Backing reforms with targeted assistance

By Farhad Peikar 

Mervat often works long hours at her vegetable stall at a corner of a poor neighborhood in the Al Fashn area of Beni Suef governorate in Egypt. She does so to bring home what little she can to feed her family. Her husband, a local craftsman, also works hard to make ends meet, fashioning and selling wooden flour sifts in the area. Despite their efforts, the couple barely manages to get by.

Not far from Mervat, Mastoura Al Bakry Hassan, a mother of two young children, speaks about a more difficult life. She is in the late stages of liver fibrosis, a condition that renders her unable to work, and therefore, unable to pay for her family’s livelihood or medical expenses.

Mervat and Mastoura’s families are not alone. Millions of households across this North African nation grapple with poverty. Extreme poverty jumped to 26 percent in 2013 from almost 17 percent in 1999-2000. Close to half of Egyptians (49 percent) are classified as “poor” or “vulnerable”.

Historically, Egypt has responded to poverty by providing food and fuel subsidies as well as cash transfers through social protection mechanisms. Although these programs absorbed large shares of the state’s annual budget, they included a large number of non-poor as beneficiaries, while being unable to reach many of the poorer; therefore, their effectiveness in managing household risks, reducing poverty and developing human capital has proved to be limited.  Additionally, Egypt is no longer a plentiful oil and gas producer, and faces an unsustainable fiscal deficit.

To reverse the worsening budget deficit and reduce growing poverty, the government of Egypt embarked on a series of energy subsidy reforms, which aim to bring down public expenditures on regressive energy subsidies and use the freed up resources to invest in more targeted subsidies that positively impact the lives of the poor and vulnerable people.

To support the Egyptian government’s plans, the MENA Transition Fund financed a project, Egypt Energy and Social Safety Nets Sector Reforms Technical Assistance, in 2013. The project aims to strengthen the Government's capacity to design a comprehensive fuel subsidy reform strategy, undertake capacity building of staff within energy utilities, prepare a roadmap towards a liberalized electricity sector and establish concrete measures for improved financial viability of key energy sector actors. It also aims to develop a database for the poor and vulnerable, and support the design and collection of a nationally representative baseline for well-targeted social safety net (SSN) programs.

 

The dual track approach: Combing subsidy reforms with Social Safety Nets

Egypt has struggled to revive its economy following the political instability, which alarmed private sector actors, and scared away tourists and foreign investors. The country also faces declining revenues from the petroleum sector and an increasingly unsustainable state budget deficit.  

These factors contributed to a growing sense of urgency in the country and compelled the government to implement an ambitious set of reform plans to redirect resources from fuel subsidies – which are costly, inefficient and regressive – to poverty reduction, health, education and other social expenditures that could spur human capital development and economic growth. The central government plans to bring subsidies down to 0.5 percent of GDP by fiscal year (FY) 2018/19.  To date, it has managed to reduce energy subsidies from around 7 percent of GDP in FY 2013/14 to around 2.6 percent of GDP in FY2016/17. 

However, more than half of the reduction in subsidies is attributed to the declining price of oil. To truly reach its targets and reduce the budget deficit, the government has little choice but to raise consumer prices of natural gas, diesel and other fuels.

Yet, Egyptians have already been squeezed by rising foreign exchange, double-digit inflation, and slow nominal wage growth. Further price hikes would severely impact citizens, particularly people in rural areas of Upper Egypt, which has the largest share of poor at risk of falling into extreme poverty.

To avoid negatively impacting the poor and vulnerable, the Transition Fund project in line with Government’s social and economic reform program, has designed an integrated, dual-track approach that addresses both energy sector reforms and the need for extended and well-targeted SSN. The Government’s economic reform program targets a fiscal consolidation savings of almost EGP 200 billion from the energy sector over the next three year, almost earmarked one-on-one with increased social protection spending. The dual track approach simultaneously reduces the amount of public expenditures spent on subsidies through a re-pricing scheme and redirects portion of the savings to SSN programs. Since its inception, the project has developed a comprehensive energy pricing and fuel switching strategy as well as toolkits, which will enable the Egyptian government to implement and monitor price adjustments. The strategy includes plans for compensatory measures to mitigate the impact of subsidy removal.

To ensure that the SSN programs are targeted towards individuals who are in need of assistance, the project supported the development of a unified national registry, which will serve as the basis of a poverty database that accurately identifies eligible beneficiaries. The database also informs the design and collection of a nationally representative baseline for other targeted social programs.

Another component of the project focuses on enhancing the performance, financial management and governance of the Egyptian public power companies. To that end, Egypt Electricity Holding Company has produced financial planning tools, and started implementing the Electricity Law, seeking movement towards a transparency, market-oriented structure with clear accountability of companies serving different segments of the electricity value chain.

Given the far-reaching coverage and long-standing nature of the existing subsidy systems, one of the challenges for the ongoing reforms is to raise awareness among the public and gather support for its execution. The project has designed a communication strategy to enable the Egyptian government to deliver clear messages to the public about the future of reforms in the energy sector, and ultimately create awareness and engagement among relevant stakeholders in the decision making process.

Additionally, the project established an Inter-ministerial coordination unit to facilitate and implement energy subsidy reforms, energy efficiency business plan, communication strategies and SSN programs.

 

Project contribution towards Takaful and Karama programs

The government launched the Takaful and Karama (Arabic for Solidarity and Dignity) Programs (TKP) to provide cash assistance to poor and vulnerable people. Takaful is an income support program that focuses on human development outcomes, especially nutrition, maternal and child health. Karama is designed for 65+ elderly and disabled people, who cannot work.

As of February 2017, more than 3 million households in the country have registered in the Takaful and Karama Program (TKP). Of that number, 1.5 million households (6 million individuals) were enrolled in the program after they were found to be eligible based on established criteria.

The transparency in the methodology of determination of energy tariffs and strategic communication on energy subsidies have helped the Government push the much need transfer of fiscal resources from energy subsidies to targeted cash transfer programs.

It is largely thanks to the poverty database that Mervat and Mastoura have been found eligible to receive government assistance.

Today Mervat’s family receives monthly payments from Takaful, which not only helps them put food on the table, but also enables the couple to send their children to school and pay for their healthcare.

“With the money I received, I paid the outstanding tutoring fees of my children, and bought some household goods” Mervat says with a smile, adding, “I still have EGP300 that I will use for other household expenses.”  

Mastoura, who has been approved by doctors for disability, uses a portion of her Karama pension to pay for her medication, and the remaining sum to feed her two young daughters.

“I paid EGP250 for my medications, and bought a kilogram of meat with the remaining money to feed my children,” she said effusively.

She admitted that the payment was not enough to pay for her treatment and cover her livelihood requirements, but was thankful for the relative ease that the assistance brought to her family’s life.