Half-baked subsidies haunt Egypt for decades

Artificial supports for bread and fuel pose a dilemma: continue them and suck more life from the budget, or end them and face riots.

A woman walks away after buying bread at a bakery in Cairo. Mohamed Abd El Ghany / Reuters

In the streets of downtown Cairo, scores of elegant pre-Second World War buildings gradually fall apart, plaster falling from the walls. In front of the petrol stations, long queues of cars, occasionally snaking around the block, wait to fill their tanks. At the myriad foreign exchange shops, try to buy US dollars and you will be told they have none.

These are symptoms of a much greater problems that sap the economy and cost the country tens of billions of dollars a year. And they all stem from the same root.

A succession of governments, always claiming concern for the poor, decide to fix prices by decree rather than let them respond to market forces. Sometimes slowly, sometimes quickly, the prices lose touch with any sort of reality, creating a host of problems and opening the field to corruption.

Take bread, for example. Many decades ago, the government decided to fix the price of a loaf so it would remain cheap for the masses.

But it put no mechanism in place to allow prices to adjust for inflation, and as a result, the real price of bread steadily declined, causing consumption to soar and the cost the government paid for each loaf to increase. Bread became so cheap that people fed it to their rabbits and chickens.

The problem haunted the presidents Anwar Sadat and Hosni Mubarak, and it remains today.

In January 1977, the Sadat government, whose finances were weighed down by the cost of the subsidies, turned to the IMF, which persuaded it to sharply increase the price of a loaf. Overnight, riots broke out across the country, leaving scores dead and the government shaken.

The costly programme remained a problem into the 1980s, forcing Mubarak to fly to Arabian Gulf countries to implore them for finance to keep bread flowing to the citizens.

In the nine months to the end of March this year, wheat subsidies cost the government about 20 billion Egyptian pounds (Dh9.63bn), representing 4 per cent of all government spending.

In the short term it has helped the country’s poor, but in the long term it has failed miserably. Perhaps directing the cash to education might have been a better idea.

And of course, people find a way to get around the rules. Many a fortune has been made by bakery owners selling cheap state-provided flour out the back door at higher prices that more closely reflect the free market.

Another example is energy. Long ago the government committed itself to sell diesel, petrol, natural gas, fuel oil and electricity at prices below the cost of production.

The cost of this programme mushroomed to the point where in the past few years it has accounted for 20 per cent of all government spending, more than it spends on health care and education combined.

The sad fact is that it is mainly the wealthier part of society – the people who own cars – who benefit most from fuel subsidies, and not the poor.

And of course, people find a way to profit, with a substantial portion of energy products leaking on to the black market.

Then there is the Egyptian pound. The government spends perhaps $8bn a year to keep the currency pegged artificially strong against the dollar, currently at about 7.63 pounds. It says it must do this to prevent the price of imports from rising and making life expensive for the poor.

That $8bn is no small amount. Surely there are more effective ways to get it to the poor.

This is not to mention the damage currency controls do to investment and trade. Businessmen are wary of putting dollars into Egypt for fear they will not be able to get them out again and out of concern of yet another devaluation that everyone suspects is coming.

And of course, people find a way to get around the rules. When the dollar is so cheap, demand increases and supply falls. People find ingenious ways to buy the dollars at the official price – credit cards while travelling abroad, buddies working in the bank who will sign approvals for a transaction, fake invoices for goods imported from abroad or something similar.

Throughout the country, hundreds of thousands of apartments lie empty. The government years ago decided to fix the rents that landlords could charge. After decades of inflation, building owners no longer have an incentive to maintain them and make repairs. Tenants have moved to other neighbourhoods but continue to pay the tiny rents on their empty apartments, and they cannot be evicted.

One result of these artificial prices is that the government has had to come up with ever more complicated regulations to stop people from finding a way around the prices that no longer make economic sense – and an army of inspectors to enforce them.

The huge profit that can be made by ignoring the rules has also resulted in a general deterioration in respect for the law.

Patrick Werr has worked as a financial writer in Egypt for 25 years.

Follow The National's Business section on Twitter