VZCZCXYZ0000
RR RUEHWEB
DE RUEHEG #3021/01 2840906
ZNR UUUUU ZZH
R 110906Z OCT 07
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 7157
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0348
UNCLAS CAIRO 003021
SIPDIS
SENSITIVE
SIPDIS
STATE FOR NEA/ELA, NEA/RA
USAID FOR ANE/MEA MCCLOUD AND RILEY
TREASURY FOR MATHIASON AND HIRSON
COMMERCE FOR 4520/ITA/ANESA/OBERG
E.O. 12958: N/A
TAGS: PGOV ECON EG
SUBJECT: RAMADAN HIGHLIGHTS EGYPTIANS' INFLATION CONCERNS
REF: A. Cairo 0361
B. Cairo 2588
C. Cairo 2887
D. Cairo 2983
Sensitive but unclassified. Please handle accordingly.
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Summary
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1. (SBU) Egypt's overall inflation rate declined over the summer
from a peak of 12% year-on-year (y-o-y) in March 2007, but ticked up
again with the start of Ramadan in September. Some of the increase
is attributable to new Consumer Price Index (CPI) methodology
introduced at the beginning of September. But most of the increase,
particularly the 16.4% y-o-y increase in food prices, is due to the
annual "Ramadan effect." Wholesalers and retailers take advantage
of higher consumption and consumer expectation of higher costs to
raise prices beyond reasonable profit margins. Hoarding of
traditional food items exacerbates the problem, as does lack of an
organized consumer sector. This year, the GOE responded with the
usual rhetoric about stricter control of markets, but did not call
for voluntary price restraints or issue price guidelines, as in past
years. Global variables, such as record high international prices
for wheat have led to higher bread prices and public protests. Both
private observers and GOE officials, while concerned about public
discontent, do not believe it will become unmanageable.
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Inflation Trending Down, but Food Prices Jump during Ramadan
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2. (U) Egypt's inflation rate began to decline over the summer,
after peaking at 12% y-o-y in March 2007. The rate decreased to 8%
y-o-y in July, and remained relatively steady at 8.4% y-o-y in
August. The decline bears out the Central Bank's claim that the
steep rise in inflation in the early months of 2007 was pass-through
from the 2006 Avian Influenza outbreak and fuel subsidy adjustments
(Ref. A). But inflation ticked up again with the start of Ramadan on
September 13. By the end of September, the monthly inflation rate
had reached 10.5% y-o-y, and food prices had jumped dramatically, by
16.4% y-o-y.
3. (U) Some of the up-tick can be attributed to a new CPI unveiled
in early September. The new index, developed with assistance from
the U.S. Bureau of Labor Statistic and the IMF, adds new items to
the consumer basket, adjusts the weighting of items, including food,
beverages and housing, and uses new methodology to calculate the
inflation rate. The new index is based on a 2004/2005 Household
Income and Expenditure Survey. Some analysts were surprise that
September's overall inflation rate (10.5%) did not increase more
with introduction of the new CPI. The last time the GOE updated the
CPI, in July 2004 (using a 1999/2000 Household Income and
Expenditure Survey as the base year), inflation jumped from 4.4% in
June 2004 to 17% in July 2004. The IMF projects inflation in the
6-9% range in the coming year, as Egypt's economic recovery
continues and the GOE carries through with planned energy subsidy
reductions.
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The "Ramadan Effect"
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4. (U) While the increase in overall inflation from August to
September was less than some expected, the 16.4% y-o-y increase in
food prices in September was right in line with predictions for
Ramadan. Last year saw an 11.8% y-o-y increase in overall inflation
and a 15.1% increase in food prices in October, the month in which
most of Ramadan fell. Average food inflation was for all of 2006
was 10%. According to a study by the Institute of National Planning
(INP), family expenditure on basic foodstuffs increases on average
30% during Ramadan, due to higher consumption (despite daily
fasting) and higher food prices. The INP researchers noted that
both wholesalers and retailers take advantage of higher consumption
and consumer expectation of higher costs to increase prices beyond
reasonable profit margins. Many suppliers and shopkeepers begin
raising prices by up to 50% even before the start Ramadan.
5. (U) In addition to price gouging by wholesalers and retailers,
local economists attribute some of the exaggerated price increases
in Ramadan to lack of proper regulation of the food supply chain.
Many wholesalers are not licensed, and engage in anti-competitive
practices, such as hoarding supplies. Shopkeepers and even some
individuals also hoard supplies, waiting for prices to increase
before selling their stockpiles. In chronicling the annual Ramadan
inflation, the media is full of reports of retailers blaming
increases on suppliers, and vice versa. Neither sector is subject
to consistent regulatory supervision, as Egypt lacks developed
consumer protection mechanisms, and the nascent Egyptian Competition
Authority (ECA) only investigates anti-competitive practices if a
complaint is filed.
6. (U) Hany Kadry, Advisor to the Minister of Finance, told econoff
that lack of an organized consumer sector is a major factor in price
increases during Ramadan. Passive Egyptian consumers believe the
government should control prices, and are unwilling to organize and
make the annual price gouging unprofitable for the seller. Most
consumers are unwilling to return even defective or spoiled items,
as store-owners don't accept returns at all, even for
defective/spoiled merchandise. Suppliers and retailers are also
aware that consumers do not expect prices to decrease after Ramadan,
so post-Ramadan prices remain at the higher levels reached during
Ramadan. Kadry estimated that this "Ramadan effect" could go on
indefinitely, until consumers are "no longer able to consume." But
as long as the GOE provides a minimal annual public sector wage
increase, most Egyptian families will be able to absorb the higher
food prices through a combination of product substitution and "doing
without," according to Kadry.
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The Usual GOE Response
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7. (U) This year, the GOE went through the usual motions in
responding to Ramadan price increases, discussing the topic in
Cabinet meetings, and calling for stricter control of markets,
according to press reports. Even President Mubarak mentioned
bringing inflation under control in his annual speech on October 6,
the anniversary of the 1973 Yom Kippur War. Unlike in past years,
however, the GOE did not call for voluntary price restraints or
issue price guidelines, as this has proved completely ineffective in
the past. Though the GOE has provided no substantive policy
statements of how markets should be regulated, the government did
set up some public markets/distribution points selling basic goods
at pre-Ramadan prices. These distribution centers are not
particularly well targeted, however, so middle income consumers can
benefit as well as the poor.
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International Factors Affecting Egypt
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8. (U) In the months leading up to Ramadan, increases in
international commodity prices, including wheat, corn and edible
oils, also began affecting the prices of staple items in Egypt,
bread in particular. In August, bread prices rose by 42%. The GOE
allocated an additional LE 4.7 billion ($836 million) for bread
subsidies (the original allocation in the FY 2006/07 was LE 7.3
billion or $1.2 billion) in response to the shortage, and has
indicated it may allocate even more. The GOE did nothing, however,
to alter the method of subsidization. Subsidized flour is provided
to bakeries, which often re-sell the flour at market prices, rather
than making low-cost bread for the poor (Ref. B).
9. (U) The increase in bread prices is reaching a crisis point in
some areas of Egypt. Some analysts believe the crisis exacerbated
recent protests by textile workers at one of Egypt's largest
state-owned factories in the Nile Delta city of Mehalla El Kubra
(Ref. C). Press reports indicated that many protesting textile
workers were holding grocery store receipts to demonstrate the
difficulties brought on by low/unpaid wages. The protesters
succeeded in obtaining a 7% wage increase, which may lead to other
strikes by workers from publicly-owned enterprises demanding wage
increases in line with inflation rates (Ref. D).
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Private and Government Observers Concerned, Somewhat
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10. (SBU) Naglaa Azzam, a professor of sociology at Cairo
University, told econoff that this year's bout of Ramadan inflation
has strained the GOE's already tense relationship with the Egyptian
people. But public discontent and disconnection with the government
is not likely to spill over into civil disturbances, according to
Azzam. Instead, Azzam believes the public will bottle up its
frustrations, as it always does. Her views were echoed by Ahmed
Abulzeid, Assistant Minister of Investment, who told econoff that he
believes that even with the new CPI index, inflation figures are
still understated. But public discontent will not become a
"revolution," as the GOE will, in the short run, meet the minimum
demands of the public. He feared, however, that protests such as
those in Mehalla El Kubra could become more violent, leading to more
violent government crackdowns, as the GOE values domestic
tranquility above all else.
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Comment
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11. (U) Although Egyptian consumers look to the government to
control prices, the GOE appears less inclined than in the past to
intervene in the market and impose even voluntary price controls.
One of the long term benefits of economic growth is the appearance
of new producers and retailers, whose additional competition in the
marketplace should drive prices down. Unfortunately, Egypt's
impressive economic growth rate has not yet brought about this
result. For the foreseeable future, consuming, one of the major
activities of Ramadan, will still be hard on the average Egyptian's
pocketbook.
JONES