Egypt inches towards far-reaching food subsidy reform

CAIRO Wed Sep 28, 2011 10:11am EDT

A farmer harvests unripened wheat by hand in a field in the Nile Delta town of Mansoura city, 210 km (130 miles) north of Cairo, March 23, 2008. REUTERS/Nasser Nuri

A farmer harvests unripened wheat by hand in a field in the Nile Delta town of Mansoura city, 210 km (130 miles) north of Cairo, March 23, 2008.

Credit: Reuters/Nasser Nuri

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CAIRO (Reuters) - Egypt, once the breadbasket of the ancient Roman empire and now the world's biggest wheat importer, is paying a hefty price to keep its citizens fed with cheap loaves and other foodstuffs.

The $5.5 billion which it spends each year on food subsidies, mostly on wheat, is a burden that it can ill afford as the economy falters and the budget deficit balloons after the uprising that ousted president Hosni Mubarak in February.

But the financial pressure is not the only cost of the subsidy system; subsidies have distorted Egypt's agriculture. Bread is so cheap that it is sometimes used as animal feed. A focus on imports has led to neglect of farms at home. Produce often rots before it ever reaches market.

Now the country's post-Mubarak government is inching toward far-reaching reforms of the system. No one talks of scrapping subsidies altogether -- the uprising against Mubarak was partly fueled by anger at the deep divide between rich and poor. But experts say the financial burden could be reduced and cash more usefully spent on strengthening the agriculture sector.

"We need a radical shift in the way we deal with our bread subsidy system," Social Solidarity Minister Gouda Abdel Khaleq told a seminar this month on food security in Egypt. His ministry is in charge of the country's main wheat buying organization and other bodies that handle subsidized foods, though any reform will also need input from the finance and agriculture ministries.

More than three quarters of Egypt's 80 million people can buy, via their ration cards, saucer-sized flat loaves of 130 grams at 5 piasters (less than 1 U.S. cent) each. Abdel Khaleq said this system was unsustainable.

In the fiscal year ended on June 30, the government spent about 33 billion Egyptian pounds ($5.5 billion) on wheat, sugar, rice and food oil subsidies. It forecasts a budget deficit of 8.6 percent of gross domestic product for the current year, and analysts say it might exceed that level.

"It is like someone climbing to the top of the Cairo Tower, sticking their tongue out and jumping," Abdel Khaleq, who joined the army-appointed government from a party with Socialist roots, said of the subsidy system, referring to an iconic building in the center of Egypt's capital.

Few dispute the need for change. But tampering with the system, set up in the 1950s by president Gamal Abdel Nasser, is tricky. In 1977, president Anwar Sadat's bid to raise bread prices led to riots. Mubarak also faced protests in 2008 over shortages.

Even before Mubarak's ouster the government talked about subsidy reform, but it made little progress. A plan to set up a voucher system for butane cooking gas cylinders, so that only the most needy could buy the most heavily subsidized cylinders, was due to be implemented before the uprising. It was postponed and the current, army-backed government has now said a trial scheme will start in October.

Anything which the current government does to change food subsidies will be liable to reversal. Parliamentary elections, to be held in stages, are due to start in November and end in January; a date for a presidential vote has yet to be set. With roughly 50 political parties competing in a new electoral landscape, predicting the shape of the new government is highly uncertain.

SOCIAL JUSTICE

But the fact that the current government is willing to tackle the issue shows widespread support for the idea of reform. Many experts believe the bloated system is too broad to help people most in need.

"The subsidy system is not a reflection of social justice; around two-thirds of the people benefiting from it are not poor," Magda Kandil, executive director and director of research at the Egyptian Center for Economic Studies, told the seminar.

Mills produce subsidized flour for the government for as little as 160 Egyptian pounds a tonne, while its market value would be around 2,000 pounds. Experts say subsidized flour is often leaked into the open market at a big profit.

To stop this, the government is considering making mills and bakeries purchase wheat and flour at market prices. The government would then buy the bread at market prices but sell it on with a subsidy to ration card holders, Abdel Khaleq said.

However, subsidized bread would still be cheaper than animal feed, a price distortion which encourages waste.

"The people who don't need the subsidy are taking the bread anyway and feeding it to their animals," Kandil said.

With bread so cheap, Egyptians have one of the world's highest rates of wheat consumption per capita in the world. Egyptians consume about 180 to 200 kg of wheat a year, compared to an estimated 51 kg for Mexicans.

"We need to change consumer habits so that we are not consuming so much bread. In Mexico, for example, they rely more on potatoes. Why can't we start shifting toward that?" said Saad Nassar, adviser to the agriculture minister.

So along with subsidy reform, Egyptian officials and experts are discussing how to change farm production and make it more efficient.

"Forget the word self-sufficiency -- what we really need to be looking for is agricultural efficiency," said Adel Beshai, an economics professor and agriculture specialist at the American University in Cairo. "We have been ignoring agriculture."

RECLAIMING LAND

Egypt consumes about 14 million tonnes of wheat each year but usually produces about half that amount. Beshai said Egypt needed to produce at least 70 percent of its wheat needs if it wanted greater food security. He said that could be achieved by expanding agriculture beyond the Nile Valley and Delta, where it is now concentrated.

Agriculture on the northern Mediterranean coast, which was cultivated in Roman times, could be expanded, he said. Much of the area, dotted with holiday resorts, is now a summer retreat for affluent Egyptians.

"You have 1.5 million acres behind these resorts that are readily cultivable with underground water. You can grow wheat there," Beshai said.

So far, Egypt has had mixed results with land reclamation for agriculture. The Toshka project to reclaim tracts of desert fed from the Aswan dam in the south of the country was launched in the 1990s but has made limited progress.

Even without expanding farmland, however, Egypt could cut imports, improve its domestic production and generate more cash from exports by improving its distribution system to reduce the amount of food lost before it reaches the consumer.

"Currently, post-harvest losses result in the destruction of 30 percent of the produce. In the case of tomatoes, post-harvest losses can reach 60 percent," said Angie Helmy, vice chairman of Egyptian Agrofoods Co.

"Produce is improperly packaged, it is stacked in a random way on trucks, travels exposed and does not receive any cooling," she added. Helmy, who has been exporting fresh produce to European markets for a year and a half, said addressing these problems would save large volumes of produce.

Water efficiency is another pressing issue. Most irrigation is now done by flooding fields from canals. Experts say this results in waste that Egypt cannot afford when it depends almost solely on the Nile for fresh water, and when upstream African states want to use more for themselves.

Advanced irrigation techniques, such as pivot systems that sprinkle water more efficiently, would mean more water available for land reclamation.

Experts say farmers using these techniques and helped by private investment could expand output of cash crops for export to Europe and elsewhere. That might not cut the wheat import bill, but it would generate more hard currency to pay for it.

"We need to adopt the agriculture for export concept," Beshai said.

Such reforms of agriculture have been discussed for years in Egypt but have often failed because of poorly functioning government bureaucracies and red tape, which make investing in the sector a challenge. Many of Egypt's farmers own very small holdings which make changing growing practices and the creation of large, economically efficient farms difficult.

But success with food subsidy reform could encourage the government and the private sector to press ahead with wider changes to the agricultural sector, while freeing up some government money to promote them.

(Editing by Andrew Torchia)

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