In this week's edition, we examine the implications of raising the subsidies&rsquo; budget and its effect on poverty rates, as well as the opportunities and challenges around Egypt's first carbon market
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<h2>Budget Allocations for Subsidies and Social Protection:</h2>
On April 23, 2023, the Egyptian Ministry of Finance&nbsp;<a href="https://www.asharqbusiness.com/article/49484/%D9%84%D8%AA%D8%AE%D9%81%D9%8A%D9%81-%D8%A2%D8%AB%D8%A7%D8%B1-%D8%A7%D9%84%D8%AA%D8%B6%D8%AE%D9%85-%D9%85%D8%B5%D8%B1-%D8%AA%D8%B2%D9%8A%D8%AF-%D9%85%D9%88%D8%A7%D8%B2%D9%86%D8%A9-%D8%A7%D9%84%D8%AF%D8%B9%D9%85-55-%D9%85%D9%84%D9%8A%D8%A7%D8%B1-%D8%AF%D9%88%D9%84%D8%A7%D8%B1/">announced</a>&nbsp;a 48.8% increase in funds dedicated to subsidies and social protection in the budget for fiscal year 2023/2024, which begins in July, up to EGP529.7 billion from EGP358.4 billion in the current budget, with the aim of alleviating the impact of the global inflationary wave. The increased support&nbsp;<a href="https://www.elwatannews.com/news/details/6540809">goes largely</a>&nbsp;to foodstuffs and petroleum products, followed by exports, health insurance, social housing, and pensions.&nbsp;
The expanded social protection is expected to be&nbsp;<a href="https://alarab.co.uk/%D9%85%D8%B5%D8%B1-%D8%AA%D9%88%D8%B3%D8%B9-%D8%A8%D8%B1%D8%A7%D9%85%D8%AC-%D8%A7%D9%84%D8%AD%D9%85%D8%A7%D9%8A%D8%A9-%D8%A7%D9%84%D8%A7%D8%AC%D8%AA%D9%85%D8%A7%D8%B9%D9%8A%D8%A9-%D8%B9%D9%86-%D8%B7%D8%B1%D9%8A%D9%82-%D8%A7%D9%84%D8%A7%D9%82%D8%AA%D8%B1%D8%A7%D8%B6">financed</a>&nbsp;by domestic and foreign borrowing, increasing debt and thus putting additional pressure on the Egyptian pound. The increase of EGP171.3 billion (about USD5.54 billion) comes as inflation surged to a five-year high of 32.7% in March 2023.
In the new budget plan, the government&nbsp;<a href="https://enterprise.press/ar/stories/2022/12/26/%D8%A7%D9%84%D9%85%D8%A7%D9%84%D9%8A%D8%A9-%D8%AA%D9%83%D8%B4%D9%81-%D9%85%D9%84%D8%A7%D9%85%D8%AD-%D9%85%D9%88%D8%A7%D8%B2%D9%86%D8%A9-%D8%A7%D9%84%D8%B9%D8%A7%D9%85-%D8%A7%D9%84%D9%85/">expects</a>&nbsp;inflation to fall to 16% in the coming fiscal year, which is much lower than the current rate, despite projections that inflation will continue to climb due to another impending&nbsp;<a href="https://www.alaraby.co.uk/economy/%D9%85%D8%B5%D8%B1-%D8%AA%D8%AE%D8%B5%D8%B5-5297-%D9%85%D9%84%D9%8A%D8%A7%D8%B1-%D8%AC%D9%86%D9%8A%D9%87-%D9%84%D9%84%D8%AF%D8%B9%D9%85-%D9%81%D9%8A-%D9%85%D8%B4%D8%B1%D9%88%D8%B9-%D8%A7%D9%84%D9%85%D9%88%D8%A7%D8%B2%D9%86%D8%A9-%D8%A7%D9%84%D8%AC%D8%AF%D9%8A%D8%AF%D8%A9">devaluation</a>&nbsp;of the pound, and an increase in the import bill and the cost of borrowing. Many of the numbers in the draft budget will therefore change, ultimately bringing a new, different budget.&nbsp;
<h3 dir="ltr">Is the subsidy increase real? </h3>
Although the government is increasing support allocations, they remain well below the real rate of inflation that caused the economic crisis. With the Egyptian pound having lost half of its value in less than a year, the real value of the subsidy increase is accordingly <a href="https://www.alaraby.co.uk/economy/%D8%AA%D8%B1%D8%A7%D8%AC%D8%B9-%D9%85%D8%AE%D8%B5%D8%B5%D8%A7%D8%AA-%D8%A7%D9%84%D8%A3%D8%AC%D9%88%D8%B1-%D9%81%D9%8A-%D8%A7%D9%84%D9%85%D9%88%D8%A7%D8%B2%D9%86%D8%A9-%D8%A7%D9%84%D9%85%D8%B5%D8%B1%D9%8A%D8%A9-%D8%A5%D9%84%D9%89-15-%D9%85%D9%84%D9%8A%D8%A7%D8%B1-%D8%AF%D9%88%D9%84%D8%A7%D8%B1">lower</a>&nbsp;than its nominal value, substantially limiting the anticipated impact of the increase.
A comparison of data from the last ten years shows that the total amount of social support and protection in the state budget has declined from EGP205.5 billion in 2013/2014 (USD29.4 billion at the contemporaneous rate of exchange), representing 29.7% of total expenditure in the budget, to EGP529.7 billion (USD17 billion at the current exchange rate), representing&nbsp;<a href="https://www.aljazeera.net/ebusiness/2023/4/7/%D9%85%D8%B5%D8%B1-%D9%83%D9%8A%D9%81-%D8%A3%D8%AB%D8%B1-%D8%AA%D8%B9%D9%88%D9%8A%D9%85-%D8%A7%D9%84%D8%AC%D9%86%D9%8A%D9%87-%D8%B9%D9%84%D9%89-%D8%A7%D9%84%D9%85%D9%88%D8%A7%D8%B2%D9%86%D8%A9">17.6%</a>&nbsp;of total expenditure for FY2023/2024. Various social protection programs in Egypt in 2020&nbsp;<a href="https://www.progressegypt.org/indicator.html#cash-transfer">covered</a>&nbsp;<a href="https://eipr.org/publications/%D8%A5%D8%B5%D8%AF%D8%A7%D8%B1-%D8%AC%D8%AF%D9%8A%D8%AF-%D9%84%D9%84%D9%85%D8%A8%D8%A7%D8%AF%D8%B1%D8%A9-%D8%A7%D9%84%D9%85%D8%B5%D8%B1%D9%8A%D8%A9-%D8%A5%D8%AC%D8%B1%D8%A7%D8%A1%D8%A7%D8%AA-%D8%A7%D9%84%D8%AD%D9%85%D8%A7%D9%8A%D8%A9-%D8%A7%D9%84%D8%A7%D8%AC%D8%AA%D9%85%D8%A7%D8%B9%D9%8A%D8%A9-%D9%85%D8%AD%D8%AF%D9%88%D8%AF%D8%A9-%D9%81%D9%8A-%D9%88%D8%AC%D9%87-%D8%B9%D9%88%D8%A7%D8%B5%D9%81-%D8%AA%D8%AE%D9%81%D9%8A%D8%B6-%D8%A7%D9%84%D8%AC%D9%86%D9%8A%D9%87?fbclid=IwAR1oASN0scHhcH2i9cLsQxBuZJamSUMwC3zl--PDhC9amwZnLA21Jag2C0k">less than half</a>&nbsp;of poor Egyptians.
<img style="display: block; margin-left: auto; margin-right: auto;" src="https://mcusercontent.com/5e42bef7fee7e6a299c3d932d/images/6834f84f-a9f3-77c4-7f80-146050f811a8.png" width="546" height="432">
<h3 dir="ltr">What about poverty rates? </h3>
The Central Agency for Public Mobilization and Statistics (CAPMAS) defines material poverty as the inability to provide for the individual or family&rsquo;s minimum basic needs (food, housing, clothing, education, health, and transportation). According to the latest <a href="https://www.capmas.gov.eg/Pages/Publications.aspx?page_id=5104&amp;Year=23573">income and expenditure survey</a>&nbsp;&ndash; the most recent available official census &ndash; the poverty rate in 2019/2020 was 29.7%, meaning that about one-third of the then-104 million Egyptians lived below the poverty line; 4.5% of the population faced extreme poverty and so were unable to meet their basic daily needs. Poverty is concentrated more heavily in Upper Egypt than in the Delta. CAPMAS is supposed to release updated data every two years, but the figures scheduled for publication in mid-2022 have still not been released.
In an&nbsp;<a href="https://www.worldbank.org/en/news/press-release/2019/04/30/world-bank-group-to-extend-current-strategy-in-egypt-to-maintain-momentum-on-reforms">April 2019 report</a>, the World Bank noted that some 60% of Egypt&rsquo;s population was either poor or vulnerable to poverty. In December 2022, the Bank&nbsp;<a href="https://www.worldbank.org/en/topic/poverty/overview">anticipated</a>&nbsp;a sharper increase in poverty rates due to the erosion of Egyptians&rsquo; real income by inflation,&nbsp;<a href="https://databankfiles.worldbank.org/public/ddpext_download/poverty/987B9C90-CB9F-4D93-AE8C-750588BF00QA/current/Global_POVEQ_EGY.pdf">triggered</a>&nbsp;by the Covid-19 pandemic, the Ukraine-Russia war, and the triple devaluation of the Egyptian pound since March 2022. More families have no doubt fallen into extreme poverty as a result. The recent decision by the Ministry of Supply to&nbsp;<a href="https://www.independentarabia.com/node/446776/%D8%A7%D9%82%D8%AA%D8%B5%D8%A7%D8%AF/%D8%A3%D8%AE%D8%A8%D8%A7%D8%B1-%D9%88%D8%AA%D9%82%D8%A7%D8%B1%D9%8A%D8%B1-%D8%A7%D9%82%D8%AA%D8%B5%D8%A7%D8%AF%D9%8A%D8%A9/%D9%85%D8%B5%D8%B1-%D8%AA%D8%B1%D9%81%D8%B9-%D8%A3%D8%B3%D8%B9%D8%A7%D8%B1-%D8%A7%D9%84%D8%B3%D9%84%D8%B9-%D8%A7%D9%84%D9%85%D8%AF%D8%B9%D9%85%D8%A9-%D9%88%D8%AA%D8%AA%D8%AC%D9%86%D8%A8-%D8%A7%D9%84%D9%85%D8%B3%D8%A7%D8%B3-%D8%A8%D9%80%D8%B1%D8%BA%D9%8A%D9%81-%D8%A7%D9%84%D8%AE%D8%A8%D8%B2#:~:text=%D9%88%D9%8A%D8%B3%D8%AA%D9%81%D9%8A%D8%AF%20%D8%A3%D9%83%D8%AB%D8%B1%20%D9%85%D9%86%2060%20%D9%85%D9%84%D9%8A%D9%88%D9%86,%D8%A7%D9%84%D9%85%D8%B9%D9%83%D8%B1%D9%88%D9%86%D8%A9%20%D9%88%D8%A7%D9%84%D8%AF%D9%82%D9%8A%D9%82%20%D9%88%D8%A7%D9%84%D9%81%D9%88%D9%84%20%D8%A8%D8%A3%D8%B3%D8%B9%D8%A7%D8%B1%20%D9%85%D8%AF%D8%B9%D9%88%D9%85%D8%A9.">raise the prices</a>&nbsp;of 31 subsidized goods for ration card holders starting May 1 on a monthly basis reflects the growing burden of the economic crisis on the poor.
<h3 dir="ltr">Challenges and recommendations</h3>
Growing poverty <a href="https://publications.unescwa.org/projects/fsde/sdgs/pdf/chapters/Chapter-5.pdf">demonstrates</a>&nbsp;that Egypt is in dire need of a more efficient and effective social protection system both nationally and geographically. The existing system has had only a&nbsp;<a href="https://www.ifc.org/wps/wcm/connect/news_ext_content/ifc_external_corporate_site/news+and+events/news/building+resilience+and+opportunity+through+social+protection+reform+in+egypt">limited impact</a>&nbsp;on poverty and human capital development due to several challenges, among them poor administrative capacities, the&nbsp;<a href="https://www.arab-reform.net/publication/egypts-political-discourse-and-changing-social-assistance-systems/">fragmentation of efforts</a>&nbsp;as a result of the multiplicity of international donors wishing to implement their own policies, and the lack of quality development services such as education, healthcare, and affordable mobility &ndash; an&nbsp;<a href="https://www.arab-reform.net/publication/egypts-political-discourse-and-changing-social-assistance-systems/">essential component</a>&nbsp;in the success of social protection programs. These challenges must be addressed to ensure that investments in social protection have a greater impact on poverty reduction.
To&nbsp;<a href="https://www.progressegypt.org/indicator.html#cash-transfer">improve</a>&nbsp;the performance of social support and protection programs in Egypt, specialized research suggests implementing some key policies, including strengthening the administrative and statistical capacity of the government in order to develop the quality and accessibility of data, enabling better targeting of groups in need of support. To ensure that these policies are sustainable, resources must be reallocated in a more transparent and equitable manner through progressive tax reforms. In addition, the debt impasse must be resolved while shifting toward a model of growth based on the production of real goods and services, enabling the country to escape the cycle of inflation and currency devaluation that has not served the Egyptian economy.
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<h2>Steps toward the Creation of an Egyptian Carbon Market <a style="color: #f1c40f;" href="https://mailchi.mp/31f40bfcda45/8elrsbfbiv-13907742?e=8ba20540d2"> </a></h2>
In April 2023, the chairman of the board of directors of the Financial Regulatory Authority&nbsp;<a href="https://fra.gov.eg/fra_news/%D8%A7%D9%84%D8%B1%D9%82%D8%A7%D8%A8%D8%A9-%D8%A7%D9%84%D9%85%D8%A7%D9%84%D9%8A%D8%A9-%D8%AA%D8%B4%D9%83%D9%84-%D9%84%D8%AC%D9%86%D8%A9-%D9%84%D9%84%D8%A5%D8%B4%D8%B1%D8%A7%D9%81-%D9%88%D8%A7/">issued</a>&nbsp;two decrees (nos. 57 and 58) forming the Supervisory and Regulatory Committee for Carbon Emissions Reduction Units and setting forth their competencies, with the aim of motivating companies to reduce carbon emissions through an emissions trading system (ETS). The system places&nbsp;<a href="https://www.emissionsauthority.nl/topics/what-is-emissions-trading">a cap</a>&nbsp;on carbon emissions and converts emissions into units or certificates with a material price, which companies can trade in the carbon market. Companies staying under the emissions cap can then sell their surplus units to companies that have exceeded the limit.
This system&nbsp;<a href="https://globalmarkets.cib.bnpparibas/everything-you-need-to-know-about-the-carbon-markets/">incentivizes</a>&nbsp;firms to gradually reduce emissions by using renewable energy sources and to cut costs.
According to a&nbsp;<a href="https://www.nature.com/articles/s41598-023-28154-6">study</a>&nbsp;of 26 developed and developing countries, ETS significantly reduces per capita total carbon emissions. Egypt&rsquo;s per capita emissions came to&nbsp;<a href="https://zenodo.org/record/7636699#.ZE-epHZByUk">3.16 tons</a>&nbsp;in 2021, 32% below the global average.
<img style="display: block; margin-left: auto; margin-right: auto;" src="https://mcusercontent.com/5e42bef7fee7e6a299c3d932d/images/2fa4aaf9-1dc3-970a-6d14-318452e60d83.png" width="546" height="432">
According to the&nbsp;<a href="https://data.worldbank.org/indicator/EN.ATM.CO2E.KT?locations=ZQ">World Bank</a>, Egypt ranks third in the Middle East and North Africa region in terms of carbon emissions, after Saudi Arabia and Iran. In 2019, the electricity and heating sector was responsible for the most emissions in Egypt (<a href="https://ourworldindata.org/co2/country/egypt">112.98 million tons</a>), followed by the transport sector (<a href="https://ourworldindata.org/co2/country/egypt">55.27 million tons</a>) and the manufacturing and construction sector (<a href="https://ourworldindata.org/co2/country/egypt">39.29 million tons</a>).
<h3 dir="ltr">How effective is ETS in relation to Egypt&rsquo;s climate goals? </h3>
Egypt&rsquo;s 2022 <a href="https://unfccc.int/sites/default/files/NDC/2022-07/Egypt%20Updated%20NDC.pdf.pdf">Nationally Determined Contributions</a>&nbsp;(NDCs) do not include a clear economy-wide emissions target or figure, but point to pledges to reduce emissions in the electricity, transport, and oil and gas sectors by 2030, conditional on the state receiving external monetary support.
Looking at current policies, however, the targets set forth in the NDCs for climate change mitigation in Egypt are not expected to be met by 2030. For example, even as Egypt seeks to set up a carbon market, the transport sector has seen significant growth in production, up by&nbsp;<a href="https://mped.gov.eg/singlenews?id=1342&amp;lang=en">14.7%</a>&nbsp;in FY2022/2023 from the previous fiscal year. A recent paper on scenarios to regulate transport emission found that the continued expansion of road networks &ndash; the current trend &ndash; will lead to a&nbsp;<a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8621196/">37%</a>&nbsp;increase in carbon emissions by 2030 due to increased traffic.
<h3 dir="ltr">Concerns and recommendations</h3>
Carbon markets can help accelerate the shift to a cleaner environment by putting a fair price on pollution, creating an economic incentive to cut emissions, and generating financial resources to build climate resilience. But there are serious <a href="https://climatepromise.undp.org/news-and-stories/what-are-carbon-markets-and-why-are-they-important">concerns</a>&nbsp;about emerging carbon markets, including issues related to&nbsp;<a href="https://www.un.org/sites/un2.un.org/files/high-level_expert_group_n7b.pdf">greenwashing</a>, whereby companies misleadingly advertise their green credentials by misrepresenting climate-neutral products or services. For carbon markets to succeed, clear governance mechanisms, high standards of integrity and transparency in the institutional and financial infrastructure of market transactions, and the consolidation of carbon reduction efforts across all fronts and climate policies must be put in place to avoid conflicting outcomes.
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"Adasa" is a weekly policy digest by Alternative Policy Solutions. "Adasa" provides an analysis of a select number of policy developments and their effect on inclusive development and socioeconomic change &nbsp;

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