Supervisor Elham AbolFateh
Editor in Chief Mohamed Wadie

Restructuring Subsidies is a Must: Op-ed


Thu 11 Nov 2021 | 11:14 PM
opinion .

Restructuring subsidies is a decisive and audacious decision that reflects and affirms transparency, governance of policies and strategies planned by the political leadership at critical stages of Egypt's economic and structural reforms, coping with the rapid increase in population growth rate, which contributes effectively to accomplishing goals of Egypt’s vision 2030 and the UN Sustainable Development Goals (SDGs).

Keeping in mind, the gap between supply and demand is aligned with the growth rate of population and the irrational use of energy, high-rate of subsidized bread accompanied by unprecedented levels of subsidies.

In this regard, demand- and supply-side measures have been considered for catalyzing the economy. Demand-side management aims at influencing the demand for goods and/ or service through rationalizing the demand for forms of energy and bread.

Supply-side management is aimed at influencing how a certain demand for goods and/or services is met through boosting the persification of renewable energy sources and improving the quality of production of bread with the reasonable cost of production.

Also, it is essential to take into consideration that there is no single best methodology for applying subsidy reforms as each country has its own consumption pattern and economic growth rate, also the elasticity of demand and supply in the market may vary from one country to another.

The importance of restructuring subsidies stemmed mainly from the necessity of bolstering the path towards sustainable development for the current and future generations.

In the meantime, the government maintains widening and deepening social safety programs and direct cash transfers in order to guarantee that subsidies reached targeted people sufficiently which results in decreasing the budget deficit.

This would create more incentives for rationalizing consumption and improving the quality of production as well as raising productivity.

From the political economy perspective, governments across the globe are always reluctant to reduce/remove subsidies in order to avoid backlashes of people without providing real and permanent solutions to achieve social equality and maintain sustainable development.

In other words, subsidies are used to be a politically deceivable tool for attracting the votes and the support of people. However, it is a short-term remedy for chronic deficiencies in the distribution of incomes.

The manifested disadvantages of subsidies concentrated in the irrational fiscal burden that the government bears by supplying electricity, natural gas, petroleum, and bread at extremely lower prices compared to the value of the Egyptian pound and the real cost of production and distribution of products. This might result in losing the economic value of these subsidized products by time, besides the excessive and irrational consumption that could lead to a shortage in the supply and the quality of production.

In light of the above, the Egyptian Political Leadership follows transparent and effective policies, implementing radical economic and structural reforms for the sake of humanity, social equality, and long-lasting development for the current and future generations.

Since 2016 the government kept the path of well-sequenced economic reforms with an adequate timeline of implementing responsive policies, backed by the support of public opinion.

Reforming subsidies implemented according to a transparent timeline of gradual removal of energy subsidies since 2016, along with expanding social safety nets to protect poor and most vulnerable households and inpiduals, exerting consolidated efforts to create a unified database that targets all beneficiaries who deserve to receive cash and food subsidies according to their level of income and standard of living.

The success of the economic reform program showed the effectiveness of energy subsidies reforms in expanding the supply in the energy market and enabling Egypt to be an exporter of natural gas and electricity.

These impressive impacts reflected on one hand in persifying sources of renewable energies, enhancing the quality of production, boosting the competitiveness of the energy sector, energy efficiency, and conservation, and on the other hand on rationalizing public expenditures through redirecting them to the eligible beneficiaries and enhancing public services in order to put an end for rampant corruption in the informal market, which is recognized as the most beneficiaries from energy subsidies on the expenses of poor households and inpiduals.

Building on success, the decision to restructure subsidies on Egyptian bread is necessary to promote the quality of Egyptian bread production, distribution, and rationalizing its consumption, ensuring self-sufficiency in healthy food for all members of society and promoting its economic and nutritional value.

Noting the exaggerated subsidies of Egyptian bread which is irrelevant to the real cost of its production, not only squander its economic value, but also its nutritional value and led to waste in its consumption in terms of irrational and wasteful consumption.

The prudence of the government decision stemmed from initiating adequate strategies and policies aligned with restructuring subsidies, redirecting the removed subsidies to public investments (i.e. Education, Health, Transportation, and infrastructure development), expansion of social safety nets, and food subsidies as well as cash transfers.

It should be noted that the restructuring of subsidies on Egyptian bread neither negatively affects the poverty rate nor the inflation rate.

Additionally, wages, salaries, and pensions have been increased in the new public budget starting from July 2021, in order to ensure equal income distributions, benefiting from the gains of economic development, as well as to ensure the provision of the necessary social protection for households and inpiduals.

It is worth mentioning that the success of the economic reform program contributed to consolidating the resilience and solidity of the Egyptian economy, which enabled it to move forward towards achieving a fundamental and structural reform of the Egyptian economy.

This shows the critical role of the State in the Egyptian Economy that concentrated mainly on regulating, controlling, and monitoring the market with the aim of promoting good governance, transparency, social equality, and combating corruption and speculation as well as price discrimination.

Noteworthy the role of the state helps greatly in boosting economic activities amid external shocks, enhancing the business environment, and enabling the private sector to contribute sufficiently to sustainable developmental projects.

With reference to Keynes’s theory, the aggregate demand is measured as the sum of spending by households, businesses, and the government which is the most important driving force in an economy, emphasizing that free markets have no self-balancing mechanisms that lead to full employment. Noting the government intervention through public policies to achieve and maintain full employment and price stability, containing market failures amid external shocks through preemptive fiscal stimulus packages.

Last but not least, the Egyptian Political will put the life of Egyptians as the top and main priority on every policy and each decision implemented with the aim of enhancing the quality of healthy and decent living standards for all Egyptians, supported by sustainable development, believing that the development of human capital is the nation's wealth and immortality.

Bearing in mind, restructuring subsidies provided is necessary through a periodic review of the subsidy ratio from the real cost of production and distribution together, as the subsidy ratio must be governed by a number of criteria; Among them are the elasticity of demand and supply of the subsidized product, the number of those eligible for the subsidy and the rate of their actual consumption of the subsidized commodity, the rate of inflation, the value of Egyptian pound, the continued developments in economic and social conditions. Therefore, the subsidy ratios cannot be fixed without change. The stability of these ratios for years and decades on commodities leads to distortion of prices in the market and erodes the economic value of the subsidized commodities.