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Viewing cable 09CAIRO2007, INFLATION COMING DOWN, BUT PERSISTENT HIGH FOOD

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Reference ID Created Released Classification Origin
09CAIRO2007 2009-10-21 14:44 2011-08-24 16:30 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Cairo
VZCZCXYZ0000
PP RUEHWEB

DE RUEHEG #2007/01 2941444
ZNR UUUUU ZZH
P 211444Z OCT 09
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC PRIORITY 3956
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
UNCLAS CAIRO 002007 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EG PGOV
SUBJECT: INFLATION COMING DOWN, BUT PERSISTENT HIGH FOOD 
PRICES SLOWING THE FALL 
 
REF: CAIRO 001927 
 
1. (U) Key Points: 
 
-- Overall inflation has been falling for most of the year 
and hit a 20-month low of 9% in August; however, food price 
inflation has been very strong all through 2009. 
 
-- The supply chain for food is full of inefficiencies which 
exacerbate high food price problems.  The Government of Egypt 
(GOE) is trying to address some of them by improving 
infrastructure. 
 
-- The Central Bank of Egypt (CBE) seems unconcerned by 
inflation and is focused on spurring economic growth.  The 
CBE has cut interest rates six times so far this year. 
 
-------------------------- 
Food Prices High This Year 
-------------------------- 
 
2. (SBU) Inflation in Egypt has been coming down from its 
peak in summer 2008, but it has fallen at a slower pace than 
economists expected.  The rate reached a 20-month low of 9% 
year-on-year (y-o-y) in August, down from its peak of over 
20% last summer, but then increased to 10.8% in September. 
Food prices were up 17.4% y-o-y in September.  Food price 
inflation has been very strong all through 2009, driven 
mainly by fruit and vegetable prices according to Simon 
Kitchen, Vice President of EFG-Hermes, a regional leading 
investment bank.  In addition, rising global sugar prices 
drove up domestic sugar prices in September, and demand 
during Ramadan drove up food prices over the past few months. 
 Food prices have a strong effect on the overall price index 
because food accounts for about 44% of Egypt's consumer price 
index. 
 
-------------------- 
The "Ramadan Effect" 
-------------------- 
 
3. (SBU) Increased demand pushes up food prices before and 
during Ramadan, which ran from the end of August to the end 
of September, since household spending on food increases 
significantly due to higher overall consumption despite daily 
fasting.  In addition, some wholesalers and retailers take 
advantage of the increased consumption and consumer 
expectations of higher prices by hoarding goods and raising 
prices, according to Amgad Hegazy, an economist at the 
Ministry of Finance.  In September, food prices increased 55% 
on an annualized basis after jumping 64% on an annualized 
basis in August and 44% in July. 
 
4. (SBU) Egypt's economic slowdown does not appear to have 
impacted demand during Ramadan.  Press reports and anecdotal 
evidence from lower, middle, and upper income markets suggest 
that demand for Ramadan related goods remained high and 
similar to last year.  Hotel managers also reported that 
demand for venues for Iftar, the nightly breaking of the fast 
celebration, was the same as last year. 
 
--------------------------------- 
Problems in the Food Supply Chain 
--------------------------------- 
 
5. (SBU) Last year,s global decline in food commodity prices 
did not fully transfer to Egyptian domestic prices.  Food 
prices are sticky downwards, according to Reham El Desoki, 
economist at Beltone Research, who attributes this to a lack 
of market information that allows sellers to markup their 
prices without consumers realizing it.  Hanaa Kheir-El-Din, 
executive director of the Egyptian Center for Economic 
Studies also attributed it to monopolistic practices 
throughout the supply chain, especially distribution. 
 
--------------------------------- 
GOE Tools to Bring Down Inflation 
--------------------------------- 
 
6. (U) The Central Bank of Egypt has not increased interest 
rates to reduce inflation because it assessed that the high 
inflation is coming from high volatility in food prices and, 
in its opinion, does not represent underlying inflationary 
pressures.  The Central Bank is primarily focused on 
encouraging economic growth and has cut interest rates six 
times this year. 
 
7. (U) Minister of Trade and Industry Rachid M. Rachid laid 
out a plan at the end of last month (reftel) to invest in 
domestic infrastructure to significantly improve the domestic 
supply chain and the movement of products to improve consumer 
 
access to those products which should bring down prices over 
the long-term. 
 
------- 
Comment 
------- 
 
8. (SBU) High and rising food prices are hard on the average 
Egyptian, and especially hard on the poor who spend a 
disproportionate amount of their income on food.  Egyptians 
have also noticed, and complain that when international food 
prices rise, domestic ones do too, but when international 
prices fall, that decrease in price is not passed on to them. 
 Egyptians are looking to the GOE to bring down food prices, 
but the GOE has limited straight-forward tools to do so. 
Successful Ministry of Trade and Industry efforts to improve 
the supply chain and movement of goods could help bring down 
costs in the long run, but the GOE's track record in this 
area gives some reason for skepticism.  Further, there have 
been no specific discussions about tackling monopolistic 
practices in the supply chain which could undermine gains 
made in other areas.  High and rising food prices will also 
make it difficult for the GOE to reduce its spending on food 
subsidies, one of the major drains on the budget. 
Scobey