Confronted with a deep economic crisis, Egypt has announced it will no longer support the domestic price of wheat
Momagri Editorial Board
February 6, 2017
Since the 2011 Egyptian Revolution, the country is struggling to regain political and economic stability. Egypt is undergoing a severe economic crisis marked by a monetary crisis, a decline in foreign investment, a very deficient trade balance and a fall in tourism.
In response, in November 2016, the Egyptian authorities adopted a package of economic measures in view of signing a $12 billion IMF bailout package. The main measure was to abandon parity with the dollar that the Egyptian economy was no longer able to bear. There are also plans to reduce the budgets for subsidized energy consumption (fuel, electricity). At the moment, food subsidies, and in particular bread, are not to be called into question. However, there are many concerns about the government's desire to offer cash transfer schemes for bread to the most deprived1. The difficulty in operating such a system, which is not certain to combat corruption, has lead Sébastien Abis, a specialist in Mediterranean geopolitics, to fear an increase in popular protests in the coming months.
It is in this depressed economic environment, but also to honour its commitments to the IMF, that the Egyptian government announced early January that from now on it would be buying wheat, a strategic commodity for the country, from domestic producers at international market prices2. Up until now, the Egyptian government has been buying wheat from local producers at a price higher than the international market price. Although Egypt is one of the largest importers of grain (between 18 and 20 million tonnes per year), the country has a sizeable yield of 14 to 15 million tonnes, with about 8 million tonnes of wheat.
A recent article published by the independent newspaper Mada Masr3 discusses this decision and denounces its potentially negative impact. Certainly, for the author of the article, the drop in domestic prices means Egyptian farmers would not be able to cover their production costs.
As Mada Masr also reports, the state budget for the current fiscal year provides for 3405 billion EGP in subsidies for wheat producers, just over 168 million Euros. With regards the 8 million tonnes of wheat, this amounts to about 20 Euros in subsidies per tonne. Though the devaluation of the Egyptian pound will improve the competitiveness of local harvests against imports, it is not clear if it still be sufficient to cover production costs, as at the same time, the price of inputs and fuel are undergoing a significant increase.
It should be added that the end of the support price for domestic wheat production is also explained by the government's aim at fighting corruption in public administrations. In 2016, a major corruption scandal affected the Department of Supply, in charge of buying and selling subsidized produce in relation to the country's wheat supply. Indeed, some suppliers presented imported wheat as domestic wheat, taking advantage of the difference in prices. Fictitious deliveries of wheat to storage silos were also reported. This scandal cost the Treasury nearly 55 million USD4.
Even if the government retains control of its borders, the decision to align domestic prices with international prices appears risky in a context of declining wheat prices for the fourth consecutive year. The government really is performing a balancing act by lowering its domestic support whilst increasing tariffs on 320 imported products, including dairy produce, sports shoes and ventilation fans, in order to attract more investors, support local industry and fill the state coffers. According to the Ministry of Finance, the increase in customs duties is expected to generate an additional 6 billion EGP ($335 million) per year.
For the time being, it seems complex to judge the impact of the reforms announced by Cairo. Is this the beginning of the loss of national food sovereignty that would explain the legitimate fear of pronounced by Egyptian producers confronted with the international prices? Or, on the contrary, is this a new approach by Egyptian authorities, which could now focus on direct aid, aimed at avoiding corruption scandals? The future will tell. But at least for Mohamed El-Erian, senior economic advisor at Allianz, in a recent article published for Project Syndicate5, thankfully, the IMF will not be imposing cuts in food subsidies at it did in 1977, causing serious riots with 80 deaths and several hundred wounded. However, the stability of the Egyptian campaigns remains a major strategic challenge for rebuilding the political and economic stability of one of the most populous countries in Africa.