Crisis in Ukraine and food fears in Egypt

Mohamed Salem
Friday 25 Feb 2022

The world's eyes turn to Eastern Europe where Russian President Vladamir Putin declared the start of a “special military operation” in Ukraine at dawn Thursday, potentially threatening Egyptian food security, but also presenting opportunities for reform.

The accelerated escalation of Russia's clash with Ukraine and its Western allies became clear when US President Joe Biden pledged new sanctions to punish Russia for aggression that has been building for weeks despite international diplomacy.

Egypt has been watching this crisis closely and with great concern since its inception because of its implications for Egypt's food security - despite the vast geographical distance of more than 2,400 km between Cairo and Kiev.

This crisis is directing attention to the importance of the strategic location of the Black Sea and the Balkans, not only as a sensitive contact area between Russia, on the one hand, and Europe and NATO states, on the other, but also regarding the economic consequences of any disruption there.

The two disputing countries occupy paramount positions on the global food supply map as two of the largest wheat exporting countries.

Russia has a diverse pool of agricultural exports. Ukraine, which used to be described as the “bread basket of the Soviet Union”, has a highly fertile black soil in 71.3 percent of its total area.

Those factors has made both countries indispensable agricultural suppliers for many countries around the world.

It is no surprise that Alex Smith, an American agricultural expert who has written for Foreign Policy magazine, is warning that threats to Ukrainian wheat exports pose "the greatest threat to the world's food security," especially since most of its grains and vegetable oil-producing regions are in the eastern part of the country - the areas most threatened by the Russian attack.

Not so long ago, the International Grains Council confirmed that wheat stocks of large exporters such as the European Union and the United States were on track to fall to their lowest level in nine years this season because of climate change. That is why we have seen American wheat futures contracts in Chicago rise sharply.

The inflation in fertiliser prices, freight costs, and the decline in yield volumes have led to the supply chain crisis that we have been experiencing for months. These crises have increased as fears of Russian invasion intensified.

Egypt is the world's largest importer of wheat, totalling more than 13 million tonnes a year with the grain occupying the position of the most important strategic commodity in the Egyptian food basket.

Last year, Egypt imported wheat 50 percent of the country's wheat needs from Russia and 30 percent from Ukraine.

In other words, Egyptian wheat imports from the Black Sea region represents a vital, critical interest for Egypt.

Even before the crisis turned into a full-blown war, the Egyptian government was preparing for any eventuality.

Egyptian Prime Minister Mostafa Madbouly has confirmed that Egypt was working to hedge against fluctuations in the price of strategic goods and that it has a reserve of wheat enough to cover four-and-half-month’s needs.

However, it is believed that Minister of Supply and Internal Trade Ali Moslehi underestimated the current market turmoil effect, given Egypt's diversification of imported wheat.

Minister of Agriculture El-Sayed El-Qusseir confirmed that local cultivation of wheat is increasing, with the total area under wheat cultivation rising from 3.1 million acres in 2018/2019 to about 3.6 million acres currently, with a projected total production of around 10 million tonnes for the current year.

In addition, the Ministry of Agriculture confirmed in a statement that the completion of the internal granaries system had raised the country’s storage capacity from 1.2 million tonnes to 3.4 million tonnes per year.

Ukrainian-Russian tensions led many of the countries who import wheat to make difficult choices. Governments are forced to either inject hundreds of millions of dollars in additional funds to subsidise essential items that are affected by rising prices, which have also been hit by a global inflationary wave, or to make an economically easier but more costly social choice of removing food subsidies.

Five years ago, Egypt began a program of economic reform with the International Monetary Fund (IMF). The most important feature of this program is the gradual lifting of subsidies on fuel and foodstuffs. The proportion of total subsidies and social protection allocations from the government expenditure budget declined from 21.5 percent in the fiscal year 2017-2018 to 14 percent in the fiscal year 2021-2022.

In the current fiscal year, subsidies for food goods amount to EGP 87 billion (about $5.5 billion), accounting for only 3.5 percent of total public spending. This includes EGP 50 billion for bread subsidies and EGP 37 billion for other food subsidies. Rising wheat prices are expected to add an additional EGP 12 billion burden to the state budget.

According to official statistics, more than 72 million people in Egypt benefit from subsidies for bread and commodities.

Despite the government's policy of working towards completely ending electricity, petroleum and water subsidies, the government is treating its bread subsidies with great caution. The 1977 bread uprising remains stuck in the minds of society and the Egyptian government. When the late-President Anwar Sadat decided to cut all support allocations at once, demonstrations and riots across the country quickly prompted him to reverse his decision.

But President Abdel-Fattah El-Sisi has been tackling files that many dared not to. The weight of 20 grams of subsidised bread had already been reduced without compromising its cost, which had reduced the amount of wheat imported annually by 13 percent.

In several recent meetings, El-Sisi criticised the decades-long unchanged policy of subsidising bread.

It is true that there has been no official decision on moving the price of subsidised bread, which is likely to increase slightly, according to the predictions of many relevant experts and parliamentarians.

Last December, PM Madbouly stressed that “Egypt is no longer insulated from global inflationary pressures, and that it is time to reconsider the food subsidy program.”

The current moment may represent a favourable opportunity to reduce the cost of Egypt's import bill for wheat.

I welcome and support any step that would help to control wasteful public spending, especially in times of crisis.

But, first, the government should try to reduce public spending on investments this year, given the major disruption in supply chains and global trade, and the potential negative effects of the United States federal decision to raise interest rates as a result of unprecedented inflation.

These factors will have a severe impact on all emerging markets, including Egypt.

Austerity in public spending is necessary at the moment, and Egypt's wheat imports are a burden on the government’s cash reserves that needs to be resolved. The Egyptian government must proceed on several reform tracks regardless of what happens in Eastern Europe.

First, the government should reprioritise local agriculture and encourage farmers – more than one-quarter of the Egyptian labour force – to grow wheat so as to increase the total area of this necessary yield, and to allocate financial funds that are rewarding for growing this strategic crop.

In doing so, the threat from climate change to the future of wheat cultivation in Egypt needs to be considered. According to a study published by Springer publishing house in 2013 entitled "Sustainable Agriculture and Climate Change in Egypt," changing temperatures, reduced water availability and rainfall due to climatic changes will reduce net productivity of agricultural crops, and also cause an increase in pests and diseases.

The study predicted that the productivity of Egypt’s key food crops would be reduced due to rising temperatures and increased need for water consumption. There is, therefore, a need to spend on growing varieties and strains that withstand high temperatures and resist drought and the risks of pests and diseases such as wheat rust disease, which is active with high humidity.

Second, according to data from the Food and Agriculture Organisation of the United Nations (FAO), the private sector in Egypt imported 6.9 million tonnes of wheat in 2021, up 11 percent from 2020, while the government's Public Authority for Food Goods imported 4.7 million tonnes, down 32 percent from the previous year.

Nasreddin Hajj Al-Amin, representative of FAO Egypt, said "If wheat purchases from the Public Commission for Food Goods fall as expected in the coming years as a result of possible reforms in the support system, a sector of subsidised bread consumers will be transformed into free-market bread."

The continued expansion of the private sector and its increasing role in the import of wheat to produce better quality bread and many baked products may gradually mark the end of most bread subsidies, especially as middle-class consumers rely on the private sector for bread and other related products. due to the large quality difference between subsidised bread and market bread.

Thirdly, President El-Sisi has repeatedly called attention to the food health of Egyptians and a need for a healthy diet that contributes to the good health of the workforce and the reduces the pressure on hospitals.

Egypt ranks first in the Middle East in terms of the prevalence of diabetes and obesity among adults due to several causes, the most important of which are the nutrition habits of Egyptians who depend heavily on carbohydrates, primarily bread.

At present, it is crucial to encourage Egyptian citizens to change their nutritional habits by switching to more consumption of vegetables and healthy foods, preferably beginning in schools.

The government should also support small and micro-enterprises that provide healthy food and fast meals that do not consume bread or hydrogenated cooking oils.

Previously, the government had tried to reduce bread subsidies by adding corn to bread production, but the adverse reaction to the change in taste and pallates later prompted the government to reverse the move, although it was more economical and healthier.

However, this option should be revisited following a recent scientific study by the Agricultural Research Center of the Ministry of Agriculture called for the use of corn flour in the bread industry to reduce the cost of importing wheat and to give better food value.

Whatever the fate of the Ukrainian crisis, it deserves constant attention and follow-up on its dangers and effects on Egypt. The bread subsidy file deserves a more comprehensive perspective in the design of public policies on this vital issue.

*The writer is a researcher in economic development and public policy - Coordinating Member for Youth of Parties and Politicians.

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