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Egypt to up food subsidies as stock market, pound drop

By Amr Ramadan and Sarah Daoud/ CAIRO: As prices continue to rise globally, Egypt said Sunday that it may spend an additional LE 4.5 billion to LE 7 billion on food subsidies during the current fiscal year.

The money allocation -- up from a previous forecasts of LE 2.5-4 billion -- is meant to combat a surge in wheat prices as well as those of sugar and vegetables, Reuters cited Minister of Trade and Industry Rachid Mohamed Rachid as saying.

Weeks-long rioting spurred by rising food prices and unemployment escalated to the point of ousting Tunisia's now exiled former president Zine El Abidine Ben Ali. Protests over rising food prices have also taken place in Algeria, Jordan and Libya among others.

Fears of the Tunisian scenario playing out in Egypt -- namely after news of an Egyptian man set himself on fire near the Parliament building on Monday, echoing a self-immolation that sparked demonstrations in Tunisia -- brought the stock market down to it's lowest point since June 2010 and the Egyptian pound to a fresh six-year low against the dollar.

The Egyptian pound reached 5.8263 against the dollar on Monday and the stock market posted its biggest drop in seven months, dipping by 2.4 percent, as wary investors are concerned that the turmoil could spread to Egypt.

"There's a bit of a strong market correction, with a catalyst being the contagion factor from Tunisia," Mohamed Seddiek, senior research manager at Prime Securities, told Reuters.

Egyptian officials, however, have affirmed that what happened in Tunisia will not be replicated in the Arab world's most populous country. "We already have a very substantial safety net for the low income people when it comes to food prices. So, the reality today of increases in food prices globally is not affecting the Egyptian consumers," Reuters cited Rachid as saying.

Rachid added that the government would increase its food subsidies by whatever amount needed to ensure stability in local price.

The Central Bank of Egypt said that monthly core inflation decelerated in December 2010 to 0.18 percent from 0.69 percent in November 2010 on the back of a deceleration in the overall increase in food items that are still included in the core index, reported Beltone Financial.

However, food items, particularly rice, sugar, red meat and edible oils and fats, contributed 0.12 percent to the 0.18 percent month-on-month increase in the index in December, Beltone reported.

Magda Kandil, director of research at Egyptian Center for Economic Studies, said, "I do not agree that the current rise in food prices is not affecting Egyptian consumers. We have done a lot of analysis that demonstrates high share of food in the consumer price basket and its impact on core inflation, and non-food inflation."

Kandil believes that from an economic point of view, one could argue that the increase in subsidies is mainly a function of the increase in food prices. Food prices, she explained, decreased during the global slowdown and are projected to increase going forward on account of higher international prices attributed to global recovery.

"However, there could [also] be a political dimension to this," she added. The increases may also be due to the fact that this is an election year, as the amount of subsidy in the budget was cut out before the last turn of events in Tunisia, she said.

Investment firm AlembicHC said in an emailed statement that "political elections preclude any subsidy reform and place the pressure on the government to absorb higher prices.

"The estimated increase in food subsidy costs would see the overall budget deficit rise to 8.3 percent of GDP in fiscal year 2010/11 from 8.2 percent of GDP in fiscal year 09/10, against government expectations of a decline to below 8 percent."

Experts have also agreed that the spending on both food and energy is unsustainable in the long run.

"If we are talking about food subsidies alone, I would think there is no concern about sustainability. However, if we combine food with fuel subsidies, total subsidies in the budget could reach LE 100 billion, depending on international prices, which is comparable to the total budget deficit," says Kandil.

"This deficit is not sustainable over time, in light of limited potential for growth on the revenue side, continued growth in expenditures, and the need to borrow domestically," she added.

In its report, Beltone Financial said that "additional fiscal outlays as a result of a hike in global food prices are unlikely to have a significant impact on the overall budget deficit [in the short run] because of the relatively smaller share of food subsidies of total fiscal expenditure (around 4 percent of total spending, with wheat's share at 3 percent of total spending) compared to energy subsidies, which represents more than 15 percent of total government spending and around 65 percent of total subsidies.

"However, our concern of the current level of annual food price inflation (17 percent in December 2010), which we do not believe is sustainable in the long run, especially given Egypt's demographic structure."

In their October 2010 report titled "Navigating Egypt," AlembicHC said that "an adverse commodity shock is a downside risk to fiscal improvement due to higher subsidy costs. Additionally, surging commodity prices will lead to higher inflation and increase the interest cost on debt."

Global oil prices rapidly rising is only set to complicate matters, and will likely cause a further hike in food prices. US crude for February reached $91.18 while ICE Brent for March was at $97.88, Reuters reported.

The current bull state of the market has been accredited to the increasing demand of the emerging markets as economies are recovering and the demand is higher than what was expected, experts told Reuters.

Kandil highlighted reforms required to prevent Tunisia's uprising from spreading to Egypt.

"The reform system should move to a better targeting scheme, gradually reducing the subsidy, particularly for products that are least consumed by the vulnerable groups. Savings could be made available in the form of targeted subsidies, cash or in kind, to the vulnerable groups," she said.

She also added that the bulk of savings could afford the government more resources that could be used to provide more subsidies for the vulnerable groups in the form of social services, support for education and health services, more loan subsidies for SMEs, and more spending on infrastructure in support of a job-conducive strategy that would help ease pressures on the public and avail natural opportunities for those who could become more productive.

Reuters also reported that the cost of insuring Egyptian sovereign debt against default rose sharply, with five-year credit default swaps rising 40 basis points to 320 basis points, an 18 month high, according to Markit.

As Egypt's EGX 30 index fell to 6,911 points on Monday, Saudi Arabia's benchmark fell 0.3 percent, Abu Dhabi dropped 0.9 percent as well as Kuwait (0.1 percent), Qatar (0.9 percent), Oman (0.08 percent) and Bahrain (0.3 percent). Only Dubai made gains, rising 0.5 percent. -Additional reporting by Reuters.

© Daily News Egypt 2011