Arab Republic of Egypt: Selected Issues

This Selected Issues paper examines whether Egypt’s current account and exchange rate are in broad equilibrium. The paper analyzes areas of fiscal spending that have the biggest saving potential in a cross-country perspective. An assessment of Egypt’s real exchange rate is presented. The paper uses data envelopment analysis to analyze the efficiency in public spending on health, education, and social protection relative to comparable countries. The results suggest significant scope to improve efficiency in all three social areas, and that room for fiscal savings is particularly apparent in social protection and education.

Abstract

This Selected Issues paper examines whether Egypt’s current account and exchange rate are in broad equilibrium. The paper analyzes areas of fiscal spending that have the biggest saving potential in a cross-country perspective. An assessment of Egypt’s real exchange rate is presented. The paper uses data envelopment analysis to analyze the efficiency in public spending on health, education, and social protection relative to comparable countries. The results suggest significant scope to improve efficiency in all three social areas, and that room for fiscal savings is particularly apparent in social protection and education.

III. Focusing Fiscal Adjustment on Relatively Inefficient Spending15

Summary

  • In light of the government’s commitment to reducing the fiscal deficit, making core fiscal spending—education, health, social protection—more efficient will be key to minimizing the burden of adjustment.

  • The efficiency of education and health spending in Egypt is about average, but social protection is below that of Egypt’s international peers. There is significant scope for improving efficiency in all three social areas, but room for securing fiscal savings is most apparent in social protection and education.

  • Efficiency could improve, in particular, by adopting a greater result-oriented focus in the budget process and by reducing the inefficient energy and food subsidies while strengthening social safety nets through better targeting.

A. Introduction

42. The need for a significant fiscal adjustment over the medium term offers a good opportunity to examine the efficiency and scope of public services. The consolidated fiscal deficit in Egypt has averaged about 9 percent of GDP since FY2002, which required sizable financing from the banking system and resulted in a high net public-debt ratio of about 70 percent of GDP.16 In this context, the government has announced its intention to reduce the fiscal deficit to 3 percent of GDP by FY2011. Expenditure rationalization will be important to achieve this objective. This chapter assesses the scope for future fiscal adjustment in areas of relatively inefficient spending to avoid relying on restraining public investment and other traditionally flexible components of the budget. In this manner, expenditure rationalization need not undermine social outcomes linked to productive public spending.

43. The chapter examines the relative efficiency of public spending in social areas—health, education, social protection—at the general government level.17 The focus on these sectors is determined by the availability of data on public sector performance—such as hospital beds, pupil-teacher ratios, or poverty indicators—, which are much more scarce in other areas such as general administration or infrastructure investment.18 The efficiency of spending is measured in terms of the ability to transform given public spending into outcomes, relative to other countries of comparable income. Because these comparisons are sample-specific and do not take into account many factors that could affect outcomes, the results should be interpreted with care and should be viewed only as indicative of potential inefficiencies.

44. Results suggest significant scope for improving efficiency in all three social areas, but room for securing fiscal savings is particularly apparent in social protection and education. Spending in the latter two areas is high relative to that in similar countries and has not been matched by correspondingly stronger social outcomes. At a general government level, Egypt spent about 12 percent of GDP during FY2007 on social protection, but social indicators appear to be lagging behind other countries in the region, with the population subsisting on less than US$2 per day—in purchasing-power-parity (PPP) adjusted terms—almost double the level in similar countries. Given that poorly targeted subsidies account for about half of the social protection spending, there may be significant scope for “doing more with less” by eliminating inefficient spending while enhancing social outcomes. Spending on education was about 5 percent of GDP in 2006—the last year for which cross-country data are available—compared to about 4 percent in similar countries. However, literacy rates are comparatively low, and scores on internationally standardized tests—a proxy for the quality of education—are also below those of comparator countries. The relatively high spending and the inefficient use of resources suggests that there could also be scope to achieve fiscal savings while enhancing outcomes, although the expected growth of school-age population would make significant savings more difficult to achieve. In the case of healthcare, on the other hand, spending is in line with or even below countries of similar incomes. This suggests that, while the relative efficiency of healthcare spending also appears to be weak in Egypt, there may be less scope to secure significant fiscal savings in the health sector. Consequently, the medium-term focus for policy makers should be on making better use of existing resources to improve health sector outcomes.

B. Recent Trends in Public Expenditure

45. General government spending is relatively high in Egypt compared to similar emerging markets. As seen in Figure III.1 total spending in Egypt (at 35 ½ percent of GDP in FY2007) is above the average for emerging economies included in the sample, especially for countries with similar incomes.19,20 This reflects a high interest bill (5½ percent of GDP) due to a sizeable public debt, a relatively large wage bill (7 percent of GDP), and significant spending on subsidies and transfers (about 12 percent of GDP). Investment and outlays on goods and services, on the other hand, are in line with countries of similar income level.

Figure III.1.
Figure III.1.

Spending in Selected Emerging Markets, 2006

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 381; 10.5089/9781451811896.002.A003

46. In the social area, public health expenditures relative to GDP are lower than in similar countries, but education and social protection are relatively high (Figure III.2-4). Public spending on health, at 2.2 percent of GDP in FY2004, is broadly in line with the average for the comparator countries in the sample, suggesting that the resources allocated to the sector may be broadly adequate. Public spending on education and social protection, on the other hand, is relatively large by international standards. Education expenditure, at 4.8 percent of GDP in FY2006, is closer to OECD averages (5 percent of GDP) then to the average spending in comparator countries (4 percent of GDP). The difference relative to the comparator group is somewhat larger in the case of social protection, at 12 percent of GDP in Egypt compared to an average of 10% percent in the comparator group. This suggests that there is potential scope both for expenditure savings and for efficiency improvements in education and social protection relative to similar countries.21

Figure III.2.
Figure III.2.

Health Spending, 2004

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 381; 10.5089/9781451811896.002.A003

Figure III.3.
Figure III.3.

Education Spending, 2005

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 381; 10.5089/9781451811896.002.A003

Figure III.4.
Figure III.4.

Social Protection Spending, 2005

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 381; 10.5089/9781451811896.002.A003

Sources: World Development Indicators (WDI), International Financial Statistics (IFS), World Health Organization; and IMF staff calculations. Figures correspond to latest available observations.

47. The composition of social spending in Egypt is heavily tilted toward fuel and in-kind commodity subsidies for social protection. Domestic energy subsidies accounted for 6.8 percent of GDP in FY2006, almost double the level three years ago as a result of higher international oil prices. While the fiscal cost of fuel subsidies has declined in FY2007 to 5.5 percent of GDP, owing partly to a hike in domestic fuel prices in summer 2006, Egypt still provides one of the highest domestic fuel price subsidies in the world (CR/06/253). As discussed below, these subsidies are generally found to be poorly targeted (World Bank, 2005c). In-kind food subsidies ranged from 1¼ to 2 percent of GDP since FY2002, depending largely on import prices. These are provided as government transfers to the General Authority for the Supply of Commodities (GASC) to subsidize the cost of several basic food staples, including bread, wheat flour, sugar, cooking oil, vegetables, rice, flour, and pasta.

48. The recent fiscal adjustment efforts led to some retrenchment in social spending. General government spending, including net acquisition of financial assets (NAFA), declined by about 4 percent of GDP between FY2003 and FY2007 to reach about 35 ½ percent of GDP.22 While the functional classification of spending is not available for the general government, at the central government level data show that the adjustment occurred across most spending categories, including health, education and social protection, where spending was reduced by over 3 percent of GDP during this period (Figure III.5).23

Figure III.5.
Figure III.5.

Egypt: Composition of the Expenditure Adjustment, FY2003-07

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 381; 10.5089/9781451811896.002.A003

Sources: Egyptian authorities; and Fund staff estimates. Data refer to the central government.

C. Relative Efficiency of Public Spending and Scope for Fiscal Adjustment

49. This chapter assesses the efficiency of social spending in Egypt relative to other countries, based on the relationship between expenditures and desired outcomes (Figure III.6).24 The overall efficiency of public spending is defined as the effectiveness of a functional component of public spending (e.g., health or education) to deliver a desired result or outcome (e.g., lower child mortality rates or higher standardized test scores). The overall efficiency can be considered in two stages: (i) the cost effectiveness of public expenditure in producing intermediate factors, such as the number of hospital beds or skilled medical staff; and (ii) system productivity in using these intermediate factors to produce desired final outcomes, such as a lower rates of child and maternal mortality.

Figure III.6.
Figure III.6.

Overall Efficiency of Public Expenditure

Citation: IMF Staff Country Reports 2007, 381; 10.5089/9781451811896.002.A003

Measuring the Relative Efficiency of Spending25

50. Efficiency is measured in terms of the ability to transform given spending into desired outcomes, relative to other countries of comparable income. This is done by adopting the “efficiency frontier” approach from the finance literature, which has been increasingly used in public finance and other fields. Efficiency frontiers are constructed by generating combinations of observed inputs (spending) and outputs (desired social outcomes) that dominate the combinations for other countries in the sample in the sense of obtaining maximum output from a given level of inputs or using minimum inputs to obtain a certain level of outputs. In this manner, countries operating on the frontier are said to reflect “best practice” relative to the countries operating below the frontier (rather than relative to an absolute efficiency standard). Efficiency frontiers can be estimated using parametric techniques (by econometrically estimating an assumed production function), as done in the stochastic frontier analysis, or nonparametric techniques that use linear programming estimation, as used in data envelopment analysis (DEA). The latter approach is used in the literature to estimate efficiency of public spending, and it is adopted in this chapter.

51. DEA is a tool to benchmark the relative efficiency of spending. Figure III.7 illustrates a stylized example of DEA based on a single spending input and a single performance indicator for a sample of countries.26 The efficiency frontier of “best practice” connects the country observation points A, B, C and D as these countries dominate countries E and G in the interior. The convexity property allows an inefficient country (point E) to be assessed relative to a hypothetical position on the frontier (point Z or F) by taking a linear combination of efficient country pairs (points A and B or B and C).27 In this manner:

Figure III.7.
Figure III.7.

Example of DEA Application

Citation: IMF Staff Country Reports 2007, 381; 10.5089/9781451811896.002.A003

  • An input-oriented efficiency score is calculated as the ratio of YZ to YE. It measures the share of actual spending that would be sufficient to produce the actual output if the country’s public sector was as efficient as the countries on the frontier to its left (countries A and B in Figure III.4). This score is thus bounded between zero and one. For example, a score of 0.6 implies that an unchanged outcome could be achieved through adopting the “best practice” available to countries of equal or lesser income, yielding potential savings of 40 percent of current spending.

  • An output-based efficiency score is calculated as the ratio of FX to EX. It measures the proportionate increase in the output that could be obtained with unchanged inputs if the country’s public sector was as efficient as that of countries operating on the frontier above it (countries B and C in Figure III.7). The output-oriented score has a minimum value of 1 for countries operating on the frontier, where scores exceed one, implying that spending could achieve better output performance. For example, a score of 1.2 suggests a potential improvement of 20 percent in the social outcome in question, by adopting “best practice” at unchanged spending.

52. The analysis for assessing the relative efficiency of spending in this chapter incorporates both input- and output-oriented efficiency scores. Specifically, input-based efficiency scores are used to assess spending efficiency in line with the Egyptian government’s commitment to significantly reduce the fiscal deficit and are applied to areas where there appears to be room for savings.28 Output-based efficiency scores are also used to assess efficiency consistent with the broader objective of enhancing social outcomes in Egypt and are applied to areas where room for savings is more limited. In this manner, the analytical framework is consistent with “doing more with less” by eliminating wasteful spending while achieving improved social outcomes. Figure III.8 illustrates this conceptual framework. If Egypt initially operates below the frontier of best practice in any given area, then policymakers can opt to move in a north-west direction (e.g., to point A) to cut spending while improving performance. Over the medium term, the objectives might be to raise spending in a cost-effective manner by moving along the frontier in a north-east direction to enhance social outcomes (e.g., from point A to B).

Figure III.8.
Figure III.8.

“Doing More with Less” in a Framework of Relative Efficiency

Citation: IMF Staff Country Reports 2007, 381; 10.5089/9781451811896.002.A003

53. There are advantages and weaknesses to the DEA approach, and care must be exercised in interpreting its results. DEA does not require an assumption about unknown functional forms for the frontier of best practice or complex distributional properties for econometric analysis. It generates intuitive results that can be useful to benchmark the extent of inefficiencies within and across sectors to prioritize reforms. However, there are important weaknesses as well. In particular, many factors affect the link between public spending and performance.29 “Inefficient” health spending, for example, may not reflect weaknesses in the management and allocation of health spending, but say, poor water quality due to environmental pollution that raises child mortality. DEA results may therefore not necessarily imply that the solution lies in improved expenditure management in the health sector but remains a valuable diagnostic tool to detect or suggest the analysis of such factors. Other weaknesses of the approach include (i) sensitivity of the results to sample selection, as the country’s performance is measured against the closest two countries on the frontier; (ii) the assumption that the “production technology” for transforming inputs into outputs is identical across countries and does not directly take into account differences in exogenous factors that affect the efficiency of spending not directly controlled by policy makers;30 (iii) difficulties in quantifying differences in quality or in matching spending to an appropriate indicator of the policy objective; and (iv) a bias due to private spending.

Data and comparative country sample

54. The selection of an appropriate comparator group is critical to ensure robust results. Efficiency scores generated by the DEA approach are sensitive to the composition of the country sample, especially countries that represent outliers. As a result, comparator countries should be broadly similar to Egypt in terms of economic development and the available technology to transform inputs into results. Specifically, it would be inappropriate to assess the efficiency of public spending in Egypt relative to advanced OECD countries or less developed countries in Sub-Saharan Africa. In this context, the country sample consists mainly of emerging markets of similar income per capita in PPP-adjusted terms.31

55. The data are drawn largely from the World Bank’s database on World Development Indicators (WDI) and a World Health Organization (WHO) database covering health indicators. Performance indicators are selected to match the timing of expenditure as closely as possible. Some indicators respond with long lags to policy decisions. For instance, life expectancy reflects policies and lifestyles over the course of a generation. For this reason, spending inputs are linked as much as possible to indicators that respond directly and concurrently to current spending decisions. The indicators include: (i) maternal and infant mortality rates, health workforce density, number of hospital beds per a thousand people, and births attended by a skilled medical person (WHO and WDI); (ii) pupil-teacher ratios, secondary enrollment, primary completion rates relative to the respective school-age populations, literacy rates for youths ages 15 to 24 (WDI), and an international standardized test score in mathematics (TIMSS);32 and (iii) poverty, nutrition, and inequality data (WDI). Data are drawn for the widest possible country sample. Expenditure data are expressed in U.S.-dollar terms after adjusting for purchasing power parity differentials.33

D. Health Care

56. The healthcare system in Egypt consists of significant public and private components (Table III.1).34 The private share of total healthcare spending in Egypt is about 60 percent, which is broadly consistent with the private share of spending in comparator countries, including Jordan, Syria, Morocco, Indonesia, and the Philippines. Public spending in Egypt includes social health insurance, covering about 40 percent of the population (mostly children), and spending on a network of healthcare providers that offer subsidized service for people lacking healthcare coverage. The government also finances 9 large teaching hospitals affiliated with universities, 34 tertiary hospitals, and specialized medical centers to treat specific disorders such as cancer.

Table III.1.

Health Spending and Indicators in Selected Countries

article image
Sources: World Health Organization, WDI, and IMF staff calculations.

57. In 2005, the government announced a strategy to reform its healthcare system over the medium term. The strategy includes consolidating fragmented social insurance programs (governed by numerous laws) into a national health insurance system and extending the social health insurance coverage to all uninsured Egyptians, among other things. These may involve additional pressures on public resources.

58. DEA results for healthcare suggest that the overall efficiency of healthcare spending is about average for Egypt compared to the countries in the sample. The output-oriented scores—more informative in the case of healthcare spending, given its broad comparability to peers—suggest that a more efficient use of the existing healthcare spending could translate into about 10 percent higher life expectancy or 60-70 percent lower infant and maternal mortality rates. This puts Egypt in the 50th percentile in the sample of 32 emerging countries. The results are broadly consistent with the input-oriented efficiency measures that place Egypt in the 41st percentile among the sample countries and suggest that equivalent healthcare outcomes could be achieved in Egypt with about 30 percent of the current health spending (Figure III.9)35. The analysis is based on total healthcare spending, given the important role of private out-of-pocket spending in the health sector of many countries and because focusing on public spending in isolation would bias the efficiency results in favor of countries with high private shares in healthcare spending. However, this also implies that low efficiency of healthcare spending might reflect market failures rather than just inefficient public spending.

Figure III.9.
Figure III.9.

Selected DEA Results to Assess Overall Efficiency Results in Health Care

Citation: IMF Staff Country Reports 2007, 381; 10.5089/9781451811896.002.A003

Sources: WDI, IFS; and IMF staff calculations

59. These results reflect weaknesses in both cost effectiveness and system productivity:

  • Healthcare spending in Egypt does not produce comparable levels of real resources (e.g., the number of physicians, healthcare workers, or hospital beds per thousand people) or a comparable level of service delivery (e.g., number of births attended by skilled healthcare staff). In line with the overall efficiency results, DEA scores for cost effectiveness indicate that, on average, Egypt scores in the 53rd percentile in terms of transforming total healthcare spending into intermediate factors (physicians, hospital beds) when measured by output-oriented scores (Figure III.10). However, Egypt would score higher on several indicators if compared to the countries in the region, as the reported results are heavily influenced by the presence of ex-socialist economies that boast a much larger number of healthcare workers and hospital beds than others.

  • Similarly, the analysis suggests that Egypt could significantly strengthen its performance in generating social outcomes, given its level of real resources and service delivery (i.e., intermediate factors). System productivity is calculated for the healthcare sector by considering an equally-weighted average of the available real resources (e.g., hospital beds, healthcare workers) and the level of service delivery (e.g., births attended by skilled medical personnel), and by measuring the productivity of using these real resources in reducing the rates of infant and maternal mortality and increasing life expectancy. The DEA scores for productivity put Egypt in the 30th percentile among the sample countries, a worse performance than in the case of cost effectiveness. These findings confirm results in a study of Egypt’s healthcare system, which pointed to the low productivity of the healthcare system, one measure of which could be the bed occupancy rate: Although Egypt’s bed capacity is comparable to that of other countries of similar income levels, the average bed occupancy is estimated at 25-35 percent compared to 80 percent of the international standards of good practice (World Bank, 2005a).

Figure III.10.
Figure III.10.

Selected DEA Results to Assess Cost Effectiveness in Health Care

Citation: IMF Staff Country Reports 2007, 381; 10.5089/9781451811896.002.A003

Sources: WDI, IFS; and IMF staff calculations

60. The analysis above suggests that the focus of reforms in the health sector should be to strengthen the overall efficiency of healthcare spending by enhancing the productivity of intermediate factors rather than reducing the spending level, which is in line with international peers. Specifically, inefficiencies in public health spending should be seen as opportunities to reallocate resources to higher priority areas within the health budget, including to the most cost-effective services and programs, and to better target government health subsidies to priority population groups. There are also significant regional disparities in key health indicators that should be addressed, especially between urban and rural areas.36 In addition, strong population growth, population aging, and the proposed healthcare reforms will add pressure on public healthcare resources over the medium term. In this context, the focus of reforms should be on enhancing system efficiency rather than reducing spending.

61. A greater results-oriented focus in the healthcare budget could enhance the relative efficiency of overall healthcare spending. The current public system relies on financing from the state budget, weakening accountability for results. Greater delegation of management authority to local spending units could improve the quality of service delivery. This would require greater flexibility in employment and compensation policies. In addition, the public share of healthcare spending should be targeted to benefit the poor, as the current system finances large comprehensive state hospitals and medical centers that disproportionately benefit urban and higher-income households.37

E. Education

62. The Egyptian government provides free public education in line with constitutional requirements. As a result, the majority of students from primary to tertiary levels (some 85 percent) are enrolled in public institutions and the university system is largely publicly financed (Table III.2).38 Public spending on education is therefore somewhat high by international standards, as discussed earlier, at 4.8 percent of GDP in FY 2005 compared to an average of 4 percent for similar countries. Nevertheless, there is also evidence of sizable private education spending (estimated at 3.6 percent of GDP), in part reflecting spending on extra tutoring (often from the same teachers children have in public schools), which would bring overall education spending in Egypt above most developed and developing countries.

Table III.2.

Education Spending and Indicators in Selected Countries

article image
Source: UNESCO, WDI, IEA, and IMF staff calculations.

63. The performance of the education sector, however, has not kept pace with expenditures. In particular, literacy rates are relatively low, at 85 percent of youths ages 15-24, compared to 93 percent in comparator countries. The average TIMSS scores—which offers a glimpse into the quality of Egypt’s education—are also below the comparator average (Figure III.11) DEA results suggest that equivalent outcomes (in terms of literacy rate and test scores) could be achieved with about a quarter of the public spending on primary and secondary education, placing Egypt in the 50th percentile among the countries in the sample in terms of the overall efficiency of education spending.

Figure III.11.
Figure III.11.

Selected DEA Results to Assess Overall Efficiency in Education

Citation: IMF Staff Country Reports 2007, 381; 10.5089/9781451811896.002.A003

Sources: UNESCO, WDI, IEA, and IMF Staff Calculations

64. As in health, overall inefficiencies reflect weaknesses in cost-effective service provision and, more so, in system productivity:

  • Cost effectiveness in transforming public education spending into real resources and improved service delivery is somewhat above average in Egypt compared to similar countries. The DEA multiple-output efficiency scores indicate that about half of the current public spending on primary and secondary education could suffice to attain equivalent size classrooms (measured by the pupil-teacher ratio), primary completion rates, and secondary enrollment rates. Although indicators of these “intermediate factors” in education are similar or better than in comparator countries, the higher spending on primary and secondary education accounts for the relative inefficiency (Figure III.12). High costs reflect, among other things, an oversupply of education personnel, relatively high investments in school construction not supported by adequate maintenance, inefficient textbook spending (which accounts for over 60 percent of nonwage current costs), and poor incentives for tuition and other cost recovery initiatives (World Bank, 2005b).

Figure III.12.
Figure III.12.

Selected DEA Results to Assess Overall Efficiency in Education

Citation: IMF Staff Country Reports 2007, 381; 10.5089/9781451811896.002.A003

Sources: WDI, IFS; and IMF staff calculations
  • System productivity is particularly weak in Egypt. An equally-weighted index measuring the level of service delivery in education (e.g., the rate of primary completion, secondary enrollment, and the primary pupil-teacher ratio) is used to assess the productivity of transforming real education resources into improved social outcomes. Two target indicators are used to represent the desired outcome in this analysis: the literacy rate for youths ages 15 to 24, and the average TIMSS score. The results indicate that Egypt could attain equivalent outcomes with about 45 percent of the current intermediate factors, placing it in the 16th percentile in terms of transforming the provision of education service delivery into high youth literacy rates and in the 60th percentile in terms of transforming education services into high standardized test scores.

65. A major cause of low system productivity in the education sector stem from the high level and poor distribution of staff, suggesting potentially large gains from civil service reform in the education sector. The World Bank (2005b) found that there is one administrator for every teacher at the primary education level, and one non-teaching staff member for every 8 teachers. As a result, there could be substantial leakage of allocated resources from the service delivery perspective. Moreover, there are shortages of skilled teachers in some rural areas. Non-wage costs, especially textbook production costs, could also be adding to the system’s inefficiencies, and their rapid growth would need to be contained. The absence of cost recovery initiatives at the university level combined with declining public funding per student has adversely affected quality as well.

66. Rigid and centralized budgeting practices for educational institutions could also be affecting efficiency. Specifically, there appears to be little scope for managers to shift spending across budgetary chapters within a fiscal year, and there is a tradition of incremental budgeting in education. Greater delegation of education-related spending decisions to local officials could enhance accountability and performance.39 Providing those officials closer to actual points of service delivery with greater authority and accountability for the use of budgetary allocations would help ensure that funds are better directed to the particular needs of a school, such as facility maintenance or additional computers. Such a reform would require complementary steps to strengthen internal controls, accounting, and procurement standards.

67. Thus, in contrast to the healthcare sector, there appears to be significant scope both to secure fiscal savings and improve social results in education. However, the rapidly rising school-age population presents a challenge to maintain the quality and equity of its educational system.40

F. Social Protection and Safety Nets41

68. Social protection spending in Egypt is high but poorly targeted and falls short of fulfilling its primary function of alleviating poverty (Table III.3). On a general government basis, Egypt spent about 12 percent of GDP during FY 2007 on subsidies, grants, and social benefits. More than half of this spending consists in subsidies for selected energy and food products. These programs are poorly targeted, result in substantial leakage of resources to high-income households, and incur a high cost of delivering assistance to the poor.42 For instance, the World Bank estimated that the lowest quintile of the income distribution receives just 16 percent of the resources allocated to the social safety net in Egypt compared to 28 percent consumed by the highest income quintile. Energy subsidies are the most regressive of the in-kind subsidies. Overall, poverty has continued to rise despite higher spending on the social safety net.43 Almost 45 percent of the population subsists on less than US$2 per day in purchasing-power-parity (PPP) adjusted terms compared to less than 10 percent of the population in Jordan.44 Similarly, the prevalence of malnutrition in children more than doubles that of Jordan, Tunisia, and Turkey despite the longstanding provision of in-kind food subsidies in Egypt.45

Table III.3.

Subsidies and Transfers: Spending and Indicators for Selected Countries

article image
Sources: WDI, UNDP, and IMF staff calculations.

69. The analysis suggests that the efficiency of spending in social protection is much lower than in health or education (Figure III.13). Input-oriented efficiency scores suggest that equivalent social outcomes could be achieved with about 10 percent of current spending (albeit the results are influenced by countries that report very little spending on social protection), placing Egypt 12th out of 16 countries in the sample in terms of transforming social protection spending into higher social outcomes.

Figure III.13.
Figure III.13.

Selected DEA Results to Assess Efficiency of Social Protection Spending

Citation: IMF Staff Country Reports 2007, 381; 10.5089/9781451811896.002.A003

Sources: WDI and IMF staff calculations

70. The challenge for policy makers is to reorient the social protection system toward delivering targeted assistance while creating space for fiscal adjustment.

  • The main focus of the reform should be on phasing out the system of fuel subsidization and in-kind social support. Reductions in subsidies on refined gasoline, which disproportionately benefit rich households, would secure savings for fiscal consolidation. The subsidy on kerosene could be reduced more gradually to insulate the regressive impact on the poor, especially given the relatively modest burden of this subsidy compared to the cost of other fuel subsidies such as natural gas, diesel, and fuel oil. Reforms to the system of food subsidies should focus on better targeting these in-kind transfers to the poor, including by tightening eligibility for ration cards based on geographic and other proxy means-testing criteria.

  • Parallel efforts should focus on substantially expanding the cash transfer and conditional cash-transfer components of the social safety net, and strengthening the targeting of social assistance based on geographic and proxy means-testing criteria.46 Improving the geographic targeting of the social safety net is essential, as too few of the poor benefit from existing programs, especially those living in rural areas.47

G. Conclusions

71. This paper examined the efficiency of social spending in Egypt at the general government level. The findings suggest that there is significant scope to improve the efficiency of public social spending, particularly in education and social protection. Spending in these two areas is large relative to countries of similar income levels, offering opportunities both to enhance social outcomes and secure savings for medium-term fiscal consolidation. Health spending, while relatively inefficient, is broadly in line with comparator countries and the focus of reforms should be to strengthen outcomes rather than to identify savings for fiscal consolidation, especially in light of population pressure and regional inequality in healthcare delivery.

72. Adopting a greater results-oriented focus in the state budget process could contribute to reforms in the education and health sectors. Policy makers should regularly review the efficiency of budget appropriations in achieving objectives and enhancing desired social outcomes. Greater managerial flexibility combined with greater accountability for results could help enhance the overall efficiency of public spending.

73. Inefficient and poorly targeted fuel and in-kind food subsidies provide significant scope to secure savings for fiscal consolidation. The effective resource transfer to the poor provided by food and energy subsidies is limited and highly expensive. Energy subsidies also distort production decisions and entail adverse externalities from excess energy consumption. The government has recently announced plans to phase out gas and electricity subsidies for industrial users; domestic fuel prices should be gradually moved closer to world prices. Social considerations suggest that the pace of price adjustments should be more rapid for products consumed intensively by higher-income households, while products consumed intensively by lower-income households should be adjusted more gradually. Subsidy reform should also be taken as an opportunity to redesign the structure of social safety nets with programs based on proxy means-testing and geographic targeting.

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  • World Bank, 2005c, “Egypt—Toward a More Effective Social Policy: Subsidies and Social Safety Net” (Washington: World Bank), available at http://www.mof.gov.eg/english

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  • Zhu, J., 2003, Quantitative Models for Performance Evaluation and Benchmarking (New York: Springer Science+Business Media Inc.)

15

Prepared by Todd Mattina and Aliona Cebotari (FAD).

16

The fiscal year begins July 1. For example, FY 2002 refers to the fiscal year July 2001 to June 2002.

17

Social protection spending includes subsidies, grants, and social benefits.

18

Even the available data, however, suffers from many weaknesses, including the potential lack of comparability across countries in terms of concepts, coverage, and timing.

19

Countries tend to consume larger and more varied packages of public services as they grow wealthier (e.g., the Wagner effect).

20

In this note, comparator countries refer to emerging markets with a GDP per capita of up to US$12,000 in PPP-adjusted terms (Egypt’s GDP per capita in PPP terms is US$4,800).

21

Public healthcare spending in Egypt accounts for close to 40 percent of total healthcare spending. This is broadly consistent with the share of public healthcare spending in similar income countries (48 percent) in the region, including Jordan, Iran, Syria, and Tunisia. In contrast, the public share of healthcare spending in Turkey and Algeria is about 70 and 80 percent, respectively.

22

The data on government spending discussed in this section adjusts for the estimated cost of fuel subsidies prior to FY2006, when these were not recorded on budget. For example, expenditures for FY2003 were increased by 3.9 percent of GDP to reflect estimated fuel subsidies not captured in the fiscal data.

23

Looking ahead, the authorities envisage greater use of public-private partnerships (PPPs) to meet Egypt’s sizable social and infrastructure needs. PPPs are also envisaged for water treatment centers in Cairo, major hospital facilities, and infrastructure to support the Nile river transportation corridor.

24

The framework applied in this chapter was originally developed in Verhoeven, Carcillo, and Gunnarsson (2007).

25

See Martina and Gunnarsson (2007), and Martina (2007) for a similar discussion.

26

The DEA approach readily accommodates multiple-output and multiple-input “production technologies” for transforming inputs into outputs. The former is used in this chapter, given the trade-offs involved in allocating public spending among various desired outcomes.

27

By construction, the set of feasible input-output combinations is convex.

28

The input- and output-based efficiency scores equally assume constant returns to scale. However, the DEA models considered in this chapter permit variable returns to scale. See Zhu (2003) for a technical elaboration of the DEA approach.

29

Ideally, these factors should be controlled in a second stage, using bootstrapping techniques as discussed by Simar and Wilson (2007). DEA results can be biased due to a small sample, as discussed by Simar and Wilson (2000). Initial bias-corrected results using a bootstrapping technique did not affect the rankings presented in this study. However, this chapter presents unadjusted efficiency scores owing to convergence problems in some of the results.

30

For a clear example, a country with a mountainous terrain would have a much higher cost of producing an equivalent road network than a country with a flat terrain, but the DEA analysis would label the former as “inefficient.” More generally, the DEA analysis can be extended to evaluate the importance of exogenous factors affecting cross-country differences in efficiency. This is usually done through Tobit regressions, by using DEA efficiency scores as the dependent variable and various exogenous factors as explanatory variables, or through truncated regressions as suggested by Simar and Wilson (2007).

31

Depending on data availability, the comparative country sample includes countries listed in Table III.1-Table III.3.

32

The International Association for the Evaluation of Educational Achievement (IEA) administers a cross-country standardized test in mathematics and science called the Trends in International Mathematics and Science Study (TIMSS). In 2003, the test was taken by eighth-grade students in 46 countries.

33

Real spending is measured in PPP terms to account for the higher relative price of non-tradable inputs in richer countries (e.g., the Balassa-Samuelson effect).

34

For a complete overview of the healthcare system, see World Bank (2005a).

35

References to percentiles should be interpreted as share of countries that do worse than Egypt.

36

The World Bank’s (2005a) recent note on the health sector in the context of the Public Expenditure Review indicates that the rural infant mortality rate is 50 percent higher than the urban rate.

37

See World Bank (2005a).

38

See World Bank (2005b)

39

World Bank (2005b)

40

World Bank (2005b).)

41

This section draws heavily on World Bank (2005c).)

42

The World Bank (2005c) report found that the cost of delivering one dollar of resources to the poor costs almost US$500 through gasoline subsidies, US$30 for natural gas subsidies, US$46 for high-quality bread subsidies, and about US$5.50 in other in-kind food subsidies.)

43

Between 2000 and 2005, the poverty rate has increased from 16.7 percent to 19.6 percent; see World Bank (2007).)

44

The share of populations living on less than US$2 per day in Morocco, Tunisia, and Turkey is well under half the Egyptian rate.)

45

Based on the percentage of children under the age of five who are underweight for their age group.)

46

The World Bank estimates that cash transfers represent less than 5 percent of spending on the social safety net. In-kind subsidies largely account for the remainder of the social safety net.1)

47

Three quarters of the poor in Egypt live in rural areas, and more than half live in rural Upper Egypt.)

Arab Republic of Egypt: Selected Issues
Author: International Monetary Fund