World prices of main grains are now about 80 per cent of what they were at their peak in 2008, when a global food crisis simmered. These current price levels are alarmingly high for all food importers, and especially for Egyptians, who are main crop importers.
As a result of these developments, a rise in inflation is a main concern. Imported inflation is brought on with a surge in the price of imported goods. It is difficult to curb through central bank intervention, and is, therefore, likely to have extensive repercussion on the population and on the economy as a whole.
Consequently, many investment banks have raised their local inflation forecasts for the next fiscal year, citing, mainly, the increase in food prices.
“Annual food price inflation in Egypt remains a concern to us,” Beltone Financial underlined in a recent report, forecasting Consumer Price Index (CPI) at 12.1 per cent in fiscal year 2010/2011 and 12.3 per cent for the year after.
Inflation of food prices, according to the report, continues to be among the highest regionally and globally, and remains very much a key concern.
The inflation may also be fueled by other factors, including an increase in fuel prices. “An increase in fuel prices, especially gasoline, diesel and butane – though unlikely in the face of the upcoming 2011 presidential elections – would prompt us to revise our inflation outlook upwards,” the Beltone report stated.
However, many believe that short-term inflation could be contained. According to Beltone, “In the short-run, we are not overly-concerned about the recent rise in global food prices, as they were led by a spike in prices of only several commodities and not broad-based rises as was the case in 2008.”
HC Securities & Investment are less optimistic and expect inflation to reach an average of 12.6 per cent and 14.5, consecutively.
Regardless, analysts do not believe that inflation dynamics will follow the same patterns seen in 2008.
“In 2008, prices increased very quickly over a short period of time. It is not the same case, so consequences would not be as harsh," explained Amr Abdel Khalek, an analyst at HC. Khalek added that currently there is no speculation on commodities markets as was seen in 2007/2008, and that oil prices remain below their 2008 records. This is indeed true, at least for now.
“That said, we do not believe running annual food price inflation at double-digit levels is sustainable in the long-run, especially given Egypt’s demographic structure," the Beltone report cautioned.
Any rise in inflation is expected to be a heavy blow for the poorest classes, especially considering the fact that Egyptians use an average of 45 per cent of their income on food.
“Spending on food can reach 60 per cent or more among the poorest households. A new wave of high inflation will definitely affect life levels and food security," warned Omneya Helmy, deputy director of research and lead economist in the Egyptian Center for Economic Studies.
Helmy also stressed that 10 per cent of the population is just above the poverty line. "They are very vulnerable and can easily fall into poverty due to any minimal spending increase.”
Back in 2008, 7 million Egyptian fell below the poverty line as a result of the increase in food prices. Long queues for subsidized bread claimed many Egyptian lives, as countless waited for hours on end, fighting for food.
This threat persists despite an orthodox engagement of the government to the in-kind food subsidy scheme, which was expanded in late 2008 to reach more than 3/4 of the population.
This threat of increased poverty and increased dependency on food subsidies is likely to be pricey for the government, and, with presidential elections coming up this year, social discontent is to be avoided at any cost.
The Parliament is currently discussing an additional public spending of LE4 billion to maintain past levels of wheat and sugar subsidies. This sum is subject to increases, should world food prices continue to surge along with oil prices.
“It is not known yet if more money will be needed, but everything is possible,” said Abdallah Chehata, advisor to the minister of finance, adding that the government might increase subsidies' allocation without additional spending, "due to some possible savings on other items or an unexpected increase in some revenues, like taxes."
In any case, these subsidies would make it hard to keep the budget deficit at its targeted level of 3.5 per cent in 2014/2015.
Moreover, an increased food import bill will further widen the country's chronic trade deficit, which, according to the Central Bank of Egypt, has grown from less than $6.3 billion in the first quarter 2009/2010 to $6.5 billion during the first quarter 2010/2011.
“The recent surge in food prices will also be a drag on the trade balance, given Egypt’s dependency on food imports, especially wheat,” HC stated in a report.
A new food crisis will not leave Egypt unscathed, as the country continues to be a top grain importer and the number one wheat importer.