Egypt readies a subsidy switch, and the inflation question looms

The government is preparing to replace Egypt’s decades-old in-kind food subsidy system with cash support beginning next fiscal year, Prime Minister Mostafa Madbouly said in a cabinet meeting this month. The shift — long pressed by international lenders seeking tighter targeting of state spending — would end access to subsidized sugar and cooking oil, instead giving households funds to purchase these goods at market price. Bread will stay under the old system for now but is expected to join the new system eventually.

Madbouly framed the move as better allocation, not retrenchment. “The state is not targeting, in any way, a reduction in the value of subsidies allocated to citizens in the state budget,” he said, stressing that the goal is to ensure support reaches those who need it most.

BACKGROUND- The food subsidy system covers roughly 68 mn Egyptians. An ongoing review could remove 10-12 mn beneficiaries while keeping an appeals process, Al Arabiya reports, citing unnamed sources. Beneficiaries would be sorted into four tiers, with the lowest eventually exiting the system. Support could run EGP 300–350 per person a month — EGP 1.2–1.4k for a four-person household — delivered via smart cards rather than direct transfers. The program would expand coverage to as many as 30 products, including meat and poultry.

This isn’t the state’s first move in that direction. The House approved Takaful and Karama in January 2025 as the distribution vehicle for direct cashbased subsidies to citizens who fall below the poverty line, in addition to the elderly, orphans, widows, and people with disabilities. By the end of the year, Suez was chosen as the pilot governorate for a full switch to cashbased subsidies. Additionally, inflation-adjusted support rates were floated as a potential option in September 2024. Together, they suggest a phased transition already under construction, rather than a sudden switch.

The inflation question

The mechanism — not the idea — is what economists worry about. “The biggest challenge does not relate to the idea of cash subsidies itself, but rather to the implementation mechanism,” Thndr economist Esraa Ahmed tells EnterpriseAM. “The philosophy of cash subsidies is to provide money instead of subsidizing goods, while those goods are sold at market prices. The question is: How will the government reach market pricing? Will this happen within one year or over several years? And will the transition be gradual or rapid?”

The greater worry is inflation. “In my view, the main concern is not the effect of cash subsidies on inflation, but the effect of inflation on cash subsidies themselves, and the state’s ability to keep pace with continuous price increases through equivalent increases in cash support, while preserving beneficiaries’ purchasing power over time,” Ahmed says.

Financial analyst Mostafa Adel frames the same risk from the other side. “The biggest challenge for cash subsidies is that their value is fixed and increases slowly. In periods of elevated inflation, the purchasing power of the cash declines rapidly. In-kind subsidies ensure access to goods regardless of price fluctuations,” he says, arguing the system will need an automatic inflation-indexation mechanism to work.

Banking expert Ahmed Shawky agrees success hinges on accurate databases, transparent eligibility, periodic reviews, and “indexing support levels to inflation and changes in living costs to prevent beneficiaries’ purchasing power from eroding over time,” the member of the Egyptian Society for Political Economy, Statistics, and Legislation adds.

The efficiency argument

Despite these challenges, the system has benefits. “It could improve the efficiency of targeting support to the most vulnerable groups, reduce the leakage of subsidies to those who are not eligible, enhance social equity by linking the value of support to actual levels of need, and give households greater flexibility to allocate spending according to their own priorities,” Shawky tells us.

“This is where a tiered system becomes important,” Shawky says. “It allows a larger share of resources to be directed toward the most vulnerable groups while creating a more flexible framework that can adapt to changing economic and social conditions.” According to Madbouly, the government is designing mechanisms to ensure the system remains responsive to changing economic conditions.

Done right, the system also frees fiscal room. “This, in turn, would give the government greater room to direct resources toward investment in education, healthcare, and infrastructure,” Shawky says. Adel adds a second-order argument: “The funds reaching beneficiaries are spent directly in local markets, creating an economic cycle that supports domestic trade rather than limiting spending to subsidized goods alone,” he says.

A phased transition

Ahmed expects the transition to be staged, rather than abrupt. “It does not seem politically or socially feasible to implement large and sudden increases in the prices of subsidized goods within a short period,” she says. “This in itself suggests that the government is not moving toward an immediate elimination of in-kind subsidies, but rather a multi-stage transition process.”

WATCH THIS SPACE: Madbouly said cross-ministerial consultations are underway ahead of a conference that will set out the final design and timelines for the new system. As Shawky puts it, the system’s success will ultimately be measured not by the savings it ensures but by “its ability to improve living standards for targeted groups while strengthening social equity and economic protection for citizens.”