WHAT’S HAPPENING? As Russia’s war against Ukraine surpasses the 100-day mark, international oil and wheat prices remain cripplingly high, forcing
As Russia’s war against Ukraine surpasses the 100-day mark, international oil and wheat prices remain cripplingly high, forcing Egypt’s government into a balancing act between relieving the burden of inflation on consumers and preventing state expenditures from spiraling out of control.
– Rising wheat prices make the Egyptian government’s bread subsidy more costly to maintain, meaning that the country’s debt-to-GDP ratio of 93.5% will likely increase.
– To curb Egypt’s reliance on imported wheat, the Sisi regime will continue pressuring domestic farmers to sell most of their harvest to the state at discounted rates.
– As a condition for a new loan, the IMF may require some military-owned companies to privatize, raising the risk that information given to shareholders sparks protests through inadvertently revealing details of illegitimate wealth obtained through embezzlement and cronyism.
WAR SENDS WHEAT PRICES SKYROCKETING
“Everything has gotten more expensive,” said Naguib, a working-class man from Cairo, in a recent telephone interview. Naguib’s statement exemplifies the struggles Egyptians have faced amidst persistent price increases for food and other essential goods over the past year.
Now in its third month, Russia’s war against Ukraine has exacerbated this inflationary trend. Moscow’s February 24 invasion cut Ukraine’s wheat exports—responsible for 16% of global supply before the war—in half. The price of the commodity on the world market soared by 20% as a result.
The world’s largest wheat importer, Egypt relies on this grain to make bread, called eish [life] by the country’s citizens. The average Egyptian consumes 180 kilograms of eish annually, twice the global average.
In the invasion’s aftermath, Egyptian bakers responded to skyrocketing wheat prices by selling non-subsidized bread at progressively higher prices. This prompted the government to intervene by capping the price of this variety of eish at 11.5 Egyptian Pounds (EGP) per kilogram in late March. As for the subsidized bread upon which two-thirds of Egypt’s population of 102 million relies, rising wheat prices make this support more costly to sustain for the national government, whose debt-to-GDP ratio already stands at 93.5%.
THE PRE-WAR COMMODITY PRICE BOOM
Food prices around the world were already rising to crippling levels before Russia invaded Ukraine. The UN Food and Agriculture Organization’s Food Price Index—a monthly indicator of international prices for a basket of commonly consumed food commodities—rose throughout the past year, plateauing at 135 points from November 2021 through January 2022. In 2011, the Index stood at 134 when Egyptians took to the streets chanting “bread, freedom, and social justice” as they demanded then-President Hosni Mubarak’s ouster during the country’s January 25 Revolution.
Persistent increases in food prices in the months preceding Russia’s invasion coincided with a significant rise in oil prices. A barrel of Brent, the North Sea crude oil whose price serves as a benchmark for around two-thirds of global trade in the commodity, sold for $86.50 in January 2022, up from $50.00 12 months before. This price shock, combined with global supply chain disruptions, heightened costs faced by major food importers such as Egypt.
In the case of wheat, Cairo responded to spiraling import prices by incentivizing Egyptian farmers to sell more of their product to the government. To do so, state authorities set a procurement price of 820 EGP per ardeb—equal to 5.62 US bushels—for locally-sourced wheat in November 2021, a 15% increase from 2020.
When Russia invaded Ukraine, global wheat prices rocketed from $794.75 per bushel on February 21 to $1,252.50 on March 7. Prices have remained at record levels ever since, with the cost per bushel peaking at $1,277.50 on May 17.
While wheat imports from Russia, Egypt’s largest supplier at $2.55 billion per annum, have continued unabated since the war began, Kyiv’s wheat exports to Cairo — valued at $685 million before the conflict—have slowed to a trickle. With port infrastructure in cities like Odessa destroyed and the Black Sea closed to cargo traffic, Ukraine has instead resorted to storing much of its winter harvest and exporting a small portion via train over its western border. To curb the impact of these export disruptions on Egyptian supply, Cairo announced on May 15 that it had reached a deal with New Delhi to purchase 500,000 tonnes of Indian wheat.
Oil prices have also soared since February 24, raising import costs further. On average, the spot price of Brent crude has remained above $100 per barrel over the past three months. The Egyptian government responded to this situation in late March by increasing its procurement price for local wheat by a further 8%. The same month, Cairo passed a $7 billion relief package intended to alleviate inflationary burdens on consumers through increasing pension payments by 13%, raising the income-tax exemption ceiling from 24,000 to 30,000 EGP, and issuing a cash bonus for civil servants.
COMMODITIES INFLATION: AN ISSUE WITH NO QUICK FIXES
Exacerbated by the Russian invasion of Ukraine, the global trend of increasing commodity prices places the Egyptian government in a fiscal bind. As a case in point, Cairo calculated its budget for the 2021-2022 fiscal year—which ends on June 30—using a benchmark oil price of $60 per barrel. Exemplified by crippling costs for oil and wheat, the unexpected fiscal reality Egypt faces today highlights the complexity of relieving consumers like Naguib while preventing government expenditures from spiraling out of control.
Similar to the $6 billion pandemic relief package Egypt’s government announced in 2020, the current fiscal balancing act that Cairo faces holds the potential to disrupt President Abdel Fatah al-Sisi’s vision for economic reform. In accordance with the conditions of IMF loans Egypt has received since 2014, Sisi’s agenda has included cuts to fuel, water, and electricity subsidies, with government support for bread rumored to be next in line. Considering the heightened potential for food insecurity and political unrest associated with weakening the bread subsidy at a time of record wheat prices, it is likely that this reduction will be shelved until supply-side cost triggers are resolved.
Instead, the Egyptian government will continue to limit the fiscal burden of inflation on bread subsidies by encouraging domestic farmers to grow wheat while making it more difficult to export the product. In addition to the aforementioned procurement price increases, Cairo is using a variety of carrots and sticks to accomplish this goal. These include requiring farmers to obtain government permission to export wheat and punishing violators of a law that requires domestic producers to sell 60% of their wheat harvest to the state.
Furthermore, the prohibitive cost of importing wheat at current prices is likely to strengthen the Sisi regime’s commitment to expanding domestic grain production through the Toshka Farm Project and the Future of Egypt Project. These desert greening initiatives aim to expand the country’s agricultural land by over 1.5 million acres.
The starting point of these efforts, however, is a domestic wheat production landscape that covers only 40.8% of Egyptian consumption. This ratio is unlikely to change significantly in light of continued population growth, desertification, and the long-term nature of the government’s land reclamation projects. Egypt will therefore remain reliant on wheat imports to create eish, meaning that the cost of bread subsidies will remain exorbitant as long as global commodity markets remain in flux.
This conundrum undergirds a vicious cycle that Egypt currently faces: as prices of vital commodities rise, the cost to the government of maintaining their affordability increases. The government must borrow more money as a result, causing the servicing of sovereign debt to constitute progressively larger portions of state expenditures. For the 2022-2023 fiscal year, this proportion is slated to stand at 54%, over twice the amount allocated for public salaries and social benefits.
Egypt’s resulting need for a further fiscal boost will likely force the national government to pursue another loan from the IMF, despite having already exceeded its borrowing quota with the fund. This weakens the country’s bargaining position with the IMF, placing the fund in a strong position to negotiate concessions that carry political-economic ramifications for the Sisi regime.
Specifically, these consequences may lie in the unpleasant steps the regime may have to take to raise the revenue necessary to convince the IMF of its ability to repay an additional loan. With further subsidy reforms off the table for now, the Egyptian government must look elsewhere to raise these funds.
One such area could be the economic shadow empire of Egypt’s military-owned companies. Long shrouded in secrecy, recent remarks by Sisi have fueled speculation that stakes in some military-owned firms may be made available for purchase on the Egyptian stock exchange by the end of 2022.
While such a move would raise revenues without further beleaguering ordinary Egyptians’ pocketbooks, it could come to represent a political Pandora’s box for the Sisi regime, particularly if the anticipated initial privatization is followed by more far-reaching rounds thereafter. This is because even partial privatization carries with it the risk of revealing the true wealth of these companies—and the possible illegitimate means through which it was obtained—to the Egyptian people, 30% of whom live underneath the national poverty line.
In 2019, small demonstrations occurred across Egypt after Mohamed Ali, a prominent actor and former government contractor, released viral videos accusing Sisi’s military cronies of embezzling millions of dollars from construction contracts given to the army. The military reacted quickly, quashing the protests in a crackdown that saw over 2,000 civilians arrested. Though it is probable that popular mobilization in response to possibly damaging information gleaned through the privatization of military firms will meet a similar end, the added variable of economic hardship due to rising prices might mean that public outcries accompanying future allegations of regime corruption will be larger.
Commodity price increases thus drive the Egyptian government deeper into a thorny fiscal situation with no apparent easy fix. As underscored by the implications of rising bread subsidy costs, the Sisi regime will likely have to accept some risk of political unrest as it implements policies designed to prevent state expenditures from spiraling out of control.