Subsidy Reform Will Increase Efficiency
BMI View : The introduction of an electronic method of delivering bread subsidies in Egypt will make the delivery process more efficient. If correctly implemented, this is likely to lead to a decrease in the country's wheat exports, which we believe the government could target amid a poor exchange rate and low foreign currency reserves.
The Egyptian government is looking to streamline its food subsidy scheme, which costs about USD4.5bn per year. Two-thirds of this amount was spent on bread products, the staple foodstuff for low-income Egyptians. The reliance of low-income families on government-provided bread has risen substantially over recent years, as poverty has risen following the 2011 Arab Spring. Given Egypt's climate and limited arable land, wheat production in the country regularly accounts for less than 50-55% of total consumption. Indeed, between 2006/07 and 2013/14, wheat imports rose 43.8%, compared with consumption growth of 24.8%.
|Imports Account For Lion's Share|
|Egypt - Wheat Imports (LHS, '000 tonnes) & Growth|
Weakness in the Egyptian pound, particularly since the end of 2012, has made wheat imports considerably more costly for the government. Similarly, Egypt's foreign currency reserves have been drained since the beginning of 2011, which the high cost of USD-denominated wheat has contributed to. Egypt is likely to experience high inflation over the next decade, which will keep a large portion of the nation dependent on food subsidies. Though our Country Risk team projects average annual real GDP and private consumption growth of 3.9% and 4.6% respectively between 2014 and 2018, inflation will average 8.2% annually across the same time frame. Between 2013 and 2018, real private consumption growth will lag behind regional peers Algeria, Saudi Arabia and Iran.
|Getting Costlier, Draining Reserves|
|Egypt - Foreign Exchange Reserves (LHS) & EGP/USD Spot Price|
The Egyptian government is therefore overhauling the current bread subsidy system with the aim to save the government EGP11bn (USD1.6bn) per year, around half of the annual bread subsidy expenditure. The new method introduces electronic cards that will monitor the distribution of bread to each family more effectively. The allocation problem that currently exists is not a result of low supplies, but of inefficient supply chains and people who abuse the system. Indeed, in March, Minister of Supply Khaled Hanafy believes that the current bread distribution system 'has wasted between 20-25% of the state's bread subsidies budget.'
|Production Deficit Remains|
|Egypt - Wheat Production & Consumption|
The new electronic subsidy scheme has been trialled in the small Egyptian city of Port Said, where it has reportedly worked well. Effective implementation of the new electronic system would increase the efficiency of food subsidies in the country, thereby reducing wastage of wheat and bread. The reduced wastage may result in stagnating short-term consumption growth or improved stocks, unless the government decides to use the surplus to provide more bread to its citizens. We believe that this is unlikely given the current expense of wheat imports to Egypt and the country's low currency reserves.
|Largest Global Wheat Importers (LHS, '000 tonnes) & Origin Of Egypt's Wheat Imports|
Decline, or even stagnation, of Egyptian wheat imports in the future would have two major ramifications. First, as the world's largest wheat importer, a sizeable amount of the grain would enter the world market, which is likely to depress global prices. Second, Russia may see its grains export dynamic shift, given that the country makes up more than half of Egypt's wheat imports. Overall, wheat production in Egypt is also unlikely to significantly change in the next few years, as self-sufficiency has never been a realistic goal of the country. Indeed, we forecast wheat production to rise from 8.5mn tonnes in 2012/13 to 9.3mn tonnes in 2017/18, growth of only 9.4%.
|Wheat Production, '000 tonnes 1||8,500.0||8,800.0||9,000.0||9,144.0||9,225.0||9,300.0|
|Wheat Consumption, '000 tonnes 1||18,700.0||19,100.0||19,482.0||19,969.1||20,388.4||20,694.2|
|Notes: f BMI forecasts. Sources: 1 USDA.|