By Sarah Daoud
CAIRO: Amidst protests and social unrest, Egyptian officials are again talking about subsidies. Officials have told local media that they will absorb the global rise in food prices through subsidies.
“I think the government was keen to press ahead with the subsidies reform prior to the protests, gradually phasing out price subsidies with an objective to move towards a more targeted system that would save a lot of government resources away from those who do not need them and achieve more equity,” Magda Kandil, director of research at Egyptian Center for Economic Studies, told Daily News Egypt.
Kandil continued by explaining that the protests — which went on for a second day Tuesday with plans for a wider turnout Friday — prompted officials to postpone the plan in order to subdue the growing negative sentiment over the rising cost of living and unemployment. She added that the government will most likely resort to more subsides to reduce the frustration.
Investment bank Beltone Financial reported that the government has also called on the Food and Agriculture Organization (FAO) to limit speculative activities in food commodities trading.
Kandil said the rising cost of global commodities has put the government in a rather difficult position. “For subsidized items, either allow for some adjustment (which proved to be politically difficult) or increase the cost of subsidies in the government budget and the likelihood of a wider fiscal deficit.
“Further, international prices for non-subsidized items increase the price of imported goods, which are highly inelastic in Egypt, increasing the need for more subsidies to mitigate the effect on vulnerable groups with limited or no income.”
Minister of Trade and Industry Rachid Mohamed Rachid underscored the fact that an estimated 63 million people currently receive food and energy at subsidized prices, which has amounted the total subsidy earmarked to LE 102 billion in the current fiscal year’s budget.
The Minister of Social Solidarity has also restated the government’s pledge to continue its protection of consumers as well as individuals in the lower income brackets.
The Central Bank of Egypt’s Monetary Policy Committee (MPC) were due to meet Thursday to decide on overnight lending and deposit facility interest rates. Beltone has commented that they expect the MPC to decide in favor of maintaining the current rates of 9.75 percent and 8.25 percent, respectively.
They are also expected to keep the discount rate unchanged at 8.5 percent.
While annual inflation has accelerated in the past couple months with a jump in annual core inflation, the main driver of the inflation are the changes in food prices.
Egyptian urban inflation inched higher in the year to December to 10.3 percent, from 10.2 percent in November.
Kandil explained that the CBE is currently maintaining a neutral position while awaiting stronger evidence of growth.
“Rates could increase if there is stronger evidence of growth, or inflation persists on account of higher international prices and/or higher cost of imports in domestic currency due to a depreciated exchange rate,” she added.
Beltone’s statement also agrees with Kandil’s opinions and stated that even with the current fiscal year’s initial growth indicators pointing towards recovery and accelerated growth, it does not necessitate a modification in interest rates unless the recovery is interrupted by domestic or external causes.
It is expected that rates will remain the same throughout at least the first half of the current fiscal year.
