VZCZCXYZ0007
RR RUEHWEB

DE RUEHEG #0152/01 0291147
ZNR UUUUU ZZH
R 291147Z JAN 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 7998
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0375

UNCLAS CAIRO 000152 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA AND EEB/IDF 
USAID FOR ANE/MEA MCCLOUD AND DUNN 
TREASURY FOR MATHIASON AND CONNOLLY 
COMMERCE FOR 4520/ITA/ANESA/OBERG 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN KLAB EG
SUBJECT:  RISING ANXIETY ABOUT PRICE INCREASES:  Part II 
 
REF:  A. Cairo 0150   B. 07 Cairo 3021   C. 07 Cairo 3097 
 
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Summary 
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¶1.  (U) Rising food prices have led to demonstrations and pessimism 
among the poor, but official data show inflation within a reasonable 
range, given current economic growth.  Most analysts believe the 
official figures do not capture the full picture, particularly as 
the poor are hurt most by rising food prices, as they spend more of 
their income on food.  The Central Bank kept interest rates 
unchanged at its last Monetary Policy Committee meeting, but the GOE 
is taking some measures to control prices.  The Ministry of Trade 
and Industry announced export fees on rice, and the Ministry of 
Social Solidarity continues to declare its intention to reform the 
corrupt bread subsidy system.  On a trip to local markets in poor 
neighborhoods, we found buyers able to afford less food than normal, 
and voicing concerns about feeding their families.  The real 
problems seem to be wages not keeping pace with rising prices and 
the still-high unemployment/underemployment rate.  These problems 
exacerbate the difficulties of the 45% of Egyptians - some 36 
million people - living on less than $2 dollars per day. 
 
------------------------------------- 
GOE Maintains Inflation Under Control 
------------------------------------- 
 
¶2.  (U) In contrast to the views of angry demonstrators protesting 
price increases (Ref A), GOE officials maintain that Egypt's 
inflation rate is within an acceptable range, given the current 6.9% 
level of economic growth.  The official government inflation rate 
was 6.87% year-on-year (y-o-y) in November 2007, and 6.94% y-o-y in 
December, well below the peak of 13% y-o-y in March 2007.  Food 
inflation was 8.5% y-o-y in November and 8.6% y-o-y in December, 
well below the peak of 16.4% y-o-y in September 2007, when Ramadan 
began (Ref B).  Central Bank officials maintain that inflationary 
pressure does not warrant a hike in interest rates.  At its Monetary 
Policy Committee meeting in December 2007, the Central Bank kept 
rates unchanged at 8.75% (deposit) and 10.75% (lending), where they 
have been since December 2006.  In public and private meetings, GOE 
economic officials assert that maintaining economic growth is more 
important than controlling inflation.  An increase in interest rates 
would slow growth at a crucial moment, just as the economy is 
starting to create jobs, according to officials. 
 
------------------------------- 
Some Measures to Control Prices 
------------------------------- 
 
¶3.  (U) Most analysts believe the official data do not capture the 
whole picture, and certainly do not capture the higher burden of 
rising prices on the poor, who spend more of their income on food. 
In response to rising prices, the GOE has taken some measures to 
control prices of the most basic commodities, those the measures 
often have unintended consequences.  For example, in early January 
the Ministry of Trade and Industry announced that it would impose 
export fees on rice to increase the domestic supply.  The Rice 
Exporters Association voluntarily suspended rice exports starting 
January 19, when prices of rice reached LE 4 ($.75) per kilo, about 
30% higher than the same time last year.  In a public statement, the 
Association said it hoped that suspending rice exports would lead 
traders to release more rice into the domestic market, easing prices 
or at least stopping the increase.  While this step may keep more 
rice in domestic circulation, it has negative consequences for 
producers trying to sell their product overseas. 
 
¶4.  (U) Minister of Social Solidarity Ali Al Moselhi has made 
several public statements indicating an intention to reform the 
corrupt bread subsidy system.  Subsidized bread, which costs 5 
piastres ($.01)/piece at official bakeries, is the mainstay of the 
diet of poor Egyptians, and therefore the most sensitive commodity. 
Recent press reports have described long lines subsidized bread at 
public bakeries, with many would-be buyers turned away when the 
bread runs out.  Buyers are then forced to purchase bread at private 
bakeries where the prices average five times more at 25 piastres 
($.05) per loaf. 
 
¶5.  (SBU) In December 2007, the USAID Mission Director and Deputy 
Director met with Moselhi, who described multiple "mafia-like" 
operations embedded in every level of the subsidized bread market. 
Currently public bakeries buy flour from the GOE at subsidized rates 
of LE 90 ($16) per 100 kilo sack.  These bakeries are supposed to 
use the flour to make low-cost bread.  But as the worldwide increase 
in wheat prices has hit Egypt, a black market for flour has 
developed.  Public bakeries can sell the same size sack of 
subsidized flour for up to LE 210 ($38) on the black market.  Al 
Moselhi painted a very grim picture of the social controls and 
intimidation that make reforming this corrupt system difficult.  He 
has not given details of how he intends to address the problem, but 
on a broader level, the GOE has publicly discussed replacing in kind 
subsidies with a monetary transfer based on need.  In doing so, the 
GOE is trying to eliminate the price distorting effects and 
resulting parallel market created by its current subsidy system. 
 
¶6.  (U) On a trip to a market in one of Cairo's poorest 
neighborhoods, one group of women described how sacks of flour are 
sold at public bakeries "right in front of our eyes."  The bakers 
then claim that they have run out of flour and can not produce more 
low-cost bread.  Most public bakeries run out of bread and close for 
the day within one hour of opening in the morning, according to the 
women.  A baker at a private bakery told us that business is 
booming, as customers who would have bought bread at public bakeries 
are now coming to his.  He admitted to buying flour from black 
marketers, claiming that they are often the only suppliers.  Since 
his costs have increased, he's begun making smaller pieces of bread, 
to avoid raising prices higher than buyers can afford. 
 
------------------------- 
More at the Local Markets 
------------------------- 
 
¶7.  (U) We were also told by buyers at the local market that high 
prices are forcing them to purchase smaller quantities of basic 
commodities.  One woman said she would normally buy one kilo of 
potatoes for LE 2.50 ($.46), but now she can only afford one half 
kilo, as prices have doubled to LE 3.20 ($.59) per kilo.  A meat 
vendor told us that he has to charge LE 18 ($3.33) for one kilo of 
meat, up from LE 15 ($2.77) one week ago, because of rising 
transportation costs for the cattle ranchers bring the animals to 
market.  The butcher said his customers have begun purchasing less 
meat than normal, about two-thirds less in most cases.  One woman 
selling rice, pasta and beans said that her sales have been way 
down, and she fears she will have to close her stall soon, as it 
will no longer be profitable. 
 
¶8.  (U) At a wholesale market outside of Cairo, wholesalers told us 
that supplies of fruit and vegetables are down, as many farmers are 
selling their crops to exporters.  Rising world prices make 
exporting more lucrative than selling domestically.  Another group 
of wholesalers told us that farmers were also charging higher prices 
than normal, claiming that fertilizer prices had gone up.  A black 
market has emerged for fertilizer, according to the wholesalers, 
with farmers buying fertilizer from agricultural cooperatives for LE 
30 ($5.55) per 100 kilo bag and selling the same size bag at LE 200 
($37).  Eggplant sellers claimed business has slowed dramatically. 
Eggplant is a staple of the Egyptian diet, but requires oil for 
cooking.  Edible oil prices have gone up 50% in the past two weeks, 
from LE 3.50 ($.64) per liter to LE 7.75 ($1.43). 
 
¶9.  (U) One woman who buys fruits and vegetables at the wholesale 
market and then sells them on the street in Cairo told us that she 
has not been able to afford buying wholesale for the last two weeks. 
 When wholesale prices first began to rise, she purchased at the 
higher price, but could not sell her purchases on the street. 
Buyers accused her of greed, saying she was charging higher prices 
simply to make more money, not to cover increased costs.  So she 
stopped buying, but still goes to the wholesale market daily, hoping 
prices will come down.  Making a gesture showing a noose around her 
neck, the woman said that people are slowly dying, and they don't 
know how to feed their families, or what the future will bring. 
 
¶10.  (U) All of the people we talked to believed that it was the 
government's responsibility to control prices.  Though many of the 
vendors in the markets were illiterate, most were familiar with the 
GOE's privatization program, and claimed that the sale of public 
companies was just another way for the rich to get richer.  One 
vendor also mentioned the ongoing cement collusion case (Ref C), 
claiming that collusion among suppliers was the main cause of high 
prices, as suppliers were speculating by withholding supplies in 
anticipation of increased prices.  Although many believe that the 
government should do something about prices, none believed that it 
would.  They were uniformly pessimistic about the future, worrying 
that they would soon not be able to feed their families. 
 
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Comment 
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¶11.  (SBU) The government's claim that inflation is within a 
reasonable range does not take into consideration the real cause of 
Egyptian woes:  wages not keeping pace with prices and high 
unemployment and underemployment.  While there is some anecdotal 
evidence of higher wages in the booming construction sector, a 
recent World Bank report indicated that 45% of Egypt's population 
subsists on less than $2 per day.  Egypt's economic growth has still 
not produced the number of new jobs needed to bring down 
unemployment, which officially stands at 9%.  While the 9% figure is 
down somewhat from 10.5% in 2004, most analysts believe it is 
underestimated. 
 
¶12.  (SBU) As noted in Ref A, the GOE will no doubt continue its 
public campaign to convince Egyptians that it is focused on "social 
justice" and ameliorating poverty.  While the GOE has talked about 
reforming and retargeting the food subsidy program, little progress 
has been made, and the discussion has largely served to confuse and 
further worry Egypt's poor.  In addressing the real problem of 
creating pro-poor growth and jobs for the middle and lower classes, 
GOE plans lack any specificity at all.  The GOE may face more 
demonstrations over high prices if it cannot demonstrate some quick 
wins. 
JONES