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As Egyptians brace for further increases in living costs, government announces social spending package
 
 

Two laws raising the salaries and pensions of some 14.5 million Egyptians were approved by Parliament on Monday, as part of a social spending package announced earlier by the finance minister on Sunday that aims to ease the burden of the state’s ongoing austerity measures on people.

The package comes ahead of anticipated austerity measures, with an expected government decision to hike fuel and electricity prices on the horizon and the surge in general commodity prices expected to follow.

The additional social spending also includes tax exemptions, Finance Minister Amr al-Garhy said in a televised interview on Sunday night. He added that the food subsidy scheme will see a minimal increase, after it was expanded significantly in the budget for the financial year ending in July.

This is the third consecutive financial year in which the government has announced a social spending package in conjunction with austerity measures. Unlike last year’s large package, however, the focus is not on raising food subsidies and cash transfers. Instead, it targets middle class salaries. Analysts that Mada Masr spoke to argue that this focus represents an awareness by the government that the expected surge in the inflation rate driven by austerity measures will reach the middle class.

“The anticipated impact of the upcoming [austerity] measures is large. As a result, the government needs to include a new social category in its social protection policy and not just the poorest class of people,” Omar al-Shenety, the managing director at the Cairo and Dubai based investment bank Multiples Group, told Mada Masr.

“The government realizes now that it needs to compensate the middle and lower middle classes in any way,” Shenety added. “To do that, it needs easy mechanisms, which is what was done with the recent decision to raise tax exemptions and credits, bonuses and pensions.”

Shenety explained that cash transfer programs like Takaful (Solidarity) and Karama (Dignity) are currently in place to target the lower-income sections of society.

Approximately five million government employees and workers will benefit from the new bonuses, 9.5 million people will benefit from pensions and 20 million people are to benefit from tax credits, according to statements by Finance Ministry officials.

The bonuses law approved by Parliament will introduce regular raises for government employees encompassed by the civil service law and other employees and workers whose wage labor falls outside the regulations put in place by the civil service law. This is in addition to an exceptional bonus for all those who work for the government. The pensions law sets a minimum and a maximum limit on the increase in order to guarantee that those with the lowest disbursements benefit the most.

Bonuses
Regular bonus for civil service employees7% increase with a minimum of LE65 per month
Regular bonus for non-civil service employees and workers10% with a minimum of LE65 per month
Exceptional bonus for all government employees and workersLE200 per month for 3 lowest income income brackets
LE190 per month for 3 middle income brackets
LE180 per month for general manager and higher
Pensions
Minimum pensions50% increase from LE500 per month to LE750
Minimum increase in pensionsLE150 per month
Maximum increase for pensionsLE626 per month

While pensions are set to increase at a fixed rate of 15 percent, the law also stipulates a minimum increase of LE150 and a maximum of LE626, according to Garhy.

Parliament’s Planning and Budget Committee also approved a government-drafted bill to raise the tax exemption limit on income taxes from LE7,200 to LE8,000. The bill also raises tax credits for all income brackets.

Rise in tax credits

Tax bracket (annual income)Tax credit before increaseTax credit after increase
Up to LE30,00080%85%
From LE30,000 to LE45,00040%45%
From LE45,000 to LE200,0005%7.5%

The government is implementing these measures as part of an economic program geared toward market liberalization and subsidy elimination, which began in July 2014, a month after Sisi took office. After two years of consultations and deliberations with the International Monetary Fund (IMF), the Egyptian government committed to moving forward with the austerity measures and restructuring policies in a November 2016 agreement in exchange for a three-year, US$12 billion loan. The program has caused inflation rates to surge, reducing people’s living standards.

The IMF agreement stipulates that the government should increase its annual social spending in order to compensate lower income individuals for the harsh austerity measures.

The first year of the program included a social spending package of LE25 billion, and the second, ending this July, saw the implementation of a LE75 billion social protection package that was funneled mostly toward food subsidies, cash transfers and other measures. Garhy estimated that the total cost of the social protection package could range from LE60LE65 billion, bringing its cumulative value over the past years to LE160165 billion, a higher figure than the LE136.6 billion set in the IMF’s three-year agreement, which ends in July 2019.  

In terms of the social spending measures already in place for the lower-income groups targeted by previous years’ budgets, the Takaful and Karama cash transfer programs were brought into effect in March 2015, reaching a reported 2.5 million households in three years, exceeding their initial target of 1.5 million households. While the Takaful program is intended to benefit poor families with children who do not own property, the Solidarity program targets the elderly and disabled.

In 2014, Egypt’s food subsidy system was converted from an in-kind subsidy system, whereby people were given a ration of basic staples every month, to a cash subsidy system, allocating each individual a maximum of five loaves of bread a day at a subsidized rate of five piastres (previously the amount of subsidized bread one could purchase was unlimited). This card system also allocated LE50 in Fiscal Year 2017/18 to the first four individuals in the household to spend on other food items per month (up from LE25 in 2016/17), and LE25 to other members of the family.

The austerity measures anticipated for this year, and accompanying the social spending package, began in May, when the government raised metro ticket prices and water tariffs. However, further austerity measures are yet to come.

According to Shenety, in order for the government to attain the targets outlined in the IMF agreement, it must increase prices even further, leading to a larger inflationary wave than anticipated. “Today the government faced a reality, that it needs to raise prices by more than initially planned due to the rise in the international oil prices and the value of the dollar,” the analyst said.

According to the agreement, the Egyptian government is committed to completely liberalizing fuel prices, except liquefied petroleum gas, by 2019.

In its second review of the ongoing economic reform program, which took place in January of this year, the IMF warned Egyptian officials of expanding social spending by more than was originally planned in the November 2016 agreement.

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