VZCZCXYZ0004
PP RUEHWEB

DE RUEHEG #0047/01 0121013
ZNR UUUUU ZZH
P 121013Z JAN 09
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 1331
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS CAIRO 000047 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR NEA/ELA 
TREASURY FOR BRYAN BALIN AND FRANCISCO PARODI 
 
E.O. 12958: N/A 
TAGS: ECON EAID EFIN EINV PGOV PREL EG
SUBJECT: EGYPT: FOOD SUBSIDY REFORM UNLIKELY 
 
REF: A. 08 CAIRO 587 
     ¶B. 08 CAIRO 2279 
     ¶C. 08 CAIRO 1863 
 
------- 
Summary 
------- 
 
¶1. (U) Subsidy reform in Egypt is politically charged.  Most 
attempts to change decades-old programs have been met with 
fierce public opposition and occasional demonstrations.  The 
GOE has been largely unsuccessful at targeting subsidy 
programs, and repeated studies have shown that only a 
fraction of the amount spent on subsidies benefits the 
neediest of the poor.  Fuel subsidies, which tend to benefit 
wealthier Egyptians, amount to over US$11 billion a year 
(septel).  Many of the reformers in the government of 
Egyptian Prime Minister Nazif have acknowledged the problem 
of a bloated subsidy budget, the negative impact on the GOE 
fiscal situation over the long term, and the economic 
distortions that subsidies have caused. They also admit that 
changes to programs that most Egyptians have grown to rely on 
for their basic needs will be difficult.  The GOE has made 
some moves to make subsidy delivery more efficient, but at 
the same time it has actually expanded the base of subsidy 
recipients.  In the past fiscal year, the direct cost of food 
subsidies alone was over US$3 billion, and the indirect costs 
of the massive subsidy infrastructure, which employs hundreds 
of thousands of people, are unknown. 
 
¶2. (U) Egyptian President Hosni Mubarak has called for a 
public dialogue to improve the subsidy program, but there has 
been very little follow up. GOE officials are working on ways 
to eliminate some of the massive corruption and waste 
inherent in the current system, but none suggest that full 
scale reform is being seriously discussed.  The global 
economic crisis has further rattled the GOE, making subsidy 
reform even more difficult and less likely in the near term. 
End Summary. 
 
------------------ 
Food Subsidies 101 
------------------ 
 
¶3. (U) The GOE has two main programs to supply subsidized 
food to Egyptians: the subsidized bread program and the 
ration card program. The subsidized bread program provides 
loaves of flat "baladi" bread to the public at 5 piasters 
(slightly less than 1 US cent) per loaf.  Bread is baked and 
distributed through a vast network of government millers, 
bakeries, and stores. The subsidized bread program is not 
targeted, and anyone can purchase the loaves.  The price of 
"baladi" bread has remained unchanged for decades (though the 
government has occasionally changed the size of the loaves), 
and attempts to alter the bread program have been met with 
fierce opposition and occasional violence, including the 
infamous 1977 "bread riots." 
 
¶4. (SBU) In March 2008, a bread supply shortage prompted the 
GOE to call out the military to help bake and distribute 
bread. (reftel A).  The subsidized bread program is 
notoriously corrupt and inefficient. Because the government 
is involved throughout the supply chain, there are ample 
opportunities for leakage from the system.  Wheat and flour 
are stolen at a number of points in the chain and there is 
very little accountability.  Worse still, there have been 
numerous reports of "baladi" bread being used to feed animals 
since it is cheaper than commercial feed.  Officials from the 
Ministry of Social Solidarity (MOSS) have told us that they 
estimate 15-20% is lost in the supply chain--the real figure 
is probably much higher. 
 
¶5. (SBU) Egypt is one of the highest per capita consumers of 
wheat and sugar in the world. According to the MOSS, the 
subsidized bread program uses nearly 10 million tons of wheat 
per year and there are more than 20 thousand "baladi" bread 
bakeries producing 220 million loaves of bread per day. In 
very remote villages, rather than bread, the GOE distributes 
flour for household baking, but there are no plans to 
distribute flour to consumers on a more widespread basis. 
 
¶6. (U) The second food subsidy program, the ration card 
program, provides ration cards to low income Egyptian 
families. Under this program, families are entitled to buy a 
monthly quantity of food products (sugar, oil, tea, rice, 
etc.) at subsidized prices.  The food is sold through 
government-owned outlets and the monthly allotment is 
adjusted according to family size. The ration card rolls were 
frozen in 1988, and from 1988 to 2005 no new names were added 
to the ration card list. Under pressure from the public, in 
2008, the GOE added 23 million new names to the ration card 
eligibility list nearly doubling the rolls to 63 million 
people (80% of Egypt's population). 
 
¶7. (U) The GOE has made other incremental changes to the 
ration card program in recent years. To streamline the 
system, an earlier attempt at partial subsidies was 
eliminated in 2007. That same year the GOE standardized the 
allotments to insure equal rations for urban and rural 
populations.  In June 2008, in response to a surge in global 
commodity prices, the GOE put in place a supplemental subsidy 
program to increase the amount of subsidized food to which 
each family was entitled. In 2008, the GOE began a pilot to 
replace paper ration cards with smart cards.  The new "family 
card" has been rolled out to nine governorates and has helped 
the GOE eliminate waste and fraud that accounted for 20% of 
its costs in those governorates (reftel B).  The GOE plans to 
fully convert to the "family card" platform by the end of 
¶2009. 
 
--------------------------------- 
While Economic Costs Are High... 
--------------------------------- 
 
¶8. (U) The food subsidy program is hugely expensive and cost 
the government LE 16.5 billion (US$3.1 billion) in the 
2007-2008 (July-June) fiscal year, nearly six percent of the 
national budget.  The expansion of the ration card rolls in 
2008, coupled with commodity price increases and potential 
economic slowdown have the potential to add to the fiscal 
pressure of the food subsidy program.  At the same time, the 
global economic situation has made the GOE increasingly 
unlikely to tinker with the program.  The GOE is also subject 
to global price increases, since it is a net importer of food 
and the largest importer of wheat in the world. Half of 
Egypt's wheat for subsidies is imported, and virtually all of 
the tea and cooking oil it provides is imported. 
 
--------------------------------------------- 
... Political Costs of Change Are Even Higher 
--------------------------------------------- 
 
¶9. (SBU) Hany Kadry, Deputy Minister of Finance, recently 
told us there was little chance of subsidy reform while the 
country's inflation rate remains high (inflation has been 
running at an average of 20% over the past year).  Kadry also 
said that there was large opposition to a move from an 
in-kind (direct provision of foodstuffs) to a cash transfer 
program. Nonetheless, the GOE goal remains moving to a cash 
transfer program which would be a much more efficient way to 
provide assistance to the poor. He told us that the 
supplemental food subsidy program put in place during the 
commodity price spike in May 2008 would be phased out by the 
end of calendar year 2008. 
 
¶10. (SBU) In a December 22 meeting at the MOSS, three 
advisors to the Minister told us that Egyptian President 
Hosni Mubarak has publicly suggested a possible move to a 
cash transfer program and there is "an open dialogue with the 
public" to evaluate such an initiative, but there were no 
near term plans to move to a cash transfer program. (Note: We 
have seen no evidence of any dialogue or serious planning to 
replace the current ration regime. End note.)  They did tell 
us that there were plans to introduce some market dynamics to 
the "baladi" bread supply chain.  These plans would include 
selling wheat to millers and flour to bakers at market-based 
prices.  The GOE would then purchase the bread and resell it 
at subsidized prices. These plans have not been announced 
publicly, and there is no timeline for these changes. 
 
----------------------------------- 
Comment: Real Reform Appears Remote 
----------------------------------- 
 
¶11. (SBU) The GOE subsidy program is a major drag on the 
fiscal budget. In total, subsidies (including energy, food 
and housing) account for 30% of total public spending. As we 
have reported (reftel C), spending on subsidies far exceeds 
spending on vital social services such as health and 
education.  Officials from the Ministry of Finance have told 
us that the current level of food subsidies, while not 
optimal, is sustainable, and there appears to be no appetite 
to make difficult choices about reform.  The GOE also finds 
itself in a perfect storm of negative sentiment regarding the 
domestic economy. The economy is approaching the tail end of 
an inflationary cycle that has seen some of the highest 
inflation rates in decades.  The effects of the global 
economic slowdown have yet to be fully felt in Egypt, but the 
consensus among analysts is that revenues from exports, 
tourism, worker remittances, the energy sector, and the Suez 
canal will all be lower over the next several years, and 
foreign direct investment is likely to fall as well.  Though 
policy makers in the GOE all acknowledge that subsidy reform 
is necessary and will eventually hae to take place, attempts 
at serious reform have een halting at best--even in good 
economic times  The current macroeconomic environment makes 
analready difficult initiative nearly impossible forthe 
government to sell to the public. 
SCOBEY