By bread alone

By Osama Diab

The Egyptian government looks to overhaul its bread subsidy system, but experts warn of a possible popular backlash.

14 April 2010

As the sun starts to set over the sprawling Sayyida Zeinab market, sellers begin to pack up their stalls, stowing fruit, vegetables and meat that have doubled in price during the last five years.

But not far away, the lines are still long at a small, worn bakery that sells subsidised bread, with dozens of men and women standing patiently, plastic bags in hand, waiting for a chance to snap up loaves at five piastres apiece.

With inflation hovering in the double digits, the lines are getting longer; a growing number of people are becoming reliant on the one food item that hasn't seen its price change in the past two decades.

But there are signs that the government, burdened by an annual bread subsidy bill of LE 16 billion, is planning to change radically the way it supplies bread to tens of millions of poor and working class Egyptians.

That is a prospect that worries Cairenes, many of whom lived through traumatic plans to revamp bread subsidies during the 1970s.

“Everything gets expensive: gas cylinders, sugar. What's next? Bread?” says a woman standing in line at the Sayyida Zeinab bakery, who asked to remain anonymous. “Bread means life for us. If they change its price, people will die.”

The government has not made its plans public, but a top official at the Ministry of Social Solidarity told Business Today Egypt that it was considering handing cash or in-kind subsidies directly to consumers, instead of supplying discounted flour to state-licensed bakeries, a process widely viewed as rife with corruption.

“There are no plans to eliminate subsidies, but we want… to reform the supply chain system,” said the official, who requested anonymity because he was not authorised to deal with the media. “We have a sincere will to reform and make sure the subsidies reach the right target group with a decent quality.”

The government has promised any changes to the system — which according to media reports could be overhauled as early as next year — would leave the total value of subsidies untouched.

But critics are worried that changes to the massive subsidy programme could result in a painful adjustment period. Egypt uses 13 million tons of flour per year to produce 220 million loaves of subsidised bread daily. Every day, the average urbanite has 3.1 loaves of subsidised bread, while rural dwellers consume 1.9 loaves.

What worries critics most is that the bread subsidy system itself might well be under threat. The centerpiece of the country's social safety net, food subsidies amount to about 1.8% of Egypt's GDP. Leaders have been eager to slash that tab in an effort to reduce the country's deficit, which currently stands at LE 57.5 billion.

The government has cut or reduced stipends on several essentials, including gas, as part of a slate of market reforms. While the liberalisation push has resulted in significant economic growth, experts warn against repeating history and deregulating the bread market.

A half-baked plan

On January 18, 1977, news spread that the government was planning to eliminate subsidies on basic commodities, including bread.

Hundreds of thousands of Egyptians took to the streets to protest the decision, one of the biggest social insurrections in the recent history of Egypt.

The uprising was eventually put down by the army, but the government of Anwar Sadat was forced to backpedal on the reforms.

“There's an economic term — a Giffen good,” says Karim Badr El-Din, a professor of economics at Sixth of October University. Unlike most commodities, “when incomes decline, its consumption increases.

“In Egypt, the Giffen good is a loaf of bread. It's a good with strategic implications for the nation.”

Governments have to be careful when they fiddle with things like that or they risk sparking an outpouring of popular anger, he says.

“The poorest segment of society has most of their income allocated for food going… to bread because it's cheap and sates their hunger. If people can't afford that … you can expect a reaction from them.”

That was evident two years ago when the price of wheat skyrocketed on the global market and the government struggled to provide enough flour to local bakeries. Shortages led to violence in bread lines and were among the causes of Cairo-wide protests.

John Salevurakis, a professor of economics at the American University in Cairo who specialises in food subsidies, says opening up the market can be a “myopic” approach.

“What we have learned from recent events is that the wholehearted embrace of liberalisation and worshipping at the altar of efficiency has the ability to yield or hasten our approach to crisis,” he says, a nod to the global economic downturn.

A state secret

To date, the government has refused to reveal its precise plans for the bread subsidy system. But a February article in al-Masry al-Youm, quoting an unnamed source, said starting from 2011, citizens will be able to choose between either direct cash payments or in-kind subsidies, most likely in the form of vouchers. Citizens who get cash subsidies would have to buy bread at the market price, which some experts estimate could reach 20 piastres a loaf — four time the subsidised rate.

Officials are eager to make the change because up to 15% of the subsidised flour provided to bakeries is siphoned off and sold on the open market, according to al-Masry al-Youm.

Changes to the system could have a dramatic effect on the more than 18,000 bakeries authorised to sell subsidised bread, 90% of which are privately owned. For decades, they have produced relatively low-quality bread but had no shortage of customers.

Many bakers say they have no problem charging market rates, but some clearly aren't prepared for the no-holds barred liberalisation of the sector.

“They should only allow authorised bakeries to sell bread, otherwise our business will be harmed because anyone would then have the chance to make and sell bread,” says Othman, the owner of the Sayyida Zeinab bakery, who asked his family name not be published.

Salevurakis supports a gradual elimination of subsidies so wages will have time to adjust. “The only way we can reduce or eliminate subsidies is to adopt a gradualist approach where the long-term schedule of reduction or elimination is known and credible,” says Salevurakis.

Bread in colloquial Arabic is aish, which translates to life, and for the 44% of the country living below $2 a day, according to the World Bank, the subsidies are a matter of survival.

“The humanitarian in me says that the current state of affairs is the only option,” says Salevurakis.

“The economist in me says that it's unsustainable, and the pragmatist in me says that we can achieve economically rational results only over a very long period of adjustment.”

This article first appeared in the March 2010 edition of Business Today Egypt. Republished here with the author's consent.