With monthly rising inflation and decreasing foreign reserves ― down 50 percent from US$40 billion in 2010 ― experts say the government can no longer support its food subsidy system, which is one of the largest in the world. According to them, the new government must institute far-reaching food subsidy reforms and better invest in the flagging agriculture sector.
“Everyone knows the system of food subsidies must be changed, but there’s been a lack of political will and with the current dire situation of public finance, it cannot be tolerated anymore,” says Magda Kandil, the executive director of the Egyptian Center for Economic Studies. “To continue to kid ourselves by borrowing money to make these resources available, everyone is paying for this method,” she adds.
The current system is too broad, experts say, to reach those most in need. Nearly 80 percent of the population purchases subsidized bread, according to the economic research organization. However, the resources should be going to a substantially smaller portion of the population, according to Kandil.
To stop this, Kandil says, the government must switch to a targeted subsidy system, where only those who qualify as in-need receive aid. “[Bread] that’s intended to feed vulnerable groups never reaches them, instead farmers rely on this wheat for their animal feed as a cheaper substitute for animal and chicken feed,” Kandil says.
Experts say the government could substantially reduce wheat imports if it stopped flour from being sold on the black market. Subsidized flour is sold to bakeries at LE160 a ton, but earns LE2000 a ton on the black market, according to the Egyptian Center for Economic Studies. Some estimate as much as a quarter of Egyptian flour is leaked out of the subsidy system through spoilage or on the black market.
Measures to stop leakages are already under consideration. According to Kandil, the Supply and Domestic Trade Ministry is considering providing the wheat at market prices to mills and bakeries. The government would then purchase the bread at market price, but sell it at a subsidized cost to ration card holders.“It closes the loopholes, but we need to rethink the whole system,” she adds.
Egyptians consume more wheat than any other country, but only produces 47 percent of its wheat domestically, according to the economic research organization. Most of it is imported from Russia, making Egypt particularly vulnerable to the world market. This problem was highlighted when Russia stopped wheat exports in 2010 after drought and a series of wildfires devastated its harvest.
“The problems then led the government to scramble; they were on the verge of panicking for food security,” says Kandil. Even adopting new buying methods instead of the current monthly tenders could save the country a considerable amount of money.
A recent World Bank study found that Egypt could have saved between LE800 million and LE3.8 billion if it relied on options contracts, in which the purchaser has the option, not the obligation, of buying a commodity at a set price for a fixed period of time.
For Kandil, though diversifying sources can help protect Egypt against price shocks on the world market, it is equally important to bolster support for domestic agriculture. Long-standing price controls on domestic wheat have led farmers to plant alternative higher-earning crops.
In an effort to encourage farmers to grow more strategic crops, the government more than doubled the guaranteed domestic price after bread shortages in 2008 sparked riots. The effort, Kandil says, has paid off “to some extent.”
The agriculture sector has suffered from decades of inadequate public investment, sidelined by the push for industrialization, according to Jim Cassing, a professor of economics at the University of Pittsburgh. Now farmers lack marketing support, access to water, fertilizers, fuel and energy.
“Most of the attention the agriculture sector gained under the previous regime was directed to export products, such as fruits and vegetables,” says Kandil.
When Egypt shifted to a free market economy in the early 1980s, small farmers found themselves in more trouble. The idea was that the country would grow enough to support itself, and then diversify its crops for luxury export. In reality, the policy increased the overall cost of living while diverting resources, such as subsidized fertilizers and water, to “mega-farms” that produced high-quality crops, such as potatoes and strawberries.
Despite providing a source of foreign reserves, the mega-farms are highly mechanized and employ few people. The profits however, have not trickled down. The problem, Kandil says, was a result of “free market combined with corruption.”
“What we saw was a system that did well at an aggregate level, but a few players capitalized on their connections and the benefit of the growth process went into their pockets while the majority of Egyptians suffered,” she adds.
According to Cassing, agricultural policies have historically favored the rural elite, leaving many poorer farmers working as landless sharecroppers. “The reform has been higher prices for agricultural lands, and some have been disenfranchised and lost their farms as areas consolidated,” he says.
If exporting is going to continue, Kandil says, the country must have a bigger plan for its agriculture sector. "[Export] proceeds have to be made available to increase the availability of other items where Egyptian production is not adequate."
