Why is Egypt raising the price of subsidized bread?

Egypt, the world's largest wheat importer, has announced a significant increase in the price of subsidized bread, marking the first rise in decades. This decision, set to take effect in June 2024, will see the price of a loaf of bread increase by 300%, from 5 piasters ($0.0012) to 20 piasters ($0.0048).

This move, although necessary for economic sustainability, carries considerable political risks given the historical sensitivity surrounding bread subsidies in Egypt.

Economic context

The decision to raise bread prices comes against a backdrop of economic challenges exacerbated by currency devaluation and inflation. In March 2024, Egypt allowed a sharp devaluation of its currency and shifted to a flexible exchange rate system. This led to record inflation levels last summer, which have only recently begun to ease. The subsidy for bread, while a crucial lifeline for millions, has become a significant strain on the national budget. The government has allocated approximately 125 billion Egyptian pounds ($2.66 billion) for bread subsidies in the 2024/2025 budget.

Subsidy system and its strains

The bread subsidy program benefits about two-thirds of Egypt's population, providing 5 loaves of round bread daily at a highly subsidized rate. However, this system has long been criticized for its inefficiency and the financial burden it places on the state. The cost of producing bread has increased, with current production costs at 125 piasters per loaf, yet the government has been providing it at only 5 piasters. This discrepancy has led to significant fiscal pressure, necessitating the recent price hike.

Historical and political sensitivity

Bread subsidies are deeply ingrained in Egypt's socio-political fabric. Attempts to alter this system have historically led to unrest, most notably in 1977 when riots erupted in response to subsidy cuts. The current administration, led by Prime Minister Mostafa Madbouly, is acutely aware of this history and the potential for public backlash. Madbouly acknowledged the political sensitivity of the decision, emphasizing the need for sustainability and gradual reform.

Financial support and international aid

The decision also follows a period of acute foreign currency shortages. Since February 2024, Egypt has received substantial financial support from the International Monetary Fund (IMF), the United Arab Emirates (UAE), and other entities, helping to stabilize its economy. This international aid has provided a buffer, allowing the government to make more strategic economic decisions, such as the adjustment of bread prices.

Moving forward: Conditional cash subsidies

To mitigate the impact on the poorest citizens, the government is considering shifting from universal subsidies to conditional cash subsidies. This approach aims to target the most vulnerable populations more effectively, ensuring that aid reaches those who need it most while reducing overall expenditure.

Egypt's decision to raise the price of subsidized bread is a complex interplay of economic necessity and political risk. While it addresses the unsustainable financial burden on the state, it also treads a fine line given the historical sensitivity surrounding bread subsidies. The government's approach to gradual reform and the potential shift to conditional cash subsidies may help mitigate some of the backlash, but the ultimate success of this policy will depend on its implementation and the public's response.

This decision underscores the broader challenges facing Egypt as it navigates economic reform while maintaining social stability. The coming months will be crucial in determining whether this policy can achieve the delicate balance between fiscal responsibility and political pragmatism.