Abou Mohamed, an Egyptian doorkeeper who lives with his wife, is unable to get enough bread through his ration card. It only enables him to secure five subsidised loaves each.
He says this quota used to be sufficient when they were able to cook pasta or vegetables stuffed with rice. However, like Mohamed, many poor Egyptians eat bread as a filling carbohydrate-rich food because of its affordability.
[…] increase in prices was one of the important triggers of the Arab Spring.
Mohamed, who lives in the slum-ridden district of Beaulac in Giza, says there had been rumours that prices of both subsidised and unsubsidised bread were about to increase. True to form, the unregulated prices of bread went up by 50% on average last weekend, as a result of the wheat meltdown induced by the Russia-Ukraine war.
“Those who have three and four kids, what [can] they do?” Mohamed says, adding that he is bracing himself for tougher living conditions. “Things are getting more expensive, and the country […] is stagnant,” Mohamed tells The Africa Report. “People are tired […].”
He says food prices are bound to rise even higher during Ramadan, which is to be observed in April. Consumer prices tend to spike during the holy month, when Muslims fast from dawn till dusk, as there is usually higher demand for food products at the time.
War: Extra catalyst
The war that Russia initiated against Ukraine on 24 February ratchets up the urgency of Egypt’s wheat liberalisation. With both countries providing nearly 30% of the world’s traded wheat, the Russian invasion has sent prices of the popular grain soaring.
“The current environment is likely to speed up the transformation of their subsidised bread programme,” Andrey Sizov, managing director of SovEcon, a market analysis firm focused on the Black Sea agricultural region, tells The Africa Report with regards to Egypt’s expected course of action.
“They’ve been trying to [increase] prices for a long time and now will have to try again, obviously with caution as the authorities remember […] that increase in prices was one of the important triggers of the Arab Spring,” Sizov says.
Climbing wheat prices on the back of the war could see Egypt incur up to LE15bn ($955m) worth of extra cost, finance minister Mohamed Maait said in an interview with Bloomberg Asharq on Sunday 6 March.
One week into the war, wheat prices had reached a 14-year high, before they hit new records later on. In Chicago, the international benchmark, wheat prices are at $13.40 per bushel, a 50% jump since the Russian invasion. “If it [the war] lasts for at least a month or more the worst is not behind us – there could be a further 10-20% upside,” Sizov says.
How long will sanctions be applied to Russia, considering the things that it has done?
There is a great deal of ambiguity surrounding the future of wheat prices and a “considerable risk” that they will be volatile for a long time – maybe a year or two, says Arlan Suderman, chief commodities economist for brokerage StoneX.
“How long will sanctions be applied to Russia, considering the things that it has done? How much damage will be done to Ukraine’s infrastructure that may prevent crops from being planted and harvested? We do not have the answers to those questions,” he tells The Africa Report. “Price breaks are expected to occur whenever rumours of peace circulate.”
Liberalisation of wheat
Egypt, the world’s largest wheat importer, has been subsidising bread for decades to aid the poor, pricing it at 5 piasters ($0.0032) per loaf since 1988. It was only last summer that President Abdel Fattah el-Sisi unveiled a plan to phase down bread subsidies, announcing a reduction of each loaf size by 20g as a start.
This month, supply minister Ali el-Moselhy said wheat, flour and bread subsidies will gradually be lifted until the three items are completely liberalised, without revealing a timetable as the government is still mulling over the matter.
Moselhy said citizens living in poverty, which he roughly estimates at nearly 25 million people, will not be affected by the move as they will still receive the bread subsidies that they are currently entitled to in the form of financial support.
Around one third of Egypt’s 103 million population is under the poverty line. With 71 million beneficiaries of subsidised bread and wheat, Egypt produces 120.8 billion loaves every year at a subsidised cost of LE44.8bn ($2.85bn).
Removing bread and wheat subsidies will be another episode in the economic reforms plan that the government has been enforcing since 2016 following a $12bn deal with the IMF, which includes floating the Egyptian pound, with the aim of becoming a free market.
Egypt imports a substantial majority of its wheat consumption, estimated at 16m tonnes per annum. Last year, Russia and Ukraine provided nearly 50% and 30% respectively of the North African country’s wheat imports, which amounted to 12.9m tonnes, worth $3.2bn.
Aside from Europe, both Sizov and Suderman cite the US, Argentina and Australia as possible future alternative exporters of wheat that could partially fill the gap left by Russia and Ukraine.
We will likely see global buyers look to Europe to fill the void near-term…
“Keep in mind that much of the US crop is in a serious drought situation, although some weather models suggest those conditions may improve later this month,” Suderman says. “We will likely see global buyers look to Europe to fill the void near-term, although there are rumours that European nations may limit sales to other European countries.”
After the Ukrainian war erupted, the Egyptian General Authority for Supply Commodities had to cancel two wheat tenders that saw high prices and few bids. Meanwhile, two Egypt-bound cargoes reportedly remain stuck in Ukraine.
No shortages, higher inflation
Egypt’s Chamber of Cereals Industry expects the government to purchase up to 4m tonnes of wheat from local farmers this year, which constitutes an 11% year-on-year increase. This, along with wheat reserves, should fulfil Egypt’s needs until late 2022.
“It depends on the market conditions, they have some reserves and they will have their own crop in a few months [from mid-April to mid-July] – so I don’t think that they can face any physical shortages,” Sizov says.
Notwithstanding, astronomical jumps in wheat prices are bound to pose extra inflationary pressures on Egypt. Inflation rates have already been driven up worldwide by a post-pandemic supply-demand gap, before the war added fuel to fire by wreaking havoc on global markets.
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