IMF loan in hand, where will the promised LE25 bn in social spending be allocated?
 
 
Photograph: بسمة فتحي
 

In securing a three-year US$12 billion International Monetary Fund loan in November, the Egyptian government pledged to increase social spending by LE25 billion. The nominal increase in spending was presented as a means of “easing adjustment” to the package of economic policies spelled out as conditions of the loan.

Egypt has since received the first tranche of the loan — although the loan itself has yet to receive Parliament’s approval — and begun taking policy decisions that have pushed inflation to 30-year highs.

However, while the loan documents broadly specify the sectors that should receive additional allocations, Egypt’s Finance Ministry has yet to present a social spending plan and the particular budgetary allocations remain largely unknown, information that is crucial to understanding the real value of any increase.

After the agreement was made and several weeks had passed, the IMF published a staff report stating that the Egyptian government would expand food subsidies and cash transfers to mitigate the effects of the policies on the poor. In accord with the loan’s conditions, the Egyptian government is required by June 30, 2017 to earmark 1 percent of GDP for “additional food subsidies, cash transfers to the elderly and poor families, and other targeted social programs … including school meals and subsidies for infant formula.”

While the IMF has forecast that inflation will dip to 18.2 percent in 2017, other private financial institutions expect the rate to remain high this year

IMF Mission Chief for Egypt Chris Jarvis further filled in some of these details in a blog post published on the organization’s website, stating that the additional spending would: raise the value of the subsidy offered through food smart cards from LE18 to 21 per person, widen the reach of the Takaful and Karama funds to 1.7 million households and 7.3 million beneficiaries, increase the social pension budget to cover another 1.7 million households and increase the general pension.

Jarvis also confirmed several other smaller initiatives, including more free school meals and new gas connections for low-income districts, and stated that LE250 million would be earmarked for public nurseries to increase the participation of women in Egypt’s formal labor market.

However, concrete details regarding the amount of money to be allocated to each of these initiatives were virtually absent from the account provided by Jarvis and the IMF’s staff report.

Piecing together LE25 billion: One fifth accounted for

Nonetheless, some details have slowly emerged to provide an image of what form the increase in social spending might take.

Egypt allocated LE2.5 billion in December 2016 to meet the IMF loan’s stated LE3-increase in food subsidies per capita, Deputy Finance Minister for Budgetary Affairs Mohamed Mait tells Mada Masr. The food subsidies increase is coupled with an additional LE3 billion directed to the Takaful and Karama funds. Mait adds that there were also increases in subsidies for wheat, cotton and sugarcane farmers, but he did not specify the amount and stopped short of mentioning other details.

In previous statements published on the Finance Ministry’s website, Mait announced plans to earmark LE3 billion for health insurance and an additional LE11 billion for government-sponsored food subsidies. He did not, however, specify whether these budgetary allocations were related to the IMF loan.

The deputy finance minister did not disclose any further information about social spending to Mada Masr and stopped short of providing an assurance that the LE25-billion increase would be met by the June 30 deadline. Enquiries into the social spending program’s details sent to other Finance Ministry officials were not answered.

Part of IMF dealDestinationIncrease (LE)
YesTakaful and Karama funds3 billion
YesThe increase in the value of the subsidy offered through the food smart cards from LE18 to 21 per person2.5 billion
UnknownHealth insurance3 billion
UnknownFood subsidy (remainder of LE11 billion, subtracting the LE2.5 billion counted above)8.5 billion

Announced increases in social spending amount thus far to LE17 billion, of which only LE5 billion are confirmed to be part of the IMF deal.

Inflation: Subsidy expansion or erosion?

The Egyptian government and the IMF have stated that the nominal increases in social spending are intended to be a safety net for inflation, which reached 29.6 percent in January, 2017 on the heels of a series of fiscal and monetary moves, including the decision to liberalize the foreign currency exchange rate, reduce fuel subsidies and introduce a new value added tax.

While the IMF has forecast that inflation will dip to 18.2 percent in 2017, other private financial institutions expect the rate to remain high this year, a fact that has raised concerns about the impact on the country’s public social security net and the ability of extra spending to alleviate the social consequences of a potential degradation.

When the Egyptian pound plummeted in value to nearly half of it’s pre-float value in November, the price of many imported commodities doubled. As Egypt is the world’s largest wheat importer, bringing in 11 million tons a year to account for nearly half of its domestic consumption, the devaluation will inevitably increase bread subsidy expenditures, which stood at 23.7 billion in the 2016/17 budget before the foreign currency exchange rate was liberalized.

President Abdel Fattah al-Sisi asserted in December that bread subsidies “will not be touched,” despite the rise in production costs from 35 to 60 piasters. In order to keep up with the rising cost of production, the subsidy will have to double to maintain the price of a loaf of bread at 5 piasters.

The current budget allocates LE41.1 billion — almost LE3.5 billion more than the previous year’s budget — for food subsidies, which include bread subsidies and smart card subsidies for other basic commodities, such as cooking oil and sugar. This figure should increase by LE11 billion before June, of which LE2.5 billion will be allocated to smart cards, according to Mait’s earlier comments. This would mean that the other LE8.5 billion will subsidize bread.

It is not clear how the state will compensate for rising wheat prices brought on by devaluation. If the cost of bread doubles, as Sisi said, the entirety of the announced food subsidy increases will not cover even half of the bread subsidy before devaluation (LE11 billion, compared to LE23.7 billion). Finance Ministry officials did not explain whether the additional subsidy will be used to finance the difference in cost, or whether new resources will be allocated for the bread subsidy apart from the LE11 billion, thereby increasing the total food subsidy beyond the IMF deal’s LE25 billion altogether.

Other subsidized commodities were also affected by inflation. In January, the price of subsidized sugar rose from LE7 to 8 per one-kilogram pack, while cooking oil rose in January from LE10 to 12 for an 800 milliliter bottle, which cost LE8.25 in November. The overall rise in the cost of these two basic commodities was LE3 in January alone, which is equal to the December increase in value of the subsidy offered through the food smart cards.

For Laithy, current expenditure alleviates some of the pressure on low-income groups, but it is not a solution. “Many patients need palliatives to ease their pain. However, these do not cure disease.”

The price increases have led to angry reactions in Parliament, as a barrage of requests for hearings and questions were filed against former Supply Minister Mohamed Ali al-Sheikh. MP Nadia Henry, a member of the legislative body’s economic affairs committee, accused Sheikh of “increasing the subsidy with one hand and withdrawing it with the other.”

Sheikh attributed the price increases to the devaluation of the pound and pointed to market conditions that have exacerbated the currency’s drop in value. For example, he said that Egypt imports 97 percent of its oils, and other price increases, such as that of sugarcane, which have affected subsidized commodity prices.

While Jarvis conceded inflation has surpassed the expectations outlined in the IMF staff report, the organization responded to Mada Masr’s inquiry into the impact of inflation on the new fiscal spending on social programs and subsidies by saying, “There are no further comments from our side.”

Without detailed information, it is not possible to know whether the LE25 billion increase will be mainly directed to compensate for inflation, or whether it will provide a sufficient social safety net to shield the poor from current economic conditions.

In any case, experts have raised doubts about whether the current social policies are effective.

Too little, too late

Despite the need to increase social spending to serve as a bulwark against increasing prices, the policy is insufficient and misplaced, argues Heba al-Laithy, a statistics professor at Cairo University and one of the supervisors of the Income, Expenditure and Consumption Survey conducted by the government’s Central Agency for Public Mobilization and Statistics (CAPMAS).

For Laithy, current expenditure alleviates some of the pressure on low-income groups, but it is not a solution. “Many patients need palliatives to ease their pain. However, these do not cure disease.”

She argues that social policy should be based on development, with social spending being allocated toward measures that create jobs to allow the poor upward social mobility and a dignified standard of living. However, recent economic decisions, which Laithy says were not sufficiently studied, will halt production in many economic sectors that have been crucial for job creation.

The Cairo University professor has conducted a study on the impact of the 15 percent value added tax, which was introduced in August and was one of the conditional economic policies for the IMF loan. The results of the study suggest that the VAT would raise the percentage of those living in poverty from its 2015 level of 27.8 percent to 35 percent. Laithy now insists that the rate will surpass her previous forecast.

Similarly, Salma Hussein, an economic researcher at the economic justice unit of the Egyptian Initiative for Personal Rights, argues that the number of people who will fall below the poverty line as a result of the new economic decisions will surpass those who stand to benefit from the nominal increase in social spending, funds that she describes as “too little, too late.”

Hussein contends that current social policies do not attempt to redistribute wealth for the benefit of the poor. “The extent of savings from the new policies far exceeds the LE25 billion allotted for social spending,” she says, as one of the major terms of the loan agreement, according to the IMF staff report, is containing the government’s wage bill.

Hussein and Laithy advocate fiscal policies that address education and health. Laithy views cash transfers that are meant to allow poor children to go to school instead of working, for example, as wasted, as the value of educational services is continuously deteriorating.

Hussein says that spending on education, health and professional training are the most effective ways to alleviate poverty. “While these are long-term policies, they are effective. Instead of wasting state resources now, changing social spending policies will save generations in one or two decades.”

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Osman El Sharnoubi