Patrick Werr: Egypt starved of solutions to bread subsidy dilemma

The cash-strapped government has been having problems financing vital imports of wheat, writes Patrick Werr.

A perfect storm is about to smash into one of the most sensitive areas of Egyptian policy – the bread subsidy programme. If the government doesn’t deal with it urgently, the country could face an unprecedented emergency.

The government sells bread to its people at 0.05 Egyptian pounds (2 fils) a loaf, a programme that is expected to costs it an enormous US$4.8 billion dollars this year. This year, Egyptians are expected to consume 19.6 million tonnes of wheat, both subsidised and unsubsidised. Local farmers have planted enough wheat this year to ensure an estimated harvest of 8.1 million tonnes by the end of June. The rest must be imported from abroad.

The cash-strapped government had already been having problems financing these imports. It was delaying letters of credit for wheat suppliers, causing shipments to be delayed. This made traders somewhat reluctant to sell wheat to Egypt.

But then in December, Egypt’s agriculture quarantine authority threw a new spanner in the works when it suddenly rejected a shipment of French wheat that contained trace amounts of ergot, a fungus that in large amounts can harm human health, but otherwise is perfectly safe. Since then, Egypt is having a very big problem finding anyone willing to sell it wheat at all.

If there is one thing Egyptian governments have learnt not to mess with, it is the wheat sub­sidy programme, which ensures that poor Egyptians living on the margin have access to cheap bread. Lives depend on it.

The Sadat government once tried in January 1977 to sharply increase the price of a loaf to take pressure off a budget weighed down by the cost of subsidies. Riots broke out across the country overnight, leaving scores dead. The government quickly reversed the price increase.

In the 1980s, a desperate presi­dent Hosni Mubarak had to fly to Arabian Gulf countries re­peatedly to seek finance for wheat imports.

That is why the recent measures by the quarantine authority are so confounding.

According to one theory, Egyptian law had long ago stipulated zero ergot tolerance. But many years ago another law, more in line with international standards, was introduced to allow ergot content of up to 0.05 per cent, according to traders.

Unfortunately, there was a technical flaw in the way the new law was put in place, a flaw that until recently everyone had ignored. So under a strict legal interpretation, the old law is still in place.

Suppliers want a written document pledging to stick to the 0.05 rule, but no official wants to give them that document in writing.

The result is that wheat traders are refusing to sell wheat to Egypt or adding a huge premium above the international price to protect themselves in case their shipments are rejected.

For the first time in memory, the government has had to cancel wheat tenders for lack of sellers, including one on Sunday.

Both the government wheat importer, the General Authority for Supply Commodities (Gasc), which is under the supply ministry, and the minister of agriculture have been trying in the past few weeks to assure importers that the 0.05 per cent rule is still in place.

But the quarantine authority is having none of it and continues to reject shipments. It rejected one on Tuesday for having trace amounts of ergot in a vessel car­ry­ing Canadian wheat.

Egypt desperately needs to buy more wheat. The supply ministry says the country has enough to keep the country supplied until the middle of May, but Gasc has been having trouble buying for quite a while, and the ministry may be including wheat that has been ordered but not yet cleared quarantine in its figures.

The authority has been zealously applying the law in other areas as well. It recently took the unusual step of blocking four vessels with 130,000 tonnes of US soybeans for being contaminated with seeds of ambrosia, an invasive species that harms soybean crops.

The soybeans had been destined for processing in Egyptian factories, and replacing the rejected shipments could take months, according to traders. Since then, domestic soybean meal prices have soared by about 1,500 Egyptian pounds a tonne.

In the end, the solution is ­either to somehow rush through an amendment to the law or to have a thorough shake-up of the quarantine authority.

Patrick Werr has worked as a financial writer in Egypt for 25 years.

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