The price of subsidised vegetable oil rose on Monday by 19 per cent to sell at LE25 per one litre bottle after a decision announced last Thursday by Minister of Supply Ali Moselhi in reaction to rising global prices and increases in the cost of production.
Explaining the decision, Moselhi said the government had had to intervene because it could not let producers sell at a loss, adding that there had been warnings earlier of increases in the prices of products including sugar, oil, and wheat.
This is the second time this year that the government has raised the price of subsidised vegetable oil. In June, the price was increased by 23.5 per cent to LE21 per one litre bottle.
The UN Food and Agriculture Organisation (FAO) Food Price Index for September, released early in October, showed prices were higher internationally by 32.8 per cent from the same month the year before. It said the increase was largely driven by the higher prices of most cereals and vegetable oils.
An infograph released by Dcode Economic and Financial Consulting also showed prices of sunflower oil up 78.9 per cent in September compared to pre-coronavirus pandemic levels in December 2019. The infograph, which tracked changes in global commodity prices, also showed wheat prices higher by 10.9 per cent during the same period.
Egypt is the world’s largest importer of wheat, and it has felt the brunt of the rising prices. According to the US financial service Bloomberg, the average price paid by Egypt’s General Authority for Supply Commodities (GASC) for wheat purchases this season has jumped by about $100 a ton. GASC is in charge of importing strategic commodities.
The rising cost of commodities is bound to be felt by end consumers, Hani Amer, an analyst with investment bank Sigma Capital, told Al-Ahram Weekly. He said producers would pass additional costs to consumers in the form of higher price tabs. Already he said the prices of local food producers have increased by 10 per cent, and he expects more increases with the new year to enable them to maintain profit margins.
The rise in global commodity prices has been spurred by booming global demand, with $10.4 trillion of global stimulus leading to higher consumption, unfavourable weather conditions affecting food supply and prices, and pandemic-induced labour shortages, especially in food and agriculture, meaning higher labour costs.
Supply chain disruptions are another factor affecting commodity prices, with global supply chains having suffered from low investment since the outbreak of the pandemic and now not able to cater for the higher demand. High shipping costs triggered by energy shortages have also pushed up prices.
According to DCode, should the higher global prices persist, this will lead domestically to a higher cost of living because of higher energy, logistics, and food prices. It will also mean higher import bills due to higher prices of raw materials.
This could cause pressure on the pound due to a higher current account deficit given that Egypt is a net importer of foodstuffs. It could also trigger higher interest rates to contain inflationary pressures. Egypt’s headline inflation rate reached a 20-month high of 6.6 per cent in September, up from 5.7 per cent the month before on the back of higher food and beverage prices.
While the inflation rate remains within the Central Bank of Egypt (CBE) target of seven per cent (plus or minus two per cent), the upward trend is undeniable. The higher global prices are also expected to affect the government budget because they will mean higher government subsidy bills and interest payments and therefore a greater budget deficit.
However, Amer believes that the fact that the government has been swift in raising the price of subsidised vegetable oil could enable it to break even and spare it footing higher subsidy bills. He said it was the right move to take, since he did not want to see a repeat of the days when the government supported the value of the pound against the dollar leading to the draining of the country’s hard currency reserves. Gradually increasing the prices of subsidised goods was the right way to go, he said.
The issue of raising the price of subsidised bread was aired for the first time in decades in August by President Abdel-Fattah Al-Sisi. A loaf of subsidised bread is currently sold at LE0.05, whereas it is estimated to cost around LE0.6 to produce. Egypt spends around LE88 billion on food subsidies a year, and around half of this goes on bread. Around 67 million people receive food subsidies in Egypt, with each person entitled to five loaves per day.
The president said that any increase in the price of subsidised bread would not be drastic, but he said the cabinet should study the matter. Since then, no action has been taken. Deciding a new price for subsidised bread “will take time”, Moselhi said last week.
What could offset the negative effects of the global hike in prices, according to Christine Kamel, an economist with DCode, is the fact that the government is already in talks regarding hedging contracts against the rise in wheat and vegetable oil prices.
“Over the medium term, increasing local production and building strong local supply chains will make Egypt less susceptible to global price volatility,” Kamel added.
*A version of this article appears in print in the 4 November, 2021 edition of Al-Ahram Weekly