Egypt Faces Food Insecurity and Social Unrest as Strategic Grain Stocks Fall

13 March 2013 FDI Team

Egypt faces heightened food insecurity as the depletion of foreign reserves undermines the government’s ability to maintain supplies of subsidised food. Subsequent increases in food prices could spur public protests that would challenge the government’s hold on power.

Background

Egypt is the world’s largest grain importer. Domestic production levels fall well short of demand and half of the 18.8 million tonnes of grain that Egypt consumes annually is imported. Egypt’s General Authority for Supply Commodities (GASC) buys strategically on global markets to ensure that wheat stocks are equal to at least six months’ consumption. This is the level necessary to maintain the programme of heavily subsidised flat loaves that are supplied to 40 per cent of Egypt’s population. Egypt has a history of civil unrest when food prices rise and, after bread riots in 2008 and 2011, protecting the food supply is considered crucial to maintaining social peace.

Comment

Egypt’s wheat imports have declined sharply this year, leading to a large depletion of wheat stocks. Late last month, the Cabinet announced that strategic stocks had dropped to 2.3 million tonnes, sufficient to last only until 29 May. The government has claimed that it is allocating top financing priority to wheat purchases and that the arrival of tendered purchases for March and April will extend supplies to four months. Private importers and financiers, however, have expressed scepticism, pointing to fewer grain ship arrivals as evidence that GASC is having problems maintaining imports. Importers are also having difficulty accessing foreign currency and have reported that some parties are rejecting letters of credit used to finance purchases.

Egypt is currently experiencing severe economic problems. The Egyptian pound has dropped eight per cent in value since the start of January and foreign reserves have fallen to US$13.6 billion, from US$36 billion prior to the fall of former president Hosni Mubarak. A safe level, required to maintain a three-month grain supply, is considered to be US$15 billion. The fall in the value of the pound is placing significant strain on the government budget, as it pushes up the cost of state subsidies on food and energy that are predominantly US dollar-denominated. Continued political turmoil has caused foreign investment and tourism to dry up and measures to tighten capital controls are unsustainable in the long-term.

The budget deficit is forecast to hit ten per cent by the end of the financial year, a level the government cannot afford and that would necessitate rises in the price of some goods and services. To avoid that, Egypt will rely on the successful completion of negotiations for a long-delayed US$4.8 billion loan from the IMF.

In the meantime, the government is supporting efforts to increase the domestic wheat supply, by providing incentives and raising the price paid to domestic producers. An increase in domestic output of 500,000 tonnes is expected, but this will still not meet overall needs. The higher level of output is unlikely to be sustainable, given existing pressures on Egypt’s agricultural sector. GASC is considering abandoning its public tender system, which has long been a centre point of global grain markets. Australia is one of the four main suppliers of Egyptian wheat imports. The abandonment of the public tender system will have implications for Australian wheat producers, as it will remove a long-held source of market transparency.

If the government fails to provide adequate food at acceptable prices, it is likely to lead to serious civil unrest. The Egyptian Central Bank is not well placed to support grain supplies in the case of escalating tensions. Given the fall in strategic supplies and foreign reserves, it is unlikely that subsidised food provision could be maintained in the event of another protracted period of unrest. This would heighten food insecurity for large sectors of the population. It would also challenge the Muslim Brotherhood government’s hold on power and could have destabilising effects across north-east Africa, particularly within the context of potential turmoil resulting from coming parliamentary elections.

Lauren Power
Research Analyst
Global Food and Water Security Research Programme

[email protected]

 

 

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