The continued disruption to wheat markets from the Russian invasion of Ukraine predictably draws global attention to Egypt’s own “wheat problem.” The absurdly high quantities of international wheat procured, and money spent consistently place Egypt as the world’s largest importer by a significant margin.
Focusing on high import figures, however, can isolate Egypt’s wheat problem from its role in developing its agricultural sector, food security, and social protection. This complicated issue has important implications for the health and well-being of the country’s population, economy, and its social contract.
More fair and complete assessments of Egypt’s wheat problem would include consideration of the following:
The Egyptian government has reduced risks in the wheat supply, chiefly by addressing quantity risks but not price risks. Despite domestic agricultural sector investments finally modernising some elements of the wheat supply, more reform is very much needed to address future risks and decrease domestic demand.
A food subsidy programme is an extremely outdated, economically inefficient, and very ineffective means to food security. When introducing cash transfer programmes in 2015, the country finally adopted a modern instrument for poverty reduction and social protection.
Continuing to transition the government budgets towards cash transfers and away from food subsidies will have massive gains in human capital stock, economic efficiency, and social justice.
Risks to the wheat supply
Egypt continues to perform globally well at weathering the impacts of significant global external shocks. The country also continues to impress in its ability to bounce back and deliver substantial economic growth following global crises. But the COVID-19 pandemic and the Russian invasion of Ukraine continue to present market disruptions that increase the risks to Egypt’s wheat supply.
To address quantity risks, the Egyptian government has diversified its wheat suppliers. Before the end of the previous FY, Egypt’s General Authority for Supply Commodities announced the largest single acquisition of wheat since 2012, which included French, Romanian, and Bulgarian wheat. Egypt also has an exemption to purchase stocks from India despite the country’s ban.
Russian and Ukrainian wheat historically account for more than three-quarters of Egypt’s imported wheat supply. Recent imports have included Russian wheat, however Ukrainian wheat continues to face delays in reaching Egypt’s ports. The two countries typically supply more than a quarter of the world’s wheat.
While this massive purchase of wheat did take advantage of a recent minor price slump to bolster supply, Egypt continues to face significant price risks. Although the COVID-19 pandemic and the Russian invasion have substantially affected current quantity risks, price risks are typically the bigger issue.
Food prices are volatile and high and will remain so, probably at least for a year or two. One week into the Russian invasion of Ukraine, wheat prices reached a 14-year high and then continued to set new records. The international benchmark for wheat prices saw a 50% jump since the invasion, for example. Price risks will also continue even after the Russian invasion ends immediate market disruptions because of input shortages and disruptions to the crop cycle.
The Egyptian government has made little progress in addressing external price risks while it continues to hijack internal markets. It will likely take some time to responsibly liberalise the latter. However, more could be done to address external risks by using modern financial mechanisms to hedge against future price risks, even while there is considerable ambiguity surrounding the future of wheat prices.
Old estimates suggested Egypt could have saved up $600m of its $2.75bn wheat import bill following the historic food price highs that came about after the 2008 global financial crisis if it utilised modern financial instruments, according to a 2009 report co-published by the World Bank, the FAO, and IFAD. Current prices and volatility are higher than they were then.
Rather than use modern price risk management mechanisms, the Egyptian government continues to purchase wheat through international tenders, and in recent weeks, through private negotiations with trading houses.
While the Egyptian government does work to reduce price risk by focusing on macroeconomic stability through foreign currency reserves and exchange rate stability, it is not doing much to directly reduce exposure to international market volatility. Why this is so remains unclear. Perhaps knowing more about what President Abdel Fattah Al-Sisi discussed with France’s President Emmanuel Macron on 22 July or with Russia’s Minister of Foreign Affairs Sergei Lavrov on 24 Julywould shed some light.
Meanwhile, Egypt continues to aim to increase its reliance on domestic production and increase efficiency gains through investments in grain silos. According to government announcements, this year’s domestic production will show an expected over 10% y-o-y increase. To reduce post-harvest losses from the old system of open-air containers, significant investments continue to be made to build modern and digitally monitored grain storage.
Food security and social protection
Also, on the eve of the conclusion of Egypt’s previous FY, the World Bank announced it is providing Egypt with $500m in development funding to combat food insecurity by supporting wheat purchases to maintain a strategic stockpile and to increase the country’s storage capacity.
Plans to reform Egypt’s food subsidies programme have been postponed protecting the population from rising food prices, despite being costly to the country’s fiscal position. Last year, Al-Sisi announced a plan to phase down bread subsidies. This was part of Egypt’s 2016 economic reforms plan in its deal with the IMF.
Ditching food subsidies in favour of cash transfer programmes is an obvious step. Food subsidies reach about 90% of the population, according to Egypt’s Central Agency for Public Mobilisation and Statistics (CAPMAS). The substantial budgetary outlays accrue benefits to the rich, those with a good income, and even those with one or multiple homes at Egypt’s many beautiful beaches.
Instead, through cash transfer programmes, the same money could be used to help more directly the approximately one-third of Egyptian households that live in poverty and better feed the estimated one-quarter of the country’s children under the age of five who suffer from chronic malnutrition. This would mitigate the current experience of poverty while helping to stop poverty from being transferred to generation after generation.
Preferring food subsidies to cash transfers is like preferring landlines and fax machines to mobile phones and the internet, unless you are illegally or unfairly benefitting from the food subsidy programme. Comparatively, cash transfer programmes are more effective and economically efficient at achieving social and economic goals.
Dozens of developing countries have, for a long time now, effectively used cash transfers to disrupt poverty and increase investments in health and education so new generations can have better opportunities. In fact, some of the world’s richest countries have implemented lessons learned from these programmes to improve their own social protection systems.
In 2015, Egypt finally introduced two cash transfer programmes that currently support over 2m households — households with the poor, the elderly, and people living with disabilities. Rigorous gold-standard evaluations assessing the impact of Egypt’s cash transfer programmes indicate the country has done a very good job with its initial implementation.
As it expands its cash transfer programmes, Egypt will benefit from the great amount of existing research that well identifies critical issues for consideration; chief among them, whether to continue with administratively expensive conditional cash transfers in a country where health and education supply side issues are substantial, or to internalise the evidence that demonstrates poor households will make good decisions without the need to enforce conditions.
Egypt’s wheat problem is a symptom of the problems with Egypt’s social contract. Note the impact of the expectations and behaviours of the non-poor on the government’s ability to help the poor.
Mitigating current poverty and ensuring social stability with rising food prices and inflation is no doubt a chief consideration. The COVID-19 pandemic and the Russian invasion of Ukraine have delayed reforms Egypt needs and presented new challenges to Egypt’s wheat problem.
Since the last major global food crisis, the Egyptian government has taken effective action to reduce risks to the wheat supply, however, more politically sensitive reforms are needed.
Dr Iris Boutros is a behavioural and development economist and strategist. She writes about employment, enterprise development, inclusion, and economic growth. Her work currently focuses on gains and value from connecting behaviour, the brain, and the body.
