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Egypt and the IMF: Are we asking the right questions? - Daily News Egypt

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Egypt and the IMF: Are we asking the right questions?

By Iris Boutros The focus of Egypt’s progress to secure the pending $4.8bn loan from the International Monetary Fund (IMF) has been on the size, timing, and conditions of the loan. Many have speculated on the impact of protracted negotiations, the economy, the currency, investment, price inflation and subsidy cuts. These questions are critical, but …

Iris Boutros
Iris Boutros

By Iris Boutros

The focus of Egypt’s progress to secure the pending $4.8bn loan from the International Monetary Fund (IMF) has been on the size, timing, and conditions of the loan. Many have speculated on the impact of protracted negotiations, the economy, the currency, investment, price inflation and subsidy cuts. These questions are critical, but in some sense obvious.

What I am interested in are the implicit or less obvious questions. In developing Egypt’s economic recovery and reform strategy, a prerequisite for the IMF loan, President Mohamed Morsi’s cabinet is making many decisions. Most of them are tough. Data are, or at least should, drive some of the economic direction, but ultimately decisions are based on tradeoffs and values. This is the basis of economic planning.

The new economic plan will have to reduce the budget deficit, by reducing expenditures and raising revenues. Currently there is an approximately EGP 185bn budget shortfall, reported as 10.7% of GDP. Some estimates put the deficit at 12% of GDP by the end of the fiscal year in June. Cutting subsidies will certainly relieve budgetary pressure. Fuel subsidies alone are expected to reach more than EGP 120bn ($17.4bn) by the end of the current fiscal year. Cuts are expected to reduce fuel subsidy expenditures by about 25%.

Fuel subsidies for high-octane gasoline and industries will be cut. Subsidised fuel prices for mass transportation will be maintained. Lower-income Egyptians will receive a “smart card” to allow them to pay subsidised prices for gasoline and diesel fuel. Minister of State for Administrative Development Ahmed Samir has announced the activation of the smart card system within three months. However, there have been reports that the IMF has questioned the government’s ability to start card distribution so soon and to monitor distribution within a realistic timeframe.

In the meantime, Egypt experiences fuel shortages. Buying diesel has been particularly problematic. Consuming half the subsidy bill, diesel fuel powers commercial transport and irrigation pumps. Among the biggest consumers are microbus drivers and small farmers. Diesel imports are now 50% of consumption, an all-time high. Black market prices are two to three times the subsidised price, and supplies have been at their lowest levels. As a result, there are longer queues, more time spent among the working poor queuing for fuel, more violence at retail outlets, a higher probability of a smaller wheat harvest, and less farmers interested in growing wheat.

These diesel disruptions will result in higher costs, especially for food. The economic plan will increase public expenditure on food subsidies by a reported 8% or 9% with the aim of protecting poorer households in the midst of rising prices. Unfortunately, the food subsidy scheme is not very cost-effective. A 2010 World Bank report calculated that at least 28% of public money spent on food subsidies never reach the intended consumers, with bread loaves and cooking oil accounting for 68% and 20% of the leakage, respectively. Close to a third of public resources committed to food subsidies end up as chicken and fish feed and in black markets.

Food subsidies are considered to be a blunt instrument. They represent a very outdated idea on how to protect the poor. A more popular strategy currently in the world today is cash transfers. Brazil, Mexico, South Africa are among only a few countries that have had great success with them. Cash transfers have been shown not only to reduce current poverty, but they also reduce the transmission of poverty across generations by raising education levels and leading to better health. The IMF mission reviewing Egypt’s economic plan has suggested the government consider using such cash transfers.

The basic idea of a cash transfer is that instead of spending money on something like subsidies that cause so many market distortions, the government transfers cash to individuals or households. Programmes differ on the attachment of conditions, such as health and education behaviours. Women are most often the recipients of the cash, as hundreds of studies have shown them to be more prudent spenders. These programmes are highly effective and represent great efficiency gains relative to a subsidy system.

The funny thing about cash transfer systems is that often one of the largest barriers to implementation is making the payments. You can’t just go around on a motorcycle and distribute cash, although that has been attempted. Implementation is easier if a large degree of the population has government issued IDs, particularly with an attached unique number. The current best practice is the use of smart cards.

In Egypt, there has been a very small-scale experiment with cash transfers conducted in Ain Al-Sira, in Cairo governorate. A larger-scale pilot was planned for two governorates in Upper Egypt to test how best to adapt the concept to Egypt. But it met great resistance from transitional governments, although it had support from ousted president Hosni Mubarak’s final cabinet. Before parliament was dissolved, the idea of cash transfers was raised and opposed by the Freedom and Justice Party.

So I guess my question is this: Why can’t Egypt protect poorer Egyptians with cash transfers instead of increasing expenditure on poorly targeted and cost-ineffective food subsidies? One of the biggest problems lower-income Egyptians have is not enough cash in the face of rising prices. Especially since one of the biggest obstacles is already figured out. The government is rolling out a smart card system.

Perhaps there are ideological and political constraints to implementing a cash transfer system in Egypt. But are those worth the trade-off between better protection of the poor and more judicious government spending versus spending more on a system that spends more for less benefit and excludes a high percentage of people it is supposed to protect?

Right now, at least 25% of Egyptians live below the poverty line. Why isn’t a cash-transfer programme a serious consideration for the government while it’s developing its economic plan? Yes, there will be resistance but many are in favour of the idea. A World Bank/Gallop public opinion poll recently conducted showed that at least half of the Egyptians asked believed that money spent on fuel subsidies should be distributed as cash to the poor and used to increase spending on health care and education. Cash transfers could do both in a more effective and efficient way.

Iris Boutros is an applied economist and strategist. She focuses on balanced growth, investment and decision-making

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    A viable social program is difficult to implement for even the richest of nations yet the basic requirements are the same. The government requires revenue from prosperous, working Egyptians. Job creation is key. Since the government cannot create jobs it is up to the private sector – both Egyptian entrepreneurs and international foreign investment. The trouble is that the investing environment in Egypt is toxic. If Egyptian people do not have guaranteed rights then neither do investors. Take what has and is happening to Centamin PLC as an example. Here we have a UK based mining company that has invested hundreds of millions of dollars in Egypt developing a mine in the southern Egypt which employs hundreds of Egyptians. Overcoming bureaucracy has been a major obstacle and now the Egyptian State Commissioners Office wants to shut them down! Is it a crime in Egypt to provide Egyptians with new skills, opportunity and a good salary? Who will want to risk an investment in Egypt after this? I hope the independent media will hold the government to account for their actions.

    • I could not agree with you more. Please watch out for my article next week on investment. I would enjoy your feedback on that as well.

  • You still aren’t asking the right questions in my opinion. You assume the main goal should be how to help the poor. I think more relevant, as far as the government is concerned, is how to keep those poor from having too many kids, how to give their children better opportunities, and how to protect investment in economic growth from being diverted. Government needs to develop the infrastructure and improve education, before it addresses the needs of the poor, an area that is better left to NGOs and charities. Otherwise, it isn’t a government, but a vehicle for the short term redistribution and long term destruction of wealth.

    • Hi Ahmed, thanks for your comment. I am not arguing that the main goal is to help the poor. I agree with you. Government has many things to worry about to set Egypt on a better path. My point is that in developing the recovery strategy, it is making decisions and are we asking the right questions about those decisions that will legally obligate Egypt once the IMF loan is signed. Here, I am arguing that when it comes to subsidies, the ideas are somewhat disconnected from the realities people face in markets and that the government is not making good decisions. Please stay tuned. I focus on investments next week. Would love to hear what you think about it.

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