Safety Nets and the Poor
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BOX 5. 1
Consumer Food Subsidy Programs in the Middle East and North Africa Algeria: Between 1973 and 1996, consumer food subsidies grew to cover a wide range of items, including bread, milk, sugar, cooking oil, and other items. Subsidies were both explicit, through a government transfer, and implicit, through exchange rate overvaluation and fixed prices and margins. Until 1982 explicit subsidies were funded entirely though budget support. When this proved unsustainable, subsidies were financed through an extrabudgetary account, Fonds de Compensation. Although beneficial for the poor, the system was inefficient and costly, reaching almost 5 percent of GDP. In 1992, in the context of a broader structural adjustment program, the Algerian government began to gradually reduce the subsidies on some food items. By the end of the 1990s most food subsidies had been eliminated (World Bank 1999a). Egypt: By the late 1970s the subsidy system covered almost 20 food items and absorbed about 20 percent of total government spending. Fueled by rapid population growth and a depreciating currency, the system became fiscally unsustainable. Initial attempts to raise prices on subsidized goods were met with riots, and the price hikes were rescinded. The authorities then adopted a gradual approach under which (a) the number of subsidized commodities was reduced to only four—baladi bread, coarse flour, edible oil, and sugar; (b) the number of ration card holders was reduced by introducing a two-tier system of full subsidy (green books) and partial subsidy (red books); and (c) prices of key foods, especially bread and sugar, were allowed to rise (Adams 2000). This pattern of adjustment was partially reversed in 2004 when new items were added to the ration card system to offset the rise in food prices brought about by the substantial exchange rate depreciation in 2003. Jordan: Prior to 1991 universal subsidies were available on a number of commodities, including bread, flour, rice, sugar, and milk. The 1988 devaluation of the Jordanian dinar (JD) substantially increased the fiscal costs of the system, and in 1991 rationing was introduced for subsidized sugar, rice, and powdered milk. In 1994 an income-based criterion was adopted for the allocation of ration coupons. Only two-thirds of the population elected to obtain the coupons, thereby helping improve targeting and reduce costs. In 1996 the subsidies on bread and flour were eliminated (general wheat subsidies were replaced with targeted means-tested cash transfers), and in 1997 the equivalent cash transfer was merged with the existing scheme on rice and sugar. In 1999 the cash transfer scheme was phased out and replaced by targeted cash assistance through the National Aid Fund (NAF) (Shaban, AbuGhaida, and Al-Naimat 2001). (Box continues on the following page.)