* Egyptian pound down over 8 percent since December
* Subsidies keep down prices of some staples for poor
* But costs of other foods climb
* Weak economy means firms hesitate to pass on costs
* Egypt's history of bread riots complicates decisions
By Sylvia Westall and Tom Perry
CAIRO, March 13 YDBWith croissants, baguettes
and bagels spilling off metal trolleys at the bakery where
Mohammed Alif works in central Cairo, food is not scarce, but
profits certainly are.
The Egyptian pound has lost more than 8 percent of its value
against the U.S. dollar since the end of December as concern
deepens about the state of the economy, which is being
undermined by political instability and rioting.
This, along with a general rise in global food prices, has
pushed up the amount which bakeries like Alif's have to pay for
imported ingredients traded in dollars, which in turn risks
feeding back into discontent with the new leadership.
The spectre of steep food price inflation driven by a weaker
pound is of particular worry to President Mohamed Mursi as he
grapples with spasms of unrest two years after the uprising that
toppled Hosni Mubarak and was itself partly driven by a sense of
mounting economic hardship in a country long steeped in poverty.
Flour and sugar are 50 percent more expensive than they were
a year ago, said Alif, and for now the bakery feels it has no
choice but to absorb the increase rather than passing it on to
"I can't make it more expensive because people cannot pay,"
he said, pausing between filling shelves with freshly baked
rolls and serving a steady flow of shoppers on the pavement.
Higher prices would drive away customers, and there is a
bigger underlying risk: if prices were to rise too quickly or if
supply were to start thinning out, there could be even more
unrest in a country with a history of bread riots.
That is one reason why, despite a heavy burden on the state
budget, Mursi's government is maintaining supplies of heavily
subsidised flat bread, which is sold for less than 1 U.S. cent
per piece and is aimed at the poor.
But there are no subsidies for products like those sold in
Alif's bakery, which caters to relatively affluent customers, so
his and other businesses bear the burden of price rises.
Some bakers have started shrinking the size of loaves and
cakes in an apparent attempt to protect margins. As data
released by the government this week showed, others have started
passing on part of their higher costs to consumers.
Annual consumer price inflation in Egyptian cities leapt to
8.2 percent in February from 6.3 percent in January, reaching
the highest level since May. Food and drink prices rose 9.3
percent year-on-year last month.
Nancy Fahim, economist at Standard Chartered in Dubai,
predicted the weakness of Egypt's economy may limit any rise in
overall inflation, however; average national inflation in the
current fiscal year to June may yet be lower than last fiscal
year's average of 8.7 percent, she said.
But Fahim added that inflation coupled with high
unemployment, officially estimated at 13 percent, was likely to
pressure the government into maintaining subsidies, despite
their increasing burden on state finances.
The government spends over $5.5 billion a year on food
subsidies, which also cover items such as rice, oil and sugar.
Curbs on bread subsidies triggered severe riots in 1977, and as
recently as 2008, Mubarak faced protests over shortages.
In 2003, a sharp decline in the value of the pound caused
the price of non-subsidised bread to soar, leaving more
Egyptians buying the cheaper, subsidised flat loaves and
triggering supply shortages.
Despite the weakness of the currency, bread supplies appear
ample. Still, wheat imports are down sharply this year as the
economic crisis makes it harder for Egypt to arrange payments;
between Jan. 1 and Feb. 20, the country bought around 235,000
tonnes, roughly a third of what it purchased in the same period
a year ago.
Wheat traders in Cairo said Egypt appeared to be running
down strategic stocks of nearly 2.3 million tonnes to avoid
having to use foreign exchange for imports.
In the next Egyptian harvest, which is expected to start at
the end next month, the government aims to raise the amount of
local wheat which it obtains to 4 million tonnes by boosting its
purchase price by 5 percent. In previous years, its targets
ranged between 2.4 and 3.7 million tonnes.
But the success of this strategy will depend on weather,
bureaucratic efficiency and other factors. As the world's
biggest wheat buyer, Egypt relies heavily on imports to feed its
84 million people; half of the wheat they consume is imported.
In 2010/11, one Egyptian in four was living beneath the
national poverty line of $1.65 a day, according to UNICEF.
Economists say many more live just above the poverty line.
For Cairo shopper Mohammed Ali, price rises in recent months
have left only enough money for basic necessities. Standing at a
bread stall on a busy street in the capital, he said he could
not even think about spending cash on luxuries such as travel.
"Food prices are rising, the economy is sick and the
politicians just sit on their chairs," he said, miming a man
lounging back and stroking his chin.
"I have just enough money for food, but nothing else," he
said, leaving with a small plastic bag stuffed with rolls to
feed his family.
Bakers who normally receive government subsidies to cover
low-cost loaves and higher fuel prices say they have not been
paid as regularly as before. The government owes such bakeries
payments dating back six months, the head of the bakers'
association said in February, threatening strike action if the
problem was not solved.
Prices at general stores have also gone up. Alfa Market, a
supermarket chain catering to wealthier Egyptians, has been
forced to raise prices several times over the past two months,
owner Mohamad Zada said. The price of cooking oil has gone up on
three occasions in that period.
"There is a 20- to 30-percent increase in prices ... for
everything," he told Reuters.
For now, Zada has not heard complaints from customers about
the price rises, but Alfa has been careful to limit the price of
its bread, even though this is eating into profits: "People say
changing the price of the bread would be a crime," he said.
The fall of the Egyptian pound has also become a headache
for Hatem Zidan, sales and marketing manager at milling company
Flour Land, which produces flour, pasta and biscuits with
In two months the price he pays for a tonne of flour has
risen 16 percent to 3,250 pounds ($480). The volatility of the
exchange rate is making his work next to impossible, he said.
"I can make a deal and then I have the surprise that I lose
money. Now I am working day by day," he said. "I cannot make
contracts for three months with businesses like I used to."
Samir Radwan, an economist and former finance minister, says
Egypt must learn from its troubled past. "The history of revolts
in Egypt is the history of the price index," said Radwan, citing
a pattern dating back to 1919. "I worry a lot about this.
"Poor people really have their back against the wall."