VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #3021/01 2840906
ZNR UUUUU ZZH
R 110906Z OCT 07
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 7157
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0348

UNCLAS CAIRO 003021 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA 
USAID FOR ANE/MEA MCCLOUD AND RILEY 
TREASURY FOR MATHIASON AND HIRSON 
COMMERCE FOR 4520/ITA/ANESA/OBERG 
 
E.O. 12958:  N/A 
TAGS: PGOV ECON EG
SUBJECT:  RAMADAN HIGHLIGHTS EGYPTIANS' INFLATION CONCERNS 
 
REF:  A. Cairo 0361 
       ¶B. Cairo 2588 
       ¶C. Cairo 2887 
       ¶D. Cairo 2983 
 
Sensitive but unclassified.  Please handle accordingly. 
 
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Summary 
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¶1.  (SBU) Egypt's overall inflation rate declined over the summer 
from a peak of 12% year-on-year (y-o-y) in March 2007, but ticked up 
again with the start of Ramadan in September.  Some of the increase 
is attributable to new Consumer Price Index (CPI) methodology 
introduced at the beginning of September.  But most of the increase, 
particularly the 16.4% y-o-y increase in food prices, is due to the 
annual "Ramadan effect."  Wholesalers and retailers take advantage 
of higher consumption and consumer expectation of higher costs to 
raise prices beyond reasonable profit margins.  Hoarding of 
traditional food items exacerbates the problem, as does lack of an 
organized consumer sector.  This year, the GOE responded with the 
usual rhetoric about stricter control of markets, but did not call 
for voluntary price restraints or issue price guidelines, as in past 
years.  Global variables, such as record high international prices 
for wheat have led to higher bread prices and public protests.  Both 
private observers and GOE officials, while concerned about public 
discontent, do not believe it will become unmanageable. 
 
--------------------------------------------- ------- 
Inflation Trending Down, but Food Prices Jump during Ramadan 
--------------------------------------------- ------- 
 
¶2.  (U) Egypt's inflation rate began to decline over the summer, 
after peaking at 12% y-o-y in March 2007.  The rate decreased to 8% 
y-o-y in July, and remained relatively steady at 8.4% y-o-y in 
August.  The decline bears out the Central Bank's claim that the 
steep rise in inflation in the early months of 2007 was pass-through 
from the 2006 Avian Influenza outbreak and fuel subsidy adjustments 
(Ref. A). But inflation ticked up again with the start of Ramadan on 
September 13.  By the end of September, the monthly inflation rate 
had reached 10.5% y-o-y, and food prices had jumped dramatically, by 
16.4% y-o-y. 
 
¶3.  (U) Some of the up-tick can be attributed to a new CPI unveiled 
in early September.  The new index, developed with assistance from 
the U.S. Bureau of Labor Statistic and the IMF, adds new items to 
the consumer basket, adjusts the weighting of items, including food, 
beverages and housing, and uses new methodology to calculate the 
inflation rate.  The new index is based on a 2004/2005 Household 
Income and Expenditure Survey.  Some analysts were surprise that 
September's overall inflation rate (10.5%) did not increase more 
with introduction of the new CPI.  The last time the GOE updated the 
CPI, in July 2004 (using a 1999/2000 Household Income and 
Expenditure Survey as the base year), inflation jumped from 4.4% in 
June 2004 to 17% in July 2004.  The IMF projects inflation in the 
6-9% range in the coming year, as Egypt's economic recovery 
continues and the GOE carries through with planned energy subsidy 
reductions. 
 
-------------------- 
The "Ramadan Effect" 
-------------------- 
 
¶4.  (U) While the increase in overall inflation from August to 
September was less than some expected, the 16.4% y-o-y increase in 
food prices in September was right in line with predictions for 
Ramadan.  Last year saw an 11.8% y-o-y increase in overall inflation 
and a 15.1% increase in food prices in October, the month in which 
most of Ramadan fell.  Average food inflation was for all of 2006 
was 10%.  According to a study by the Institute of National Planning 
(INP), family expenditure on basic foodstuffs increases on average 
30% during Ramadan, due to higher consumption (despite daily 
fasting) and higher food prices.  The INP researchers noted that 
both wholesalers and retailers take advantage of higher consumption 
and consumer expectation of higher costs to increase prices beyond 
reasonable profit margins.  Many suppliers and shopkeepers begin 
raising prices by up to 50% even before the start Ramadan. 
 
¶5.  (U) In addition to price gouging by wholesalers and retailers, 
local economists attribute some of the exaggerated price increases 
in Ramadan to lack of proper regulation of the food supply chain. 
Many wholesalers are not licensed, and engage in anti-competitive 
practices, such as hoarding supplies.  Shopkeepers and even some 
individuals also hoard supplies, waiting for prices to increase 
before selling their stockpiles.  In chronicling the annual Ramadan 
inflation, the media is full of reports of retailers blaming 
increases on suppliers, and vice versa.  Neither sector is subject 
to consistent regulatory supervision, as Egypt lacks developed 
consumer protection mechanisms, and the nascent Egyptian Competition 
Authority (ECA) only investigates anti-competitive practices if a 
complaint is filed. 
 
¶6.  (U) Hany Kadry, Advisor to the Minister of Finance, told econoff 
that lack of an organized consumer sector is a major factor in price 
increases during Ramadan.  Passive Egyptian consumers believe the 
government should control prices, and are unwilling to organize and 
make the annual price gouging unprofitable for the seller.  Most 
consumers are unwilling to return even defective or spoiled items, 
as store-owners don't accept returns at all, even for 
defective/spoiled merchandise.  Suppliers and retailers are also 
aware that consumers do not expect prices to decrease after Ramadan, 
so post-Ramadan prices remain at the higher levels reached during 
Ramadan.  Kadry estimated that this "Ramadan effect" could go on 
indefinitely, until consumers are "no longer able to consume."  But 
as long as the GOE provides a minimal annual public sector wage 
increase, most Egyptian families will be able to absorb the higher 
food prices through a combination of product substitution and "doing 
without," according to Kadry. 
 
---------------------- 
The Usual GOE Response 
---------------------- 
 
¶7.  (U) This year, the GOE went through the usual motions in 
responding to Ramadan price increases, discussing the topic in 
Cabinet meetings, and calling for stricter control of markets, 
according to press reports.  Even President Mubarak mentioned 
bringing inflation under control in his annual speech on October 6, 
the anniversary of the 1973 Yom Kippur War.  Unlike in past years, 
however, the GOE did not call for voluntary price restraints or 
issue price guidelines, as this has proved completely ineffective in 
the past.  Though the GOE has provided no substantive policy 
statements of how markets should be regulated, the government did 
set up some public markets/distribution points selling basic goods 
at pre-Ramadan prices.  These distribution centers are not 
particularly well targeted, however, so middle income consumers can 
benefit as well as the poor. 
 
------------------------------------- 
International Factors Affecting Egypt 
------------------------------------- 
 
¶8.  (U) In the months leading up to Ramadan, increases in 
international commodity prices, including wheat, corn and edible 
oils, also began affecting the prices of staple items in Egypt, 
bread in particular.  In August, bread prices rose by 42%.  The GOE 
allocated an additional LE 4.7 billion ($836 million) for bread 
subsidies (the original allocation in the FY 2006/07 was LE 7.3 
billion or $1.2 billion) in response to the shortage, and has 
indicated it may allocate even more.  The GOE did nothing, however, 
to alter the method of subsidization.  Subsidized flour is provided 
to bakeries, which often re-sell the flour at market prices, rather 
than making low-cost bread for the poor (Ref. B). 
 
¶9.  (U) The increase in bread prices is reaching a crisis point in 
some areas of Egypt.  Some analysts believe the crisis exacerbated 
recent protests by textile workers at one of Egypt's largest 
state-owned factories in the Nile Delta city of Mehalla El Kubra 
(Ref. C).  Press reports indicated that many protesting textile 
workers were holding grocery store receipts to demonstrate the 
difficulties brought on by low/unpaid wages.  The protesters 
succeeded in obtaining a 7% wage increase, which may lead to other 
strikes by workers from publicly-owned enterprises demanding wage 
increases in line with inflation rates (Ref. D). 
 
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Private and Government Observers Concerned, Somewhat 
--------------------------------------------- ------- 
 
¶10.  (SBU) Naglaa Azzam, a professor of sociology at Cairo 
University, told econoff that this year's bout of Ramadan inflation 
has strained the GOE's already tense relationship with the Egyptian 
people.  But public discontent and disconnection with the government 
is not likely to spill over into civil disturbances, according to 
Azzam.  Instead, Azzam believes the public will bottle up its 
frustrations, as it always does.  Her views were echoed by Ahmed 
Abulzeid, Assistant Minister of Investment, who told econoff that he 
believes that even with the new CPI index, inflation figures are 
still understated.  But public discontent will not become a 
"revolution," as the GOE will, in the short run, meet the minimum 
demands of the public.  He feared, however, that protests such as 
those in Mehalla El Kubra could become more violent, leading to more 
violent government crackdowns, as the GOE values domestic 
tranquility above all else. 
 
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Comment 
------- 
 
¶11.  (U) Although Egyptian consumers look to the government to 
control prices, the GOE appears less inclined than in the past to 
intervene in the market and impose even voluntary price controls. 
One of the long term benefits of economic growth is the appearance 
of new producers and retailers, whose additional competition in the 
marketplace should drive prices down.  Unfortunately, Egypt's 
impressive economic growth rate has not yet brought about this 
result.  For the foreseeable future, consuming, one of the major 
activities of Ramadan, will still be hard on the average Egyptian's 
pocketbook. 
JONES