Q&A: How to save LE8 bn without raising subsidized bread prices

If the primary reason behind raising subsidized bread prices is to channel LE8 billion into school meals for children, as President Abdel Fattah al-Sisi said in August, there are a number of alternatives the state can consider in order to cut expenditures and increase revenues that would secure that amount many times over, according to former Solidarity and Social Justice Minister Gouda Abdel Khaleq.

Abdel Khaleq, who served in three cabinets following the January 2011 revolution, spoke with Mada Masr about how to approach the dilemma of subsidized bread through practical measures. He presented two ways to optimize government spending and four measures to increase revenue without raising bread prices.

At the same time, the former minister and economist characterized the state’s fixing of subsidized bread prices for the past 33 years as a “crime” repeatedly committed by successive governments. He says that any plan to raise bread prices must ensure it comes within a framework of social justice.

Our interview with Abdel Khaleq has been lightly edited for clarity.

Mada Masr: Over the past two years, the government has added new, more restrictive eligibility criteria for subsidized bread and food commodities. Nevertheless, the president spoke of an inevitable increase to the prices of subsidized bread. How do you view this trend?

Gouda Abdel Khaleq: The fixing of subsidized bread prices for more than 33 years is a crime that has created a general imbalance in the economy, a waste of wheat and flour, and other major problems. I am in favor of raising bread prices, even though that seems strange for a leftist like me who often speaks of social justice, but there’s a necessity called economic efficiency. Without efficiency, the economy collapses.

Major social and economic changes have taken place around the world in recent decades. In 1980, for instance, the exchange rate for US$1 was 70 piasters. It’s well-known that we import more than half of our wheat needs, which means that more than half of every loaf we eat comes from abroad — and we pay for that in dollars. While the dollar has risen to more than LE15, the price of a loaf of bread has remained fixed, making the situation economically unviable, especially since the prices of many other goods are allowed to float freely to reflect market conditions, such as animal and bird feed. As food for humans, a kilogram of subsidized bread — around 11 loaves — is sold for 55 piasters. But as animal feed, it’s sold at a minimum of LE6–7. So there is a severe imbalance in pricing systems, which has resulted in the waste of wheat as a commodity.

When we look at international data on wheat consumption, we find that Egypt has among the highest wheat consumption per capita in the world. However, this accounts for animal, as well as human, consumption.

Along with the Tagammu Party to which I belong, I presented a study to the economic conference held by former President Hosni Mubarak in the 1980s. We called for bread prices to be linked to their production costs. We were against freezing the price of bread because doing so for the cost of doing so for just several years had already begun to mount. We also called on the state to protect these vital commodities — wheat and bread —from being used for other purposes, such as for animal feed or the production of sweets.

MM: What is the role of the state in supporting the poorest households?

GAK: The cost of producing bread is many times higher than the subsidized sale price of 5 piasters. Therefore, any change in bread prices would be cataclysmic because even the smallest price increase by the government [to actually affect expenditure] would be several times higher than the current price. This is extremely serious because there are households that spend more than 50 percent of their budgets on food, especially on bread. So, any bread price hike would greatly increase their spending on essentials.

The government should resort to partially correcting the price imbalance by raising the price of bread from five to 10 piasters, for instance. That could be an acceptable increase, provided that affected groups are compensated for the price increase. But this must also be followed by setting a clear mechanism for pricing bread — similar to the pricing mechanism for petroleum products over a specific period — to address the imbalance in bread prices over the past years.

Politically, this is a very sensitive issue and may result in social unrest and protests, as was the case on January 18 and 19, 1977 [the mass demonstrations in protest of increases in the prices of bread and other commodities that became known as the bread riots], and in 2017 [when the supply system was being upgraded]. As the saying goes: “Bite my heart, but not my loaf.”

For a more politically acceptable and socially just solution, the government could provide affected citizens with some measure of compensation, in the form of increased income, in parallel with raising bread prices.

MM: Are cash payments the solution?

GAK: I’m against cash payments under such conditions in Egypt. Let’s say we liberalize bread prices and compensate citizens with cash to buy bread at the market price — there will be a race between bread prices and income, and prices would be out of the government’s control. Ultimately, this would negatively affect people’s incomes and nutrition levels.

MM: In 2017, the Supply Ministry proposed to reduce the daily individual quota of subsidized bread while increasing its price to 20 piasters. What do you think of this proposal?

GAK: I’m against this approach. My personal assessment is that it will create too much political unrest. People would very clearly see it as the government [being unable to confront the big issues and going after the little guy]. There are high-income groups who don’t pay taxes. Meanwhile, the government burdens impoverished citizens with the consequences of mistakes for which they’re not responsible.

Citizens would need more bread, so they’d buy it at the non-subsidized price. This proposal means overloading vulnerable citizens with a burden beyond their capacity, which goes against the concept of social justice, in my opinion. 

According to Article 79 of the Constitution, every citizen has a right to adequate and healthy food. Reducing the per capita quota of bread to less than five loaves means that people won’t be getting enough food.

MM: How can the government address the imbalance in bread prices without compromising people’s right to adequate food?

GAK: The political framing of the issue is crucial. This problem must be resolved within a framework of social justice in the sense that we safeguard the rights guaranteed to citizens by the Constitution to healthy and adequate food and not reduce their daily quota to less than five loaves each, out of concern for citizens’ health and nutrition, and to protect them from malnutrition. Malnutrition causes stunted growth, intellectual disabilities and many other problems, and these problems would require other [types of] intervention [by the president].

Wheat gets diverted at high rates from subsidized bread to other fields. I was once the supply minister and I know this issue by heart. If we look at the figures, we’ll see that the General Authority for Supply Commodities (GASC) now provides up to 1.25 million tons of wheat for the production of bread every month. In 2016, that quantity was 700,000 tons every month — meaning it’s increased by up to 60 percent in just five or six years.

This is illogical because Egypt’s population didn’t grow at the same rate. It indicates that wheat and flour are being diverted out of the subsidized bread system on a large scale. This means that a portion of wheat that comes out of the GASC with the intention of making it into bread doesn’t go to bakeries, but rather to other activities such as sweet shops and more. The rate of diversion could be up to 20 percent. Eradicating this diversion in and of itself would significantly reduce the burden on the general budget.

MM: How do we get rid of this leakage?

GAK: Several years ago, the rate at which bread was being diverted to animal feed and the production of sweets was high, but the rate has significantly dropped in recent years due to the bread points system. However, there’s still diversion because the GASC gives wheat to mills in exchange for a milling commission rather than cash payment. 

The authority is supposed to sell flour to bakeries at market price, an idea I came up with when I was the supply minister. We sell wheat to mills and flour to bakeries at market prices to prevent diversion to other uses and accept payment in cash. But [there is still flour being diverted because the] authority is providing wheat on credit to mills, who then sell the flour to bakeries. Mills record on paper that they’ve disbursed a certain portion of flour to bakeries who, in turn, record in their own books that they have received that amount and converted it into bread. So, it appears on paper that the amount of flour is equal to the number of bread loaves produced. This is only on paper though, meaning that it’s a process of “fixing the books” without verifying the reality on the ground and making sure flour sacks aren’t being diverted to sweet shops.

The government can solve the problem by selling wheat to mills at market prices that they must pay for up-front in cash. Bakeries would then buy flour with cash at market prices. The government could work with banks to provide credit for bakery owners that are unable to pay for the flour upfront.

MM: What is the acceptable and just scenario to raise bread prices?

GAK: This brings us back to the original topic. The president says that we need LE8 billion pounds for the school meals program. This would mean that the government is finding it difficult to secure the LE8 billion from the general budget and that the motive behind raising bread prices at the moment is to secure that amount to fund school meals.

But if that’s the case, there are other areas in the budget from which LE8 billion can be secured without compromising citizens’ constitutional right to adequate and secure food. Rationalizing government spending is one area through which this can be achieved. I was a minister and I know. Even now, there’s a squandering of funds and wasteful spending at the level of ministries, agencies, authorities and government services. This is captured in reports by the Central Auditing Authority that review spending by economic and service authorities, as well as the general budget’s balance sheet. There are recurring examples of wasteful spending that appear in the auditing authority’s reports each year. If we went through the reports and found all of the instances of wasteful spending in various government agencies and ministries, we'd find multiple times the LE8 billion amount.

There are also foreign delegations. In the recent period, for instance, we’d read news of delegations traveling abroad on a daily basis. The prime minister and half a dozen ministers traveled to Paris. Upon returning, they went to Dubai, after which some headed to Geneva while others went to Korea to inspect factories. It’s not a minister’s job to go here and there to check things out and implement them. Ministers set policies. But if their biggest hope is to copy from other places, that would be a tragedy. Expenses for these trips are massive, and they’re all paid in foreign currency. Conserving even a portion of these expenses would save a lot in the budget and reduce pressure on the balance of payments.

These are only two items in one aspect of the budget — spending — in which we can conserve expenses and secure more than LE8 billion. On the other hand, there are also ways to increase revenues.

An example of profits that the state allows to be exempted from taxes is e-Finance, which listed its shares in a recent IPO. During the initial offering, people bought stock at less than LE9 a share. A week later, when the stock began trading, they sold the stock for LE20 a share. That’s a sizable profit margin, which the government didn’t tax. In economic terms, this kind of profit is called “unearned income,” which means that whoever obtained it didn’t put sweat into it, and didn't exert effort to make it. They bought [stock] for LE9 and sold it for LE20, earning more than double without any effort and we don’t tax them. But when it comes to a regular worker or employee, we tell them to pay a 20 percent tax on wages and salaries. Futile justifications about [the capital gains tax] dissuading stock market investors are completely unconvincing.

There’s also the exchange transactions tax. The Finance Ministry, for instance, offers government securities in the form of short-term treasury bills and long-term treasury bonds. Foreigners and large investment funds enter the Egyptian Exchange and buy these securities, be it treasury bills or bonds, which currently carry yields of around 12 to 13 percent, much lower than the 2 to 3 percent rate in markets such as New York or London. Then, after a period of three or six months, or a year, they sell these securities without paying a dime in taxes. Is it conceivable to exempt this revenue from taxes, even though it’s income obtained in Egypt and all countries around the world impose an exchange transactions tax? For whose benefit is this done?

Additionally, there are fields that make huge profits resulting from government subsidies, which we don’t talk about, that don’t pay enough taxes, such as car assembly companies. All they do is import car components from Japan, the UK, the US and elsewhere, relying on licenses from foreign car companies, and assemble them at home with a 15 to 20 percent customs tax. But if you import a finished car, you’ll pay a tax of 100 percent or higher. So, whoever produces internally becomes protected from this tax, even though they sell their cars in the market at a price very close to that of cars imported from abroad. Incidentally, this is what is called “rent,” not profit. This industry hasn’t been developed since 1980. If we aggregate all these sums, they’d come to several times more than LE8 billion [needed for the program].