Solving Egypt's Subsidy Problem
November 20, 2013
Subsidies for consumer goods, including fuels and food, account for almost one-third of Egypt's public spending, or 13 percent of the country's gross domestic product (GDP). Not only are subsidies highly ineffective in helping the poor, they are also an increasingly unsustainable drain on the country's public finances and its foreign reserves, says Dalibor Rohac, a policy analyst with the Cato Institute's Center for Global Liberty and Prosperity.
Subsidies for consumer goods and fuels have existed in the country since the 1920s. Various approaches are available for scaling them down or eliminating them altogether. However, most of the prior attempts to reform the subsidy system in Egypt have failed. Cash transfers targeted at the poor would be a superior policy relative to the status quo.
- Eliminating subsidies and replacing them with cash transfers would produce significant savings and would be politically feasible.
- A successful reform of subsidies will have to be accompanied by a series of complementary reforms, which would reduce food insecurity in the country and improve supply chains in the areas of food and energy by introducing competition.
- Finally, prudent macroeconomic policies, including a reduction in inflation rates, will be necessary to contain the potential effects of food and energy price hikes on poorer households.
A real subsidy reform has to be designed as a permanent change, precluding a politically convenient return to the practice of subsidizing consumption goods in the future. In order to avoid reversals, the reform will have to create strong constituencies that will prevent politicians from reintroducing subsidies in the future. One way to do that is to ensure that the wider population understands the economic benefits of the reform and can enjoy them. In addition, politicians should tie their own hands by dismantling the administrative apparatus that is involved in the disbursement of subsidies and price regulation.
Source: Dalibor Rohac, "Solving Egypt's Subsidy Problem," Cato Institute, November 6, 2013.
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