VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #0530/01 0771200
ZNR UUUUU ZZH
R 171200Z MAR 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 8567
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0390

UNCLAS CAIRO 000530 
 
SIPDIS 
 
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 EG
SUBJECT:  INFLATION REACHES 12.1% IN FEBRUARY 
 
REF:  A. Cairo 282  B. Cairo 330 
 
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Summary 
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¶1.  (U) Inflation surged to 12.1% year-on-year (y-on-y) in February, 
up from 10.5% y-o-y in January.  Food prices led the rise, 
reflecting rising global food prices.  Local analysts believe the 
Central Bank will raise interest rates again this month, but predict 
that greater exchange rate flexibility may also be needed to control 
inflation.  The GOE increased its allocation for food subsidies, but 
bread prices continue to rise, caused by shortages of subsidized 
bread at public bakeries.  Residents of the Nile Delta town of 
Mahalla told us that they were not enthusiastic about joining 
workers from the local textile mill in demonstrations over high 
prices, preferring instead to seek work overseas. 
 
----------------- 
Inflation Surges 
----------------- 
 
¶2.  (U) Egypt's inflation rate surged to 12.1% y-o-y in February, up 
from 10.5% y-o-y in January, according to the GOE's Central Agency 
for Public Mobilization and Statistics.  February's rate is the 
highest since April 2007, when inflation peaked at 12.6% y-o-y. 
Food, which constitutes 40% of Egypt's consumer basket, continued to 
drive inflation.  Food prices rose 16.8% y-o-y in February, up from 
16.2% y-o-y in January.  Edible oil led the way, surging 39.8% 
y-o-y, from 26.4% y-o-y in January.  Bread and grains followed, 
rising 26.5% y-o-y, though this was down from 34.9% y-o-y in 
January.  According to a report by EFG-Hermes, Egypt's largest 
investment bank, the rise in edible oil and bread prices is mainly 
driven by high international prices for palm oil and wheat, which 
jumped 70% in 2007. 
 
¶3.  (U) The Central Bank's Monetary Policy Committee (MPC) will meet 
March 20, and local analysts are predicting an interest rate 
increase of about 75 basis points.  The MPC raised rates 25 basis 
points at its last meeting in early February (ref A).  Analysts are 
skeptical, however, that another interest rate hike will control 
Egypt's inflation, given weak monetary policy transmission 
mechanisms between the Central Bank and the rest of the financial 
system, and excess liquidity in banks.  If rate hikes do not halt 
inflation, EFG-Hermes predicts the Central Bank may be forced to 
allow greater exchange rate flexibility, which would likely lead to 
lower import prices. 
 
----------------------------------- 
Bread Prices Rise Despite Subsidies 
----------------------------------- 
 
¶4.  (U) The GOE continues to use subsidy spending to keep domestic 
food prices low.  Parliament increased the allocation for food 
subsidies by LE 4.7 billion ($840 million) in February (ref B), 
bring the total food subsidy bill for FY 2007/08 to LE 14.4 billion 
($2.5 billion).  The official price for one piece of subsidized 
bread is still 5 piasters ($.01), though recent press reports claim 
that the government is considering raising the subsidized price. 
Despite the subsidies, bread prices continue to rise, driven by 
shortages of the subsidized bread at public bakeries.  Public 
bakeries produce limited amounts of subsidized bread, using only 
part of their government-allotted quota of subsidized flour and 
selling the rest on the black market.  Buyers unable to buy 
subsidized bread at public bakeries - often after standing in line 
for several hours - are forced to turn to private bakeries, which 
charge up to 25 piasters/piece. 
 
---------------------------- 
Unrest and Apathy in Mahalla 
---------------------------- 
 
¶5.  (U) We recently visited the main food market in the Nile delta 
town of Mahalla, scene of wildcat labor strikes in 2007 and 
demonstrations in January and February against rising prices. 
Prices in the market were roughly equivalent to those in Cairo's 
markets.  Low-grade cooking oil was selling for LE 9.50 
($1.72)/liter, up from the LE 8 ($1.45), observed during out last 
visit to a Cairo market in mid-February.  A kilo of pasta was LE 4 
($.72)/kilo, up from LE 3.5 ($.63), lentils were LE 8 ($1.45)/kilo, 
up from LE 7.20 ($1.30), and beans were LE 7 (1.27)/kilo, up from LE 
6.30($1.14).  Butchers told us the price of meat has held steady at 
LE 13.80 ($2.50)/kilo since the major Muslim holiday Eid al Adha in 
December 2007. 
 
¶6.  (U) At a public bakery, we saw a familiar scene of approximately 
20-30 people standing in gender-segregated lines, waiting to buy 
subsidized bread.  Buyers told us the bakery sells a maximum of 20 
pieces of bread per person at the subsidized rate.  Fights over 
bread sometimes break out, according to one buyer, especially toward 
the bakery's closing time, usually 2-3 hours after opening.  Despite 
the prospect of standing in line for hours and coming up 
empty-handed, he said he understood why bakeries sell their allotted 
bags of subsidized flour on the black market.  "I would do the 
same," he said.  The subsidized bread in Mahalla was of noticeably 
better quality than the bread we observed at public bakeries in 
Cairo. 
 
¶7.  (U) Many buyers in the Mahalla market told us they were aware of 
the recent protests over rising prices, but had not participated. 
Only workers at the textile mill are willing to demonstrate, they 
said.  The workers are convinced the government is now afraid of 
them, and they can accomplish anything by demonstrating.  The rest 
of the people in town, however, do not believe protesting will do 
any good, one poultry vendor told us.  He cited government 
corruption as the most important problem in Egypt, worse than 
inflation.  He was especially critical of privatization, saying it 
was increasing poverty and destroying the middle class.  Several of 
the people we spoke to said they were planning to seek work abroad, 
or had family members who were planning to do so.  Libya was most 
often cited as the destination. 
RICCIARDONE