Abstract

Most Egyptians receive food subsidies, which are the cornerstone of the country’s social protection system. The government recently attempted to reduce subsidies, with limited success, and introduced a cash transfer program targeting the poor. We use a dynamic general equilibrium model of the Egyptian economy to evaluate the growth and distributional impacts of subsidy reforms and cash transfers. We find that the welfare of poor households would be enhanced by a smaller, but better targeted food subsidy program, and that, if the cost savings from reforms are channeled into investment, faster economic growth would eventually outweigh any short-term welfare losses. However, most of the gains from subsidy reforms accrue to nonpoor households. Combining subsidy reforms with cash transfers leads to the largest welfare gains for the poor, while leaving the welfare of nonpoor households largely intact. The latter is crucial to maintaining support for ongoing subsidy reform efforts.

Highlights

  • Gentilini (2016) reviews the merits of food subsidies versus cash transfers and finds that poor targeting of beneficiaries is a major concern for food subsidy programs

  • We initially focus on short-term impacts during the period 2015 to 2022 under the assumption that any changes to social protection programs leads to changes in tax revenues, rather than the fiscal deficit

  • Population growth causes the number of beneficiaries and the total cost of the program to increase, but average benefits per person remain unchanged in real terms

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Summary

INTRODUCTION

Food subsidies are a traditional pillar of the social contract in Egypt. Since the 1940s, the government has subsidized staple foods for most Egyptians and, despite reforms over the years, these Tamween subsidies remain one of the country’s largest social programs, accounting for about 4 percent of public spending over the period 2016 to 2020 (MOF 2019a). The authors find regressive welfare changes, even with cash transfers, and recommend additional health and education spending targeting the poor Both studies use static models and impose balanced budgets, and, so, do not consider the implications for economic growth and program sustainability. We use a dynamic model to assess both short-term impacts on welfare over the period 2015 to 2022 and longer-term impacts on fiscal deficits and economic growth through to 2030 This is important for Egypt, where concerns about fiscal sustainability underpin much of the ongoing debate about the future of social protection in the country.

Food subsidy system
Cash transfer program
Direct and administrative costs
ECONOMYWIDE MODEL AND DATA
POLICY SCENARIOS AND RESULTS
Scenario design
Reforming the Tamween food subsidy system
Expanding the Takaful and Karama cash transfer program
Replacing food subsidies with cash transfers
Fiscal deficits and longer-term growth impacts
CONCLUSION
Exchange rate

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