Egypt's president announces potential bread price increase

• The Ministry of Supply and Internal Trade is on the course of drafting a report with the new price hikes to be reviewed by the Cabinet before approving it.
• The president offered no further details on the amount or timing of the price increase but said that the increase would be 'modest'. Twenty subsidized pieces of bread cost EGP1 (UD0.064), while a single piece of bread usually costs between a half pound (USD0.032) to a pound (USD0.064) on the regular market. Members of the bakeries division at the Federation of Egyptian Chambers of Commerce supported the decision of cutting bread subsidies as they complained that production costs, especially the price of wheat, have increased over recent years.
• According to Al Sisi, potential savings from hiking bread subsidy prices along with cuts in the allocated budged of each ministry could help cover a plan to improve child nutrition. The nationwide scheme is expected to cost EGP8 billion (USD509.6 million), with a single meal served daily to each child expected to cost between EGP6-7 (USD0.38-USD0.44).
• The price of subsidized bread in Egypt has not changed since 1977 but now Al Sisi is requesting the price be increased.

Over 65 million people are part of welfare programs that allocate five loaves of bread per day to each person at less than one-tenth of what it costs to produce. Prices of other essential commodities, including fuel, have increased in recent years as the Al Sisi administration gradually phased out energy subsidies, but bread subsidies have long been a contentious topic in Egyptian politics. Since the food riot in 1977, Egyptian policymakers have been disinclined to make large changes in their food subsidy system. Rather, their strategy has been to reduce the costs and coverage of this system gradually.

According to the FY2021/22, bread subsidy costs EGP44 billion (USD2.8 billion) per year, other than EGP2.5 billion (USD159.3 million) in subsidies for flour for people who opt to take flour and not bread. Assuming that the EGP44 billion (USD2.8 billion) covering 71 million Egyptians who are eligible for bread support, of course not everyone resorts to such support, then the cost of supporting bread per citizen is about EGP619 (USD39.4) per year, i.e., about EGP1.7 (USD0.10) per person per day, and since each person is allocated 5 loaves per day, the cost of supporting a loaf of bread is about 33 piasters (USD0.02) per loaf. The amount of wheat required to produce the 89 billion loaves per year that are bought at the subsidized price is 7.96 million tonnes; Egypt is the world's largest importer of wheat.

The government has allocated EGP87.8 billion (USD5.3 billion) for commodities subsidies, including bread, in the financial year that began on 1 July, which represents 17% of government expenditure. Initial projections for the fiscal budget in 2020/21 set the subsidy bill at EGP360 billion (USD22.9 billion), though the lower amount of EGP326.3 billion (USD20.7 billion) was eventually budgeted. Even then, the total bill was not used, and EGP21 billion (USD1.3 billion) was carried over to the budget for FY2021/22, which was set at EGP321 billion (USD20.4 billion).

Outlook

The price of subsidized bread in Egypt has not changed since 1977 but now Al Sisi is requesting the price be increased. Despite calls to reform the system, the subsidies are deemed key to guaranteeing food security in a country where 33% of the population was officially below the poverty line in 2018, so IHS Markit is of the view that any changes are going to be incremental, given the sensitivity of such move, to minimize the protests risk, and that the price hike will take place in Q4 2021.

IHS Markit is also of the view that such announcement is in line with a policy of scaling back subsidies that the government began in 2014 and continued after securing a US$12 billion deal with the IMF alongside a commitment to an economic adjustment reform program.

To renew the pre-pandemic trend toward fiscal consolidation, the FY2021/22 draft budget targets reducing the deficit-to-GDP ratio to 6.5%. Authorities will continue to grow their tax revenue stream by widening the taxpayer base and enhancing tax collection mechanisms.