Before we dive into subsides, we interrupt your program to issue the following PSA: This is Kramer. Kramer lives in a nice apartment and has food. Kramer likes to barge into (runtime: 2:12) his neighbor’s house and take his food. Don’t be like Kramer. —Best regards, the Egyptian Council of Ministers.
If the Ismail cabinet was to be taken seriously on its reform agenda, it had to start tackling head on the problem of subsidies. Urgency was spurred not just by the need to meet the IMF’s conditions — the falling value of the EGP had a direct impact on the subsidy program, massive chunks of which are USD-linked. As fear of social unrest as a result of inflation still loomed over the cabinet, a measured gradual approach was adopted. Easing subsidies for the rich would be matched by raising them for the poor, a transition into cash subsidies and away from commodity subsidies, with a dose of price monitoring. By the end of the year, the government had done more to strengthen the social safety net — and to lay the groundwork for a cleanup of welfare rolls — than it has actually cutting subsidies. Still, heading into 2017, one thing is relatively certain: If you earn above a certain income level, your mooching days are over.
On fuel subsidy reform, the Ismail cabinet acted only when the gun was to its head. The night of the EGP float saw fuel prices rise for the first time since 2014. This was touted by some as a major move towards cutting subsidies, but by the cabinet’s own admission this was merely a step to keep up with global oil prices and the devaluation, which pushed the fuel subsidies bill from a budget allocation of EGP 35 bn to EGP 65 bn. Oil Minister Tarek El Molla then said this might be expected to rise to EGP 80 bn with an expectation that fuel prices will rise again before July of 2017. The government had hedged its fuel subsidy reform plan on the fuel smart cards, but had held off on that since 2015 with no word if it had abandoned the policy altogether. Judging by the performance of the supply smart cards, it is more than likely that the policy has been nixed. We would not be surprised to simply see a complete phase-out of subsidies at the fuel pump over the coming two years.
Tackling food subsidies primarily meant fixing the poorly managed smart card system for distribution of bread and commodities. This mismanagement had manifested in ration cards being hacked and forged (costing the state untold mns, if not bns) and in the mns of middle-class Kramers who were plugged into the system. To guard against the hack, the Ismail cabinet handed over management of the cards to the armed forces. As for the Kramers, the government plans to purge 3-4 mn of them from the system in its initial phase. The government opened the snitch line in December, offering incentives for those who voluntarily removed themselves or any dead relatives or those living abroad. Cabinet was also setting up new criteria for eligibility in the system, and will announce those next year. Authorities made a nod to inflation by raising the monthly allocation of commodities to EGP 21 per month from EGP 18 at a cost of EGP 5 bn, and raising the price of buying agricultural crops from farmers. Raising the purchasing prices of domestically harvested goods will cost the state EGP 5 bn, raising the commodities subsidies budget to c. EGP 49-50 bn.
Perhaps the most effective policy adopted this year was cutting of electricity subsidies. In July, the cabinet raised electricity prices across all consumption tiers (including the poor) in an unprecedented move. It had announced back in February an ambitious five-year plan which would see power subsidies cut 50% from their 2014 levels by 2020 and fully eliminated by 2025. However, with the devaluation and fuel price hikes doubling the power subsidies budget to EGP 60 bn, ministry officials have stated that this could mean slowing down the phase-out. The ministry is considering three options to replace the plan: raising prices by next July as planned and scrapping subsidies entirely by FY2018-19; cutting subsidies completely from FY2017-18 except for low-tier consumers; keeping subsidies for the lower-tier segment until 2019 while eliminating subsidies for high-tier consumers by FY2017-18. The Ismail cabinet will review the policy at the end of January.
Strengthening the social safety net to cushion the impact on the subsidy phase-out and of inflation was a key priority in 2016 and will be high on policymakers’ agendas in the new year. The budget for pensions has been raised to EGP 15 bn, a four-fold increase over last year. Retirement benefits under the Karama program will now be extended to retirees aged 60 and up from a previous age of 65. The Social Solidarity Ministry announced plans to increase beneficiaries of both Takaful and Karama to 1.7 mn families by next year at a cost to the state of EGP 2.5 bn. This figure will rise to 4.3 mn families by June 2017.
The ministry will also be charged with moving to a program of cash subsidies in 2017, abandoning the wasteful commodity subsidies that benefit the wealthy more than they do the poor.
How bad will inflation get? Since the November float, the Central Bank reported that inflation accelerated to its highest level in eight years, as the annual headline inflation rate increased to 19.43% in November from 13.56% in October. Prior to the float, the IMF had projected an inflation rate of 14%, amending that to 18.2% for FY2016-17. The European Bank for Reconstruction and Development is projecting inflation will reach 18%, while Capital Economics is anticipating inflation will increase to 22% by mid-2017. Still, Finance Minister Amr El Garhy told Bloomberg that the government is targeting to pull inflation down gradually to 10% “sometime mid-next year.” The government is, in essence, projecting that inflation is a one-off driven by the float — imported inflation, if you will — and not structural inflation in the economy.