beyondbrics

As the world’s largest grain importer, Egypt eats heaps of Russian wheat. What does Moscow’s impending ban on exports mean for Egyptians and the country’s economic diet?

So far Egyptian officials have played down its implications and said they have plenty of stocks in reserve, but the ban has the potential to affect two of Egypt’s biggest economic challenges: inflation and public debt.

Wheat prices eased slightly in frenetic trading on Friday having hit their highest level since the 2007-08 food crisis the previous day, but the ban’s longer-term implications for supply and prices remain unclear.

Trickily for Egypt, it will come into effect on August 15, once the holy month of Ramadan has begun, and that’s a time when food consumption surges.

The Egyptian government has long played an active (and expensive) role in subsidising food prices for its young, fast-growing and widely impoverished population.

Reinhard Cluse, an economist at UBS, told beyondbrics that significant hikes in the global price of wheat would present the government with a difficult dilemma.

Do they want to pass on price rises to end consumers, which would reduce Egyptians’ purchasing power and might lead to social discontent?

Or do they keep their regulation of prices tight and end up paying higher subsidies for food? In which case the problem would not go away but end up in the government budget.

Egypt’s public debt is already high, at roughly 74 per cent of GDP, according to UBS. Earlier this year the IMF projected that Egypt’s food subsidies would cost the equivalent of 1.1 per cent of GDP in 2009-10, while subsidies for energy were expected to add up to 5.1 per cent.

Consolidating public finances would do Egypt’s economic health no end of good, but with parliamentary elections due later this year and a presidential poll in 2011, political calculations will have a big influence on the policy response.

Egyptians already spend a big chunk of their income on food (that’s why its weight in the consumer price index is 43.9 per cent) and overall inflation of roughly 10 per cent is high by regional standards.

Tensions over food have led to violence in bread queues before and it wouldn’t take much of a price rise for the squeeze on many consumers to become unbearably tight, and as Cluse says:

In the run up to the elections the government will be particularly keen to appease the electorate and make sure they don’t support the opposition, the Muslim Brotherhood.

Russia is shaking the commodity world again, and the reverberations for Egypt could continue for a long time.