy, Egypt's finance minister said yesterday.

"We will no longer support through subsidies because too much support is like a cancer," says Hazem El Beblawi, Egypt's finance minister. Andrew Henderson / The National

CAIRO // The Egyptian government cannot continue with its expensive subsidy regime, the finance minister said yesterday.

One third of the country's budget is spent on subsidies including wages for public sector workers, and gas.

"We will no longer support [the country] through subsidies because too much support is like a cancer," said Hazem El Beblawi, who took over as the finance minister from Samir Radwan in July as part of a broad cabinet reshuffle.

"People must get used to the idea that subsidies are an exception," Mr El Beblawi said.

He said changes in the subsidy system that lower prices for consumers and industry were essential in the next two or three years but the government would decrease payments only "gradually" to prevent any major side effects.

The government has started some subsidy reforms, including improvements to the way cooking gas is distributed to the poor, and some steps towards a more sustainable food subsidy programme.

More than three quarters of Egypt's 82 million people can buy loaves of bread at less than US1 cent each. But many regard the estimated US$5.5 billion (Dh20.2bn) the country spends each year on food subsidies alone as a huge burden on the already distressed economy.

"It is absurd how most people pay the same for a loaf of bread, which is cheaper than animal feed," said Magda Kandil, the executive director at the Egyptian Center for Economic Studies, a non-profit, private-sector research institute.

"At least [the government] has the guts now to start talking about it. The attitude of the previous finance ministers was to overlook this issue, which is not sustainable."

Although Ms Kandil said there was little the finance minister and government could do to make any changes in the budget because capital had already been ring fenced, she welcomed his move to kick-start some fundamental changes in the economy.

In June Mr Radwan laid out a budget for this year and next that predicted a 26 per cent increase in subsidies of consumer commodities such as basic foodstuffs and fuel.

The government said it would spend 22.4bn Egyptian pounds (Dh13.79bn) over the next two years to make consumer goods more affordable.

Fuel subsidies, seen as more beneficial to the rich, were also expected to rise by 31.3bn pounds over the next two years compared with the last budget.

But as the Egyptian economy creaks under a growing budget deficit and the debt burden grows, the government has experienced growing criticism that it is spending too much money on subsidies it can ill afford.

Experts have suggested some kind of threshold be put in place to limit the billions of dollars of subsidies that are spent each year.

Ms Kandil said applying subsidies only to those below the poverty line, which her organisation estimates is about 22 per cent of the population, would be more sustainable than the current practice where everyone is eligible for money from the welfare system.

Mr El Beblawi said the government was looking at ways to reduce its dependence on borrowing from local banks because it added a greater strain on the economy.

Egypt rejected an offer of IMF funds in June and has said it would rely on the local market to plug its financing needs. But the IMF said it would lend money to Egypt if Cairo changed its mind and asked for assistance.

* with additional reporting by Amina Ismail