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Escaping the poverty cycle? 3 years of Takaful and Karama
Staggering inflation, limited payout increases and a conflict impeded rollout have marked the lifespan of government subsidy programs
 
 
 

Financial aid programs Takaful (Solidarity) and Karama (Dignity) are entering their fourth year, as President Abdel Fattah al-Sisi ventures into his second term in office. While Sisi has made it a point to refer to the programs in public comments as evidence that he is helping the poor, a series of economic measures taken during his first term have resulted in many households losing their purchasing power and failing to maintain their standard of living.

Takaful and Karama were first implemented in March 2015, paying out baseline sums of LE325 and LE325 per household member respectively. Takaful, which received the lion’s share of funding in the government’s cash transfer program, was presented as aiming to allow Egypt’s poor to break out of the poverty cycle by making payouts contingent on child education and health conditions, and thus guaranteeing better jobs.

Just a year before the two programs were rolled out, fuel subsidies were cut, and in-kind food subsidies were converted into cash payments. These measures were followed by the structural adjustment program the government and the International Monetary Fund (IMF) agreed to in November 2016. While Egypt received US$12 billion in financing, the agreement ushered in the liberalization of the currency exchange rate, which sent the value of the local currency plummeting, in addition to several consecutive cuts in fuel subsidies and tax hikes on consumption goods.

The effects of the adjustment program on the most vulnerable segments of Egyptian society were stark. In an attempt to address the expected impact of price hikes, the IMF program also included provisions, funded by the institution’s loan, to boost the social safety net and allocate resources for conditional monetary aid.

The number of beneficiaries since the adjustment program went into effect is actually increasing at a faster pace, after an initially slow uptake, with as much as 10 percent of the population now receiving some form of payment from the two programs. But, there remain red flags as to how effective the program has been and can be going forward.

Implementation of the programs has been mired in internal government conflict over the aims and targeting methodology, and over whether to raise the value of payouts or widen their reach. There have also been long delays in implementing conditions that are pivotal to the success of the programs. In light of living conditions in the country, where almost a third of the population was living under the poverty line prior to the implementation of the structural adjustment program, many economic researchers believe that the form of financial aid provided by these programs can only go so far in compensating the poor.

A larger base of beneficiaries

Since the programs were introduced in March 2015, and as of March 2018, approximately 2.5 million households have been enrolled under Karama and Takaful, says Ahmed Lutaif, the Social Solidarity Ministry’s field officer for the programs. This puts total enrolment above the government’s initial target of 1.5 million households in three years.

Source: World Bank

According to Lutaif, the bulk of government allocations have been poured into the Takaful fund.

The Takaful program targets poor households that do not own assets – such as cars, tractors or more than half a feddan of land — and with one or more children under 18 years of age. The Karama program, on the other hand, targets the elderly and people with disabilities.

For Alya al-Mahdi, an economics professor and former dean of the Faculty of Economics and Political Science at Cairo University, the number of households that received financial aid through the Takaful and Karama funds can be considered “a win, especially compared to the target number.”

In a February study titled “Cash subsidies are not everything,” the Egyptian Initiative for Personal Rights (EIPR) also describes it as “a significant win [for the state] in terms of the ability to reach the poor population compared to [the state]’s performance on social security programs.”

Nevertheless, the study points out that the base covered by Egypt’s conditional and unconditional subsidy programs falls short if compared to “the most notable experiences in conditional financial aid: Brazil and Mexico’s.” Where their programs reached nearly a quarter of the population, coverage in Egypt remains “quite limited.”

Figures published on the Social Solidarity Ministry’s Facebook page show that, as of January 2018, 9.33 million people have received payments through Takaful and Karama, a number that constitutes approximately 10 percent of the population.

Shereen al-Shawarbi, an economics professor at Cairo University and the finance minister’s former assistant for economic justice, tells Mada Masr that, as the number of Takaful and Karama beneficiaries hit 1.7 million households, “we thought that, in addition to the population collecting social security payments, recipients of government financial aid would be half of Egypt’s poor population, according to 2015 figures.” Yet, the size of the poor population “changes from one year to another as economic conditions change. For instance, we expected an increase in the number of poor households following the liberalization of the [foreign currency] exchange rate.”

This expectation was reflected in an interview with Heba al-Laithy, a statistics professor at the Faculty of Economics and Political Science at Cairo University who was one of the researchers who calculated the poverty line used in Central Agency for Public Mobilization and Statistics’ Household Income, Expenditure and Consumption Survey (HIECS), and upon which Egypt’s official poverty figure is determined. In July 2017, Laithy told the privately owned Youm7 newspaper that she expected the poverty line threshold to rise to near LE800 per person per month from LE482 in 2015.

The EIPR study points out that the beneficiary base is not only limited in comparison to other countries, but also in light of the extent of poverty in Egypt. As per the poverty line figure used in the 2015 HIECS survey conducted prior to the IMF structural adjustment program and the inflation wave that ensued, poverty in Egypt sat at 27.8 percent.

“Many truly eligible households have yet to be enrolled,” says Mahdi. “And the bouts of inflation during the past year and a half have rendered many more households eligible. So, we hope that it grows to encompass a larger portion of the population.”

Given Mahdi’s estimate, the poverty circle would grow to include a larger percentage of the population. Laithy sees the poverty figure increasing to 35 percent of the population in the next HIECS — which is scheduled to be published in October. If results come out as Laithy expects, this would indicate that at least a quarter of the population could qualify for coverage under the cash subsidy program, but are not currently receiving payments.

Increases in aid and food subsidies fail to match inflation

As more and more beneficiaries are served by Takaful and Karama, the state has also increased the cash payments offered to eligible recipients in an effort to counter the devaluation of the pound and the rise in the prices of goods and services. But the increase still fails to adjust purchasing power in line with the high inflation rate.

The value of the pound compared to the dollar was halved by the liberalization of foreign currency exchange rates, contributing to an exponential increase in the inflation rate, which hit an all-time record of 34.2 percent in July 2017. The highest increase at the time was on the price of food items at an annual rate of over 40 percent, according to the Consumer Price Index.

Accordingly, in order for the program to guarantee the same expenditure level for the programs’ beneficiaries that it offered when it was first launched in March 2015, there should have been annual increases in the value of the subsidy equivalent to the inflation rate, says Mohamed Gad, an economic researcher who co-authored the EIPR study. But the actual increases were much smaller. Furthermore, Lutaif thinks it is unlikely that financial aid payments will see any increases in the near future.

Annual inflation rates countrywide over three years of the programs
201520162017
10%13%30%

But an effort was made to keep up with Egypt’s price increases, which far outpaced the IMF and government’s projections. In late June 2017, Sisi announced a social expenditure package to supplement the “social safety” net. The package included additional financial provisions for the Takaful and Karama funds to be put toward higher aid payments.

Takaful payments started at LE325 per household. The value of the subsidy then increases with an additional allotment for each child, with a maximum of three children per household. The value of this is determined by the child’s school grade. Under the recent social package Sisi announced in June 2017, allotments offered by the Takaful program for children were increased, but the total raise in aid per household was capped at LE100.

Increase in financial support as part of Takaful and Karama
July 2017March 2015Type
LE450 per personLE350 per personKarama
LE325 per household per monthLE325 per household per monthTakaful
LE80 per person per monthLE60 per person per monthElementary school students
LE100 per person per monthLE80 per person per monthPreparatory school students
LE140 per person per monthLE100 per person per monthHigh school students
LE60 per person per monthNoneChildren under six years

Aid offered by the Karama program, on the other hand, was increased by LE100 per person, with a maximum of three beneficiaries per household.

Shawarbi saw the timing of Takaful and Karama’s launch, ahead of the decision to liberalize the exchange rate and the consequent price rises, as a positive thing. “Experiences from other countries,” she says, “show that it is better to prepare for the implementation of difficult policies by first adopting a social safety net.” But she argues that inflation-matching increases in Takaful and Karama aid were not necessary. “Takaful and Karama are not the only two poles of social safety nets. There are also food subsidies (the ration card system.)” She points out that subsidies offered per person were valued at LE15 in 2014, but their value has reached LE50 now. “What do you call that? Inflation compensation,” she says.

The value of food subsidies granted by a ration card were raised from LE18 to LE21 in November 2016, as the local currency fell in value, and yet again to LE50 in June of last year as the social expenditure package was implemented.

EIPR’s study, however, directs attention to another aspect: Shortly after the value of food subsidies granted by ration cards was raised, the prices of food items available at approved outlets increased, rendering the amount of goods offered to card holders less than the amount targeted by the subsidy raise.

Gad also tells Mada Masr that the shortfalls in the food subsidy program will force Takaful and Karama aid recipients to put payments they collect toward covering their basic needs. This would defy the purpose of the cash transfer program, which is designed to provide a cash surplus that allows for spending on education.“The poor have borne the brunt of inflation,” says Gad, who asserts that food subsidies cannot shield beneficiaries from price increases.

According to Lutaif, the total spending on the Takaful and Karama programs from their launch to mid-February 2018 is LE18.5 billion. The next budget is planned to allocate LE15.5 billion to the two programs. Actual spending in the first fiscal three years amounted to less than LE4 billion, which indicates that most of the total spending, almost LE15 billion, was spent in Fiscal Year 2017/2018. The allocation for FY 2018/2019 would maintain the current year’s spending.

Change in budget allocation of funds for the programs versus actual spending in four fiscal years
Year2014/20152015/20162016/20172017/2018
Allocation

(LE billion)

2.54.74.17.75
Spending

(LE billion)

None1.72.05Unannounced

How was the decision to include more beneficiaries reached?

The devaluation of the pound and the inflation that ensued led to controversy within the government as to what should be the goal: expand coverage to include a larger number of beneficiaries or increase aid value. Expansion was selected over value, but the rationale for this decision remains unclear.

“An attempt at a compromise was eventually made. It involved re-examining program recipient groups and excluding a portion of them. But there were no clear development goals that justify these expansion measures,” the EIPR study argues.

Lutaif explains that the programs have gone through three phases: In phase one, they targeted areas where over 50 percent of the population fall below or near the poverty line. In the next phase, areas with over a 30-percent poverty rate were targeted. The threshold was lowered to 18 percent in the third phase. Then, the Social Solidarity Ministry decided to cover the entire country.

Under this coverage plan, individuals were approached based on a field survey which assigned classifications to participants, and priority was given to those whose classifications reflected a greater degree of poverty.

Shawarbi provides an explanation for this shift from targeting groups in specific areas to countrywide coverage. “From a humanitarian viewpoint, the poorest areas and the poorest of the poor should be targeted,” she says. “But from a political viewpoint, poor people who are not in the poorest bracket should not slip through the cracks, especially those in urban areas. Politically speaking, they are ticking time bombs. Compromises are, therefore, necessary.” The situation, according to Shawarbi, “is not governed by technical concerns, as much as it is by political decisions adapted to our reality.”

Meanwhile, Gad warns that the absence of a comprehensive vision may render the Takaful and Karama programs “a form of compensation that aims at pacifying the poor and diverting them away from political action.” He argues that this may render them devoid of any development goals that may help beneficiaries move out of the poverty cycle and make active contributions to the workforce.

For Lutaif however, the number of beneficiaries will stabilize, even with enrolments continuing, a fact he explains by saying that recipients will exit the program and others will take their place.

“The economic conditions have begun to stabilize and prices are going down. This means that some households will have a better grip on their finances and, therefore, exit the program. Others will take their place,” he says. The exit strategy, however, has yet to be implemented. “I’m not saying that that the program has served its purpose and should be terminated. This is a presidential program that we cannot stop,” he adds.

One of the ways the Social Solidarity Ministry has sought to help people leave the subsidy program is by introducing the Forsa (Opportunity), which is designed to enable aid beneficiaries to generate their own income. But this initiative is still limited in its scope.

The Forsa program was launched in January 2017. Its objective was to economically empower households that collect Takaful and Karama payments by facilitating job opportunities through soft loans and providing youth with vocational and occupational training.

For Shawarbi, policies that aim at creating job opportunities are necessary for people to escape poverty.

Delay in the enforcement of payout conditions

Takaful payouts were contingent on education and health conditions. Children over six years of age had to be enrolled in school and attend no less that 80 percent of school days, in addition to all children being required to receive regular healthcare and all mothers health education.

This conditionality clause requires protocols of cooperation between the Social Solidarity Ministry and the ministries of education and health and population for database sharing, according to Lutaif.

However, enforcement of the conditions on payments has long been delayed. The ministries signed the cooperation agreement on Tuesday and plan to begin enforcing conditionality in Assiut, Damietta and Qalyubiya as part of an experimental phase at the start of the new school year. According to Nevine Qabbag, the deputy minister of social solidarity, the conditions will be implemented by introducing punitive measures on families that do not conform, starting with a 30 percent cut in the value of their payout that can be redeemed retroactively upon conforming with the conditions. However, if three review sessions in a row show that a family has failed to meet the conditions of the program, they will be cut off from the program and prevented from re-applying for a year.

Nonetheless, according to the February 2018 follow-up document released by the World Bank, which contributes a US$400 million loan to the funding of the program, conditionality was achieved in November 2017, surpassing target rates for the implementation of conditions.

Lutaif says that the ministry has been slow to enforce conditionality, because “the conditional financial aid programs were implemented gradually to familiarize the population with cash transfers. Conditions should be introduced gradually and at a later time.” He does not, however, explain the gap between the figures reported by the World Bank and reality.

Conditionality is the primary feature that distinguishes Takaful from the social security program that has been in effect for decades, a feature that the EIPR study describes as “what prepares households to eventually exit the program.”

The study also highlights the incompatibility between the usual goals of such programs and the complex situation on the ground. “Making education mandatory for children is a positive thing. But the labor market does not encourage creating job opportunities for the more educated. Instead, it seeks poor workers for low-value added jobs.” The study, thereby, concludes that “the implementation of conditional support policies must come as part of a wider context of policies aimed at education reform, economic development and quality-of-work enhancement.”

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