Inflation fuels rising food prices in Egypt

Inflation fuels rising food prices in Egypt
Analysis: Following cuts to subsidies and rises in food prices, Egypt's annual inflation hits a five-year high.
5 min read
11 June, 2015
Once basic foodstuffs are now a luxury for many Egyptians - click to enlarge [AFP]
Egypt's inflation hit a five-year high in May on the back of wide-ranging rises in food prices, analysts report.

Economists have said that this is due to price shocks, and not an increase in demand from consumers.

The price of many goods in Egypt has been soaring since the government slashed subsidies on petroleum products in July last year, raising the price of fuel 78 percent at the pumps.

The price of fuel affects the cost of many goods, from food stuffs to transportation.

A couple of days after the slash on subsidies in 2014, Egypt's central bank hiked interest rates in an attempt to contain inflation.

However, Ahram online reported that the government was expected to either maintain or cut interest rates in a monetary committee policy meeting on Thursday, to encourage lending in the wake of decreased growth projections in the private sector.

The media has reported that food price rises are due to an increase in supply to Libya, Hany Genena, chief economist of Pharos Holding, told Ahram Online.

However, the UN Food and Agricultural Organisation has placed the blame on subsidy cuts, contrasting the situation in Egypt with the global market - which has seen a drop in food prices. 

Subsidies and food prices

Subsidies on fuel and food products have been in place in some form in Egypt since the years following the First World War, and have long been a politically sensitive issue.
Subsidy cuts have led to food price rises, says the FAO [AFP]

The 1977 bread riots caused by a termination of subsidies following World Bank and IMF loans demonstrated the importance of subsidies in the everyday lives of Egyptians.

In lieu of a comprehensive welfare state, subsidies on fuel and food products have historically allowed Egyptians to live extremely cheaply on low salaries.

Since the early 1980s, the Egyptian government has gradually cut spending on subsidies by reducing the number of subsidised commodities - such as chicken and fish - yet often shied away from drastic cuts for fear of political unrest.

However after the election of Abdel Fattah el-Sisi in 2014, Egypt slashed energy subsidies by a third for the budget year 2014-2015.

In the months following the cuts, the prices of petrol, natural gas and diesel rose, driving up prices of goods and transport and fueling inflation. The Consumer Protection Agency warned that the price of some goods may rise 200 percent.

     After the election of Sisi in 2014, Egypt slashed energy subsidies by a third.

Egyptian industry also voiced concerns about the cuts, saying that businesses need to pay close to international rates for materials and fuel.

According to Thursday's statement by the Central Agency for Public Mobilisation and Statistics, prices of goods have risen about 16.5 percent in the past year.

The prices of meat and poultry rose by 2.7 percent, vegetable prices increased by 7.7 percent and sugar increased by 1.1 percent, according to the statement, reported in Daily News Egypt.

Many Egyptians have been complaining about the price hikes.

Umm Asmaa, a resident of Bulaq, told al-Araby al-Jadeed in May that cucumbers now cost six Egyptian pounds (80 US cents) per kilogram. Some 40 percent of Egyptians live on less than $2 a day. A day's wage for nearly half the country will not buy three kilos of cucumbers.

"To hell with anyone eating cucumbers in Egypt," she said.

When Anadolu questioned a number of Egyptians about Sisi's first year in office, the rising prices constantly arose as a concern.

"There is one problem - that is the prices. The prices for many things have gone up, which is bothering everyone. It's the issue of prices... for example you have fruit and vegetables and things like that have become expensive," said one interviewee.

"Today a kilo of chicken [costs] 22LE ($2.90) and it is full of hormones and poisons," said another.

The economic logic

The cuts were carried out purportedly in order to reduce a deficit that accounts for 12 percent of Gross Domestic Product, with officials saying money saved would go towards providing more services.

This follows a pattern of austerity measures taken by the Egyptian government, reportedly urged not only by economists and the IMF, who have long encouraged targeted cuts within a package of structural adjustment in Egypt, but more recently by backers from the Gulf.

There exists a couple of dominating arguments in favour of these cuts.

     In a country where 40 percent of people live on $2 a day, this would now not be enough to buy a kilo of lemons

On one hand, it is argued that a reduction in subsidies will make Egypt more competitive on the world market, particularly if complemented with other trade liberalisation reforms.

It is also argued that subsidies also benefit the rich due to cheap goods - and therefore the poor would be better targeted if funds that contribute towards subsidies are redirected towards government initiatives that would help the needy.

"How can I achieve social justice while I am subsidising the rich at the expense of the poor?" Prime Minister Ibrahim Mehleb was said to have asked, regarding the cuts last year.

Various studies have sought a solution that would cut subsidies, thus saving money, whilst also mitigating the effects this has on inflation, as well as on people's wellbeing.

One study carried out by the Egyptian Centre for Economic Studies found that cash transfers to the poorest families, accounting for 50 percent of the current energy subsidy budget, could be one better alternative - improving the state of the budget whilst avoiding a reduction of welfare.

Others have sought to find ways that subsidies could be better redistributed, to avoid wastage and corruption in the system - for example the use of bread ration cards.

This "smartcard" system has been rolled out in governorates in the past year, and has been met with some success from both consumers and economists, as it decreases queues in bakeries and prevents profiteering from subsidised flour on the black market.

However, consumers still complain that living is becoming unaffordable. That $2 daily income for 40 percent of Egyptians is not be enough to buy them a kilo of lemons or okra.  

Egyptian officials have remained unsympathetic.

"If okra is too expensive, eat potatoes," said Atif Yaqoub, the head of the consumer protection authority.