VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #0932/01 1261516
ZNR UUUUU ZZH
R 051516Z MAY 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 9170
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0400

UNCLAS CAIRO 000932 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA AND EEB/TPP/ABT/ATP JANET SPECK 
USAID FOR ANE/MEA MCCLOUD AND RILEY 
TREASURY FOR MATHIASON AND CONNOLLY 
COMMERCE FOR 4520/ITA/ANESA/OBERG 
 
E.O. 12958:  N/A 
TAGS: ECON EAGR EAID EFIN EINV ELAB PGOV EG
SUBJECT:  RESPONSE:  IMPACT OF RISING FOOD/COMMODITY PRICES - EGYPT 
 
Refs:  State 39410 
        Cairo 150 
   Cairo 152 
   Cairo 282 
   Cairo 530 
   Cairo 536 
   Cairo 587 
   Cairo 621 
   Cairo 697 
   Cairo 715 
   Cairo 724 
   Cairo 779 
 
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SUMMARY 
------- 
 
¶1.  (SBU) Rising global food prices are hitting Egypt's poor hard 
and are the major contributor to stubbornly high inflation (14.4% 
y-o-y in March).  Past episodes of rising food prices (e.g., 
2003-05) pushed Egypt's poverty rate up, and some fear this is 
happening again now.  Almost every international media report on the 
global food crisis mentions Egypt's bread lines.  The bread lines, 
however, are less an indication of scarcity than of corrupt leakages 
in a bread subsidy system that does not really target the poor.  The 
economic reformers in the GOE responsible for Egypt's 7% growth rate 
recognize that market-distorting subsidies are ineffective in 
combating poverty.  But the GOE can not change the subsidy system at 
a time of high global food prices.  Fear of change is too powerful 
among the population, and reform of the subsidy system at such a 
volatile moment could lead to more of the social unrest Egypt has 
seen in the past few months.  End summary. 
 
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DEMAND 
------ 
 
¶2.  (U) With a growing population and 7% economic growth, food 
demand has been and is expected to remain strong.  Wheat, corn, 
sugar, beans, rice and vegetable oil are the most important staple 
commodities consumed in Egypt.  Egypt is a net importer of all these 
commodities except for rice, which Egypt traditionally exports.  The 
import/local production ratio for wheat and corn are about 50/50, 
sugar is about 40/60 and beans are about 30/70.  Egypt is almost 
completely dependent on imports of cooking oil, importing palm and 
sunflower oil, as well as corn and soybeans, which are processed 
locally to make oil and also used as animal feed. 
 
¶3.  (SBU) As a net food importer, Egypt's domestic prices have risen 
in tandem with international commodity prices.  Egypt's Central 
Agency for Public Mobilization and Statistics (CAPMAS) reports that 
the price of the average consumer food/beverage basket rose 24% from 
March 2007 to March 2008, 27% in rural areas.  Individual items 
exhibited even greater increases, with vegetable oil and bread up 
45% and 48%, respectively.  Though CAPMAS's statistical methods have 
improved recently, data may still substantially underestimate actual 
price increases for certain staple goods.  Informal surveys by FAS, 
for example, indicate that consumer-ready retail flour and rice 
prices more than doubled in the past year and retail vegetable oil 
prices have almost tripled. 
 
¶4.  (SBU) When wheat/flour prices began to accelerate in early 2007, 
consumers began switching to rice.  But as rice prices then 
skyrocketed as well, the rice-wheat flour substitution trend abated. 
 As global vegetable oil prices rose, imports of palm oil were down, 
but this was mainly due to a decision by Malaysia - Egypt's 
traditional supplier - to meet commitments to other buyers first. 
Declining palm oil imports were offset by increased soybean and corn 
imports.  Flour/bread is the foundation of the Egyptian diet, and 
total demand remains firm.  With higher wheat prices, however, 
demand for price-controlled or "subsidized" bread has increased as 
market prices of unsubsidized bread have risen.  Low income 
consumers, who were once able to afford occasional purchases of 
unsubsidized bread, now increasingly opt to buy lower quality 
subsidized bread.  Anecdotal evidence indicates that leakages of 
subsidized bread for use as animal feed also increased as market 
prices of normal feed rose. 
 
------ 
SUPPLY 
------ 
 
¶5.  (U) While it is premature to forecast with any specificity, 
reports suggest that Egypt's wheat farmers are increasing area 
devoted to wheat.  The General Authority for Supply of Commodities 
(GASC) is the central authority for domestic procurement and 
importation of wheat.  To attempt to reward local producers for the 
higher international prices, the guaranteed price GASC pays farmers 
was increased to $466/ton for the current harvest season (which will 
begin in May), more than double the previous crop year, but still 
hundreds of dollars below international prices.  Several large land 
reclamation projects are being brought into production, but Egypt 
lacks the productive land and water resources necessary to expand 
domestic production in any meaningful way.  Higher fuel and 
fertilizer costs are also taking a toll on Egypt's ability to 
provide an adequate supply response.  The overriding constraint on 
increased production, however, continues to be lack of sufficient 
land and water, a problem that has plagued Egypt since ancient 
times. 
 
¶6.  (SBU) GASC's stated policy is to maintain a six-month supply of 
wheat and, even as prices have risen dramatically, GASC and private 
importers have been able to acquire adequate supplies on the 
international market to meet this goal.  Recently, however, GASC has 
held on average only about 2 months of stocks, including "pipeline" 
stocks, or product in-transit.  With the sharp increase in prices, 
wheat is simply too expensive for GASC to maintain a large 
inventory. 
 
¶7.  (U) Egypt usually produces a surplus of rice, exporting about 1 
million tons per year.  But when local rice prices increased from 
about $450/ton to $750/ton in April 2008, Egypt banned rice exports 
to ensure that sufficient supplies remain in the domestic market. 
 
--------------- 
ECONOMIC IMPACT 
--------------- 
 
¶8.  (SBU) The increase in wheat prices exposed and exacerbated 
inefficiencies and corruption in Egypt's subsidized flour/bread 
supply and distribution system.  Every consumer in Egypt is eligible 
to buy subsidized bread at about $.01 per flat, round "loaf."  As 
world prices rose, the difference between subsidized flour and 
non-subsidized flour prices increased commensurately, leading to an 
increase in numbers of millers and bakers willing to illegally sell 
their quota of subsidized flour on the black market.  This practice, 
combined with greater demand from consumers opting for subsidized 
bread rather than higher quality, more expensive bread, led to long 
lines at public bakeries.  Anxiety over long bread lines resulted in 
media reports of bread "shortages."  However, the lines were less 
the result of short supplies than of diversion of subsidized flour 
to the black market and precautionary purchases ("hoarding"). 
 
¶9.  (U) Food prices are the driving force behind inflation in Egypt, 
although rising prices for construction materials are also a 
significant factor.  High food prices have been manageable within 
Egypt's balance of payments, as a capital account surplus from 
strong investment inflows offsets the widening trade deficit. 
However, the increased cost of food subsidies (along with energy 
subsidies) will make it impossible for the GOE to meet its goal of 
reducing the deficit from 7% currently to 4% by 2011.  The FY 
2007/08 budget for food subsidies stands at LE 20 billion ($3.7 
billion), a 33% increase over FY 2006/07.  The GOE also recently 
announced plan to add some 15 million people to the ration-card 
system in place since the 1950s.  The currently strong economic 
growth, which reached 7% this fiscal year, is expected to continue. 
 
¶10.  (U) Inflation disproportionately affects the poor, and food 
prices disproportionately affect the poorest.  World Bank (WB) 
analysis of the 2005 Household Income and Expenditure Survey (HIES), 
the best information available to date, estimates that some 3.8% of 
Egypt's population was so poor in 2005 (spending under $1/day) that 
their entire income was not enough for an adequate diet.  Another 
15.8% of the population was poor enough that scrimping on food for 
other needs probably left them with inadequate diets, making a total 
of 19.6% of the population that was hungry as of 2005.  As noted 
above, the GOE's subsidized bread distribution does not target this 
group:  subsidized bread is available to everyone and the very poor 
are often not reached.  According to the WB, Egypt's poor spend 
approximately 45% of their income on food. 
 
¶11.  (U) The WB blames a previous round of food price increases 
after 2003 (following the devaluation of the Egyptian Pound against 
the U.S. Dollar), along with the failure of the bread distribution 
system to target the poor, for increasing the proportion of the 
population that is very poor from 2.9% in 2000 to 3.8% in 2005.  The 
"scrimping" group also grew from 13.8% of the population in 2000 to 
15.8% in 2005, for a total increase of 2.9% in the share of the 
population that was hungry (16.7% to 19.6%).  A similar increase is 
presumably occurring now, although we must await a fresh HIES survey 
to measure accurately.  The GOE plans to accelerate HIES surveys 
from once every five years to one every second year. 
 
¶12.  (U) The impact of higher food prices reaches higher income 
levels as well, but economic growth has mitigated the impact for 
those with more income.  The 2005 HIES data found a reduction in the 
"near poor" (the non-poor with incomes below about $2/day) from 
25.9% of the population in 2000 to 21.0% in 2005.  The increase in 
economic well-being for middle income earners stems from better job 
opportunities, which outweighed the impact of higher food prices 
after 2003.  As economic growth has accelerated since 2005, this 
affect is likely to have strengthened as well.  Fruit and vegetable 
farmers are benefiting somewhat from high prices, as they can now 
sell domestically at international prices.  Grain farmers, however, 
depend partly on GASC's purchase prices.  Although higher now, 
GASC's prices are still lower than international prices. 
 
---------------- 
POLITICAL IMPACT 
---------------- 
 
¶13.  (SBU) Sporadic violence has broken out in bread lines at public 
bakeries, killing eleven people over the past few months.  Public 
frustration over the bread crisis and spiraling food prices have 
become intermingled with labor unrest, mainly dissatisfaction with 
low wages and lack of action by government-controlled labor unions. 
Participants in recent demonstrations in the textile factory town of 
Mahalla for higher wages were confronted by security forces and 
turned violent.  Opposition parties and also many members of the NDP 
in parliament have called for greater government action to control 
food prices.  In his Labor Day speech, President Mubarak announced a 
30% increase in base public sector wages, and had previously ordered 
the Cabinet to find funds in the budget to increase subsidy 
expenditures. 
 
--------------------------- 
GOVERNMENT POLICY RESPONSE 
--------------------------- 
 
¶14.  (U) In addition to banning rice exports, the GOE lowered duties 
on vegetable oil and dairy products.  Duties on bulk commodities 
(corn, soybeans, wheat) were already zero.  Egypt and Syria usually 
sign an annual rice/wheat barter deal.  However, with Egypt's ban on 
rice exports and concerns that Syria's wheat crop may be well below 
average this year, this traditional barter deal may not go through 
in 2008/09.  The Central Bank raised interest rates several times 
over the last few months in an attempt to control inflation, but 
this has not been very successful.  Substantial liquidity from Gulf 
oil money prevents interest rate increases from dampening inflation. 
 
 
¶15.  (U) To control corruption, the GOE has ordered the separation 
of bread production from distribution.  Public bakeries receiving a 
quota of subsidized flour are now required to deliver a quota of 
subsidized bread at distinct distribution centers.  The GOE also 
directed police and military bakeries to produce and distribute 
subsidized bread for the general public.  Reports of bread lines 
have subsided somewhat since implementation of these measures. 
 
¶16.   (U) In addition to subsidized bread, which is available to 
anyone, the GOE provides ration cards for about 11.1 million people 
and plans to add another 15 million soon, as noted above, bringing 
the total to nearly one-third of the population.  The program 
provides sugar, edible oil, rice, beans, lentils, and tea to ration 
card holders.  Like the bread subsidy system, however, the ration 
card system does not adequately target the poor and is riddled with 
corruption.  By having goods sold at both a "market price" and a 
"subsidized price" in the same store, the temptation for the store 
owner to sell the subsidized goods at the market price is simply too 
great.  The GOE is attempting to reform the ration card system by 
introducing food subsidy "smart cards," though these are not yet 
widely used, and we have no evidence yet of the cards' success at 
addressing corruption.  The GOE eventually plans to move to a cash 
subsidy system to replace all in-kind programs, but this plan is not 
politically feasible for now. 
 
¶17.  (U) Prior to the steep increase in commodity prices, the 
private sector was assuming an increasing role in imports and the 
GOE was considering elimination of GASC and privatization of all 
wheat procurement and distribution.  The rise in food prices, 
however, led to calls for the GOE to be more active in managing 
inflation, which in turn has stalled efforts to privatize wheat 
imports.  With public calls for the GOE to do more, GASC's role in 
wheat imports is again dominant. 
 
---------------- 
POLICY PROPOSALS 
---------------- 
 
¶18.  (SBU) We support the GOE's plans to move gradually to a cash 
subsidy program that targets the poor and reduces waste and 
corruption.  We recognize, however, that Egypt's culture is 
powerfully resistant to change, so maintaining a broad food safety 
net is unavoidable for the time being.  If the deeply inequitable 
and extremely expensive fuel subsidies continue to be reduced (per 
the recent increase in fuel prices for heavy industrial users), 
Egypt may be able to bear the price of a limited and better targeted 
food subsidy system.  However, the GOE should not derail market 
forces in the bulk of the commercial markets for grains and other 
food commodities.  Cost-reducing investments, including 
rationalization in use of land and water resources and improved 
irrigation methods, are also critical to increasing agricultural 
production in cost-effective manner. 
SCOBEY