INFLATION COMING DOWN, BUT PERSISTENT HIGH FOOD

UNCLAS CAIRO 002007

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EG PGOV
SUBJECT: INFLATION COMING DOWN, BUT PERSISTENT HIGH FOOD
PRICES SLOWING THE FALL

REF: CAIRO 001927


1. (U) Key Points:

-- Overall inflation has been falling for most of the year
and hit a 20-month low of 9% in August; however, food price
inflation has been very strong all through 2009.

-- The supply chain for food is full of inefficiencies which
exacerbate high food price problems. The Government of Egypt
(GOE) is trying to address some of them by improving
infrastructure.

-- The Central Bank of Egypt (CBE) seems unconcerned by
inflation and is focused on spurring economic growth. The
CBE has cut interest rates six times so far this year.

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Food Prices High This Year
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2. (SBU) Inflation in Egypt has been coming down from its
peak in summer 2008, but it has fallen at a slower pace than
economists expected. The rate reached a 20-month low of 9%
year-on-year (y-o-y) in August, down from its peak of over
20% last summer, but then increased to 10.8% in September.
Food prices were up 17.4% y-o-y in September. Food price
inflation has been very strong all through 2009, driven
mainly by fruit and vegetable prices according to Simon
Kitchen, Vice President of EFG-Hermes, a regional leading
investment bank. In addition, rising global sugar prices
drove up domestic sugar prices in September, and demand
during Ramadan drove up food prices over the past few months.
Food prices have a strong effect on the overall price index
because food accounts for about 44% of Egypt's consumer price
index.

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The "Ramadan Effect"
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3. (SBU) Increased demand pushes up food prices before and
during Ramadan, which ran from the end of August to the end
of September, since household spending on food increases
significantly due to higher overall consumption despite daily
fasting. In addition, some wholesalers and retailers take
advantage of the increased consumption and consumer
expectations of higher prices by hoarding goods and raising
prices, according to Amgad Hegazy, an economist at the
Ministry of Finance. In September, food prices increased 55%
on an annualized basis after jumping 64% on an annualized
basis in August and 44% in July.


4. (SBU) Egypt's economic slowdown does not appear to have
impacted demand during Ramadan. Press reports and anecdotal
evidence from lower, middle, and upper income markets suggest
that demand for Ramadan related goods remained high and
similar to last year. Hotel managers also reported that
demand for venues for Iftar, the nightly breaking of the fast
celebration, was the same as last year.

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Problems in the Food Supply Chain
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5. (SBU) Last year,s global decline in food commodity prices
did not fully transfer to Egyptian domestic prices. Food
prices are sticky downwards, according to Reham El Desoki,
economist at Beltone Research, who attributes this to a lack
of market information that allows sellers to markup their
prices without consumers realizing it. Hanaa Kheir-El-Din,
executive director of the Egyptian Center for Economic
Studies also attributed it to monopolistic practices
throughout the supply chain, especially distribution.

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GOE Tools to Bring Down Inflation
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6. (U) The Central Bank of Egypt has not increased interest
rates to reduce inflation because it assessed that the high
inflation is coming from high volatility in food prices and,
in its opinion, does not represent underlying inflationary
pressures. The Central Bank is primarily focused on
encouraging economic growth and has cut interest rates six
times this year.


7. (U) Minister of Trade and Industry Rachid M. Rachid laid
out a plan at the end of last month (reftel) to invest in
domestic infrastructure to significantly improve the domestic
supply chain and the movement of products to improve consumer

access to those products which should bring down prices over
the long-term.

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Comment
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8. (SBU) High and rising food prices are hard on the average
Egyptian, and especially hard on the poor who spend a
disproportionate amount of their income on food. Egyptians
have also noticed, and complain that when international food
prices rise, domestic ones do too, but when international
prices fall, that decrease in price is not passed on to them.
Egyptians are looking to the GOE to bring down food prices,
but the GOE has limited straight-forward tools to do so.
Successful Ministry of Trade and Industry efforts to improve
the supply chain and movement of goods could help bring down
costs in the long run, but the GOE's track record in this
area gives some reason for skepticism. Further, there have
been no specific discussions about tackling monopolistic
practices in the supply chain which could undermine gains
made in other areas. High and rising food prices will also
make it difficult for the GOE to reduce its spending on food
subsidies, one of the major drains on the budget.
Scobey