Egypt’s rising bread price sparks austerity fears

Dietmar Temps/Alamy via Reuters Connect

• Subsidised bread price up 300%
• Rumours of other price rises
• Analysts say burden falls on poor

Egypt’s plan to hike the price of subsidised bread for the first time in 30 years has increased talk of an austerity budget for the coming fiscal year, amid rumours of price increases for medicine and electricity and the phasing out of fuel subsidies. 

The International Monetary Fund, which is currently preparing a third review for an $8 billion extended fund facility, has long pushed for reforms to state subsidies.

The extended fund facility was approved in March and $820 million was disbursed in April, according to local reports.

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Data released by the Central Bank of Egypt show that the foreign asset deficit shrank by EGP26 billion ($586 million) that month.

Analysts say the move is likely to contribute to inflation, which has been in double digits for more than two years, and increase the financial burden on the poor.

The cut will result in the price of a 90-gram flatbread rising by 300 percent, from EGP0.05 to EGP0.20.

Despite an apparently modest increase of just under one-third of one US cent per flatbread, the decision was not taken lightly. Bread is a historically politicised issue, going back to the 1977 “Bread Riots”, sparked by plans to cut subsidies. 

Prime minister Mostafa Madbouly last week broached the subject of price rises with reporters, in an apparent attempt to test the waters.

During a 40-minute press conference, ostensibly linked to construction projects around Alexandria, Madbouly spent half an hour stressing the financial burden of subsidies, the pressures of population growth and the government’s ongoing commitment to maintain subsidies. 

He announced the new bread prices two days later in a cabinet meeting.

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Egyptian media has reported that electricity prices and pharmaceuticals will increase by about 20 percent from the start of the next financial year.

Madbouly’s speeches suggest there will be further cuts to fuel subsidies, in addition to hikes of between 8 percent and 21 percent implemented in March. 

Monica Malik, chief economist at Abu Dhabi Commercial Bank, said the issue of subsidies “has built up across the decade and as the population has increased” and has “reached a point where you have to progress”.

These cuts may help to reduce a budget deficit that is expected to widen to 7.2 percent of GDP by the coming fiscal year. 

Many economists criticise the practice of blanket subsidies for distorting economic incentives by making subsidised goods more attractive and disproportionately benefiting the largest consumers, who tend to be the richest, at a cost to the state.

Austerity anticipated

However Timothy Kaldas, deputy director at the Tahrir Institute for Middle East Policy, said that as a proportion of income, poor people, rather than the rich, are the largest consumers of subsidies and the ones who will suffer the most from subsidy removal.

At a time when people are already struggling with rising prices, Kaldas said that “it is really irresponsible to go after one of the most accessible sources of calories”.

The IMF has long pushed Egypt to reduce subsidies and move towards “fiscal consolidation”, which Kaldas describes as a euphemism for austerity.

Egyptian President Abdel Fattah El Sisi has garnered praise from the IMF for multiple price raises during his tenure.

These have reduced the combined subsidy bill for food, petroleum products, and electricity in dollar terms from EGP143.7 billion ($21 billion at the time) the year before he took office, to the EGP291,149 ($6.1 billion) earmarked for this coming financial year. 

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Following Thursday’s announcement, the bread budget will also fall slightly from EGP19.4 billion ($2.77 billion at the time) in 2013-14 to EGP125 billion ($2.66 billion) in 2024-25.

Malik predicts modest savings of roughly 0.1 percent of GDP, which, she said, “shows how the government is slowly trying to implement measures that can be absorbed and balancing both the social side as well as the reform side”. 

Inflation forecast

On inflation, Malik said there is “a bit of ambiguity on the impact of subsidised bread on the overall inflation food basket” but has projected an increase of between 1 percent and 1.5 percent as a direct result of the move in bread prices.

Everybody AGBI spoke to for this story predicted further subsidy cuts.

The government has also indicated that it would increase direct cash aid to its most vulnerable citizens.

In February, it announced social spending increases to mitigate the effects of inflation, raising the state pension by 15 percent and minimum wages by 50 percent in what it called the "largest urgent social protection package” in its history.

However, much of this package may have been nullified by the currency float the following month, which resulted in the Egyptian pound depreciating 37 percent against the US dollar.

On Thursday, Madbouly said that the government was looking at shifting the subsidy system to a direct cash-payment model.

Kaldas reacted to this by saying: “If you want to cut subsidies, then you need to have the cash ready to go.” 

Increasing the price of a “vital source of calories” without measures in place to mitigate its impact, he said, “will endure for years to come”.