Ethar El-Katatney

Waiting for ‘Aish

Posted in Egypt Today by Ethar El-Katatney on May 9, 2008

Waiting for ‘Aish
Egypt Today
Watch
May 2008

Available at: http://www.egypttoday.com/article.aspx?ArticleID=7989
Photo Credit: Mohamad Allouba

In the face of rising food prices, people turned to subsidized bread, only to find it wasn’t there. The government has promised swift reforms, but will they be enough?

By: Ethar El-Katatney

In perhaps the only redeeming scene in this year’s comedy Tabakh El-Rayes (The President’s Chef), the president is made aware of the fact that the baladi bread on his table is 10 to 15 times the price of the bread that the overwhelming majority of the nation’s population waits hours in line to receive. He invites the ministers to dinner and serves them fuul and subsidized bread, telling them to partake of the food that sustains most Egyptians. Making comic faces of disgust, they begin eating, cracking their teeth on tiny stones, extracting hairs, one even finding a tooth.

As funny as it is tragic, the scene illustrates a bitter reality: Subsidized bread is not exactly food of the gods. A staple in the diet of Egyptians, 20 percent of whom live below the poverty line of $2 a day, and 20 percent of whom hover just above; many exist on the shelen (five-piaster) pieces, sold for a currency denomination that is rarely found and rarely used. To add insult to injury, it suddenly became widely unavailable.

Prices have risen on of food staples in general and on international wheat used to make bread over the past few months. As a result more people, not just the poorest of the poor, sought out the round, unleavened, water-based baladi bread mocked in Tabakh El-Rayes.

According to the government’s Central Agency for Public Mobilization and Statistics (CAPMAS), the official annualized inflation rate reached 15.8 percent in March 2008, compared with 11.5 percent in January. The UN’s World Food Programme estimates that the average household expenditure on basic foodstuffs and services in Egypt has risen by 50 percent since the start of the year.

The local inflation has been a result of international prices on energy and commodities as a well as domestic policies trying to reform the subsidy system.

There are a total of 23,664 bakeries in the country, meeting the needs of nearly 80 million people — approximately one bakery for every 3,380 citizens, already a less than ideal situation. Add the spike in demand for subsidized bread and the bakeries just couldn’t keep up. Throw in a booming black market, which siphons subsidized wheat out of the back door, and you have all the ingredients for a food crisis.

International Inflation

Egypt consumes over 14 million tons of wheat every year and grows only slightly over half that amount. To make up the shortfall, itis the second-highest importer of US wheat, using about $54 million (LE 297 million) of some $2 billion (LE 11 billion) a year in US aid to buy it. But in the past year, prices in the US market have soared to $430 (LE 2,300) per ton of wheat compared to $180 (LE 990) in 2006.

The first cause is rising oil prices, which directly affect agricultural costs from fertilizers to shipping. The second reason is derived from the first: In an attempt to decrease reliance on oil, countries are turning to bio-fuels; farmers are encouraged to grow crops such as corn and soybeans, diverting fields from wheat production, reducing supply and driving the price up even further. Finally, a series of droughts and floods, often attributed to climate change, have adversely impacted harvests worldwide.

Searching for cheaper sources of wheat, Egypt also imports from Russia, France, Kazakhstan, Argentina and Australia, among other countries. Its US purchases have fallen from about four million tons in 2001 to 1.6 million in 2006 — but with every wheat-importing country doing the same, prices have gone up substantially from other suppliers too. When prices for other food staples such as pasta (also made from wheat) and rice also rose, Egyptian consumption of bread shot up as well.

Amr Helmy, CEO of Modern Bakeries, says that the price rises are unbelievable: “The raw materials are all expensive: wheat, flour, oil, milk. We’re actually losing money; we’re making losses.” Modern Bakeries produces Rich Bake, the nation’s leading brand of packaged bread with products such as ‘European’ breads, including toast and petit pain, which sells for LE 2.50 for six small rolls. As a private company, Modern Bakeries has the freedom to raise the prices of its products.

The government, on the other hand, doesn’t. In December 2007, Prime Minister Ahmed Nazif caused a stir when he suggested that the socialist-inspired, decades-old government subsidized food staple system be replaced by a monetary handout to those who need it. The suggestion was aimed in part to reduce a budget deficit estimated at 5.3 percent of GDP in 2006-2007, but it was — to the relief of the population — rejected by President Hosni Mubarak.

Out of the Oven, Into the Fire

According to CAPMAS, of the nation’s 23,664 bakeries, 17,002 are licensed to sell subsidized bread, and 6,662 are privately owned. UN statistics estimate that the government-owned bakeries serve over two-thirds of the population, approximately 50 million people who eat subsidized bread every day at an average of 3.2 pieces per person.

The Ministry of Social Solidarity (MOSS) is responsible for the sale and distribution of subsidized bread. MOSS spokesperson Yahia Mahmoud says that the ministry oversees 18,000 bakeries around the country, which are making 220 million loaves of subsidized bread per day. The military and the Interior Ministry (which controls the police), own their own bakeries, which they normally use to feed their employees and now the general population.

Local mills produce two types of flour. The first is extracted from wheat at a 72 percent rate and used for making pasta and artisan, or fino bread, which resembles an anemic baguette. The other is extracted from wheat at an 82 percent rate and used to make regular baladi bread. The percentage rates reflect the degree to which the flour has been refined, with lower rates considered more desirable. At press time, the market price for a 100 kilogram bag of 82 percent flour is LE 360; the MOSS sells it to both government-owned and government-licensed bakeries at LE 16 per bag, subsidizing 96 percent of the cost.

The low-grade baladi bread is categorized as tabaky, magry or moladan. The difference is in the recipe’s flour-to-water ratio: Tabaky uses the most water of the three and has a shorter shelf-life. Magry and moladan use more flour and are firmer than tabaky bread.

To prevent bakeries licensed to make subsidized bread from selling the flour to privately owned bakeries that must pay market price for their flour, the MOSS has a huge cadre of inspectors whose job is to make sure bread is produced according to specifications and that no sacks are being smuggled out of the bakery. If an inspector certifies at the end of three months that each bakery uses its government flour ration to produce only subsidized bread, the bakery is refunded LE 5 for every 100 kilograms.

Magdy Sobhi, an economist at the Ahram Center for Political and Strategic Studies (ACPSS), claims that corruption in the system is to be expected, as inspectors only make between LE 200-300 a month. If a dishonest inspector finds a bakery bootlegging its government flour, Sobhi alleges, he takes a “don’t see, don’t tell” approach in return for a cut of the refunds at the end of the quarter. In 2001 the International Food Policy Research Institute (IFPRI) in Washington reported that 28 percent of the subsidized flour in Egypt was being sold on the black market.

While corruption has always been present, the dramatic increase in global wheat prices meant the black market for flour has thrived, and Sobhi alleges that bakery owners are selling the LE 16 bag for prices ranging from LE 120 to 260, “a profit of up to 1,500 percent for no effort.”

The MOSS is not unaware of the problem. Darwish Mostafa, undersecretary to the Minister of Social Solidarity, claims that in addition to selling their wheat at record prices, some bakery owners deliberately ruin some of their output by overcooking it so it can be sold more profitably as animal fodder.

The General Company of Grand Cairo Bakeries, part of the Holding Company for Food Industries overseen by the Ministry of Investment, was launched in 1970 to be the MOSS’s main distributor of subsidized bread in Cairo and Giza. Today, it has 230 production lines around Greater Cairo, producing a total of 6 million loaves with a ration of 579 tons of wheat a day. The company also produces yeast, pasta and oriental desserts.

Grand Cairo Bakeries CEO Hussein Al-Shams says that the company serves approximately 15 percent of Giza and five percent of Cairo residents through its 108 bakeries and through distributing bread directly to almost all factories, hospitals and some universities. Although he wouldn’t disclose specific figures, Al-Shams says that for at least 30 years the armed forces have helped them by producing a certain percentage of the 6 million loaves.

“The problem is that bread is a staple, and when the prices [of other staples] rose, people turned to bread,” notes Al-Shams. “But another reason [for increased demand] is that the subsidy for some staples was removed from the ration cards, and of course the increase of wheat prices worldwide. All these things came at one time. When people felt that bread supply was decreasing, they started increasing consumption.”

“[An offshoot] of course is that thug numbers rose — young men who would go to the baker with a matwa (switchblade) and take bread from him for LE 5 and then sell it for LE 10 in the street [to people who don’t want to wait in lines],” Al-Shams alleges. “Are we going to assign every [bakery] a police officer?”

The price of baladi bread in private bakeries has reached a record of LE 0.75 —15 times the price of subsidized bread. Mostafa recalls that fino bread, the middle-class alternative to baladi bread, was previously sold at 10 loaves for LE 1. “Now, you only get four loaves for LE 1. And they’re this big,” he says, gesturing to the end of his index finger. “As a result, everyone switches to the shelen bread, which causes tremendous traffic.”

Demand was so high that Egypt’s wheat imports jumped 43 percent to 5.2 million tons in the first eight months of the fiscal year 2007-2008, compared to the same period the previous fiscal year.

Bread lines got longer and the people more tense, arriving as early at 3am to wait in line for when the bakery opened at 5am. Usually, each person is allotted 20 loaves (LE 1) a day, but it is widely acknowledged by bakery owners, customers and even MOSS officials that amid fears of the bread running out, many often take their serving of bread and then get back in line for a second helping. Since there is no official way to keep track of who has already bought bread, this further overburdens the bakeries.

El-Shafii’s bakery is considered one of the best in Helwan, and his customers say they travel miles for his bread. To make sure everyone gets their fair share, the baker gives out numbered tokens. “I had to do something,” he says. “People aren’t as morally upright as they were before. Now you can find a young man pushing an old man out of the way to move ahead in line. This system keeps things fair.”

On a typical day at a subsidized bread outlet, it’s not unusual to see fists and elbows flying, women shouting, men pushing and little children dodging blows to get their hands on bread. After months of escalating discontent, however, the situation became fatal in mid-February. One man was shot while in line for bread; a woman was stabbed in a brawl that broke out in front of a bakery. Another woman was hit by a car while standing in a line that stretched into the street. Others died of medical problems aggravated by waiting in the heat. Local and international media reports estimate that between seven and 15 people have died.

In late March, spontaneous protests broke out throughout Fayoum as people took to the streets voicing their discontent over the “disappearance” of bread. Likewise, Minya was the site of two protests over subsidized bread shortages, with protestors stopping traffic on the main road. On March 23, Prime Minister Ahmed Nazif told the media that the bread crisis would be contained within six weeks. Holding the prime minister to his word, the independent daily Al-Masry Al-Youm has been publishing a countdown to May 4, the end of the six weeks.

Out of Patience

On the same day of the protests in Fayoum, President Hosni Mubarak ordered that the bread crisis be resolved immediately. “In my opinion, there is a clear dichotomy between the presidency and the government in this instance; they’re thinking differently,” says Sobhi. “[The president] really understood the size of the problem and said ‘I want the issue to be worked out in couple of weeks,’ when [the government] was speaking about three months. I lived during the entire reign of [former President] Sadat and for the first time I see [a president’s] decision as critical, fast and instantaneous without any excuses. He’s the one saying there are no excuses; he’s saying, ‘Yes, world prices have risen, but of course the government has to fulfill its role’.”

Mubarak ordered the Army to increase the production and distribution of subsidized bread to cope with the shortages. According to the MOSS, military bakeries are now producing 1.75 million pieces of bread a day, which the ministry then distributes to six major bakeries in Cairo. The police produce 650,000 pieces a day, while the Environmental and Water Police produce 120,000 pieces a day.

As magry and moladan bread have longer shelf lives, the MOSS has reassigned all the bakeries on the North Coast to produce those types of baladi bread; 20 percent of the rest of its bakeries in Cairo have also switched recipes.

At least 500 kiosks unaffiliated with bakeries have sprung up in Cairo to sell subsidized bread to the public. Also opened were 2,140 new bakeries for the tabaky bread, with a ration of 1,125 tons per day. Al-Shams adds that his company alone has started 11 new production lines in Dewe’a on the outskirts of Maadi, with an output of 300,300 pieces a day.

Mubarak also ordered the government to use foreign currency reserves to buy additional wheat and to increase spending on bread subsidies to LE 15 billion, or about 5.5 percent of the country’s budget. Flour rations for bakeries in Cairo went up by 89,000 tons per year and rations in another seven governorates were also raised by a total of 400,000 tons per year. Working hours were also extended: Bakeries usually close around 2–4pm, but some are now open until 6 or 7pm.

The president also authorized 15 million new names to be added to rosters of those authorized to receive subsidized rations of cooking oil, sugar and rice.

In an effort to decrease demand for shelen bread, the MOSS announced in mid-March that it would be making higher-grade baladi bread, which normally sells between LE 0.25–0.75 per piece, available for LE 0.10. All these measures combined will increase the government’s annual food subsidy costs by $3.1 billion (LE 17.05 billion) to a total of $13.7 billion (LE 75 billion) this year.

On March 30, the government announced it would suspend rice exports for six months beginning in April 2008. The goal is to increase the supply of rice in the domestic market and curb the accelerated rise in its price, in hope of lower bread consumption. The government also waived import duties on dairy products and several types of cement and steel products.

Carrots and Sticks

Beginning in March, the crackdown on bakeries began and, by early April, the MOSS reported that it had inspected over 2,000 bakeries, closing 120 that were operating without a license and seizing 479 tons of smuggled wheat. At press time, the ministry had found thousands of violations from overcharging for bread to producing substandard loaves, closed more than 320 bakeries, indicted hundreds of bakers for black-market dealing in subsidized flour and seized over 700 tons of flour.

One of the disincentives bakeries have faced is how their profits are calculated. For private bakeries licensed to make and sell subsidized bread, the government not only stipulates how much the flour costs (LE 16 per bag) and how much to sell the bread for (LE 0.05 per piece), but how much the bakeries can claim as production costs on their taxes. While bakeries claim it costs them approximately LE 70 per 100 kilograms of flour to make the bread, the government allows them to claim only LE 51.40 per 100 kilograms. Artificially low production costs mean the bakeries report higher profit than is true, meaning higher taxes on the bakery.

To address this, the MOSS has raised its assessment of production costs to LE 60 per 100 kilograms of flour. This will reduce the amount of reported profit and consequently the overall tax bill for the bakery.

To improve the quality of the bread, MOSS has offered bakers an incentive of LE 5 for every 100 kilograms of flour they get if no police reports are filed against the bakery. This is in addition to the rebate of LE 5 per 100 kilograms of flour if the bakery passe surprise inspections. Inspectors are now not just recruited by the MOSS but by the Ministry of Health, Ministry of Agriculture and industry councils.

The bakery licensing contracts are being revised to detail violations and their corresponding penalties. For example, if a bakery is caught selling pieces of bread that are 10 to 20 grams underweight, it must pay the market price for 10 percent of its flour ration for 15 days. For the most serious offenses, such as selling subsidized flour to restaurants or making substandard bread for animal fodder, the bakery can be shut down completely and the recipients of the black-market flour forced to reimburse the government at market prices.

In late 2007, Article 111 was passed, which made smuggling, selling, or hiding subsidized bread a crime. The MOSS also considered adding a color to subsidized flour to make it easier to track and decrease smuggling.

Even the mills are coming under closer scrutiny. To motivate mills to produce better quality flour, MOSS will pay LE 75 for every 100 kilograms of flour rather than LE 49. Bakery owners have the right to refuse a sack of flour if they think the quality is bad and have it exchanged by the ministry.

The ministry is also looking beyond basic economic and quality issues toward public health. UNICEF reports that 31 percent of children and 28 percent of women suffer from anemia in Egypt. In mid-April, the MOSS launched the first bakery producing bread fortified with folic acid and iron, two nutrients essential in preventing anemia. The new bakery is in the Sharqiyya governorate, with other governorates soon to follow.

The upshot of all this? According to Mostafa, “the improved quality which has resulted from the contracts, incentives [and penalties] meant that people who shied away from the subsidized bread and bought more expensive bread now came back to it.” By trying to decrease demand, demand increased.

Reaping Results

Upping production and quality comes at a hefty cost. Minister of Agriculture Amin Abaza announced in March that to cut spending on imports, the country will grow about 8 million tons of wheat this year, up from 2007’s 7.39 million tons, with the hope of producing at least 65 percent of the wheat the nation consumes. Some 3.7 million acres will be planted with wheat, compared with last year’s 2.7 million.

The increase in output, according to Abaza, will also come from cutting wastage. To motivate local farmers, the government has promised to pay higher-than-market prices for their wheat harvest this season, which runs from April and ends in the summer. In early April, the Ministry of Agriculture announced that instead of LE 180 per ardab (150 kilograms), farmers will now get LE 380-390, depending on the purity of the wheat. In the short term, this costs the government more, since this means they are paying $472 (LE 2,600) per ton when international prices range between $400-500 (LE 2,200-2,750), but hopefully it will pay off in the long term.

“There is also serious thinking [from Egypt and the Emirates] about growing wheat on 2 million acres in Sudan next season,” says Sobhi. “But we’ve been speaking to Sudan since the 60s and this is documented, so I don’t know how [realistic] this is. […] I think there is a strong monetary incentive to do so. [] Sudan says they have 16 million acres suitable for planting immediately. All we need is good infrastructure and the issue will be a snap. Planting [in Sudan] will save costs of shipment and insurance, which is no small amount: $100 (LE 550) per ton. […] The funding is $6 billion (LE 33 billion), which the Emirates can make available in a moment.”

Another option to decrease costs is to mix corn flour and wheat flour together. “If necessary we will do it,” says Mostafa. “But the minister doesn’t want to because [the bread] only lasts a couple of hours before it’s inedible. It saves us approximately 20 percent on costs, which means we can save our consumption of our subsidy or the amount of wheat we import [but we’d rather look for other ways].”

Shortcomings in the System

Despite all that’s been said and done, the political opposition is not happy with the efforts of the government. Critics claim that it is not global price hikes but the liberalization of the economy that has made the poor poorer and the rich richer.

Thirty-seven countries currently face food crises, according to the UN Food and Agriculture Organization, and Egypt is one of them. But critics say the problem isn’t with a lack of supply.
“Our problem is not with the amount of wheat,” Sobhi says. “If it was we would have starvation. The problem is one of organization, strong inspection on bakeries, and fixing distribution.”

To eliminate or at least dramatically decrease smuggling, a new system separating the production and distribution process has been established, with bakeries producing and the government distributing. At press time, it had been implemented in five governorates. The public joint-stock company El-Masryeen for Distribution and Services has already started distributing subsidized commodities through designated outlets, and is scheduled to start delivering bread straight to homes for a flat fee of LE 3 a month. It began in the Fifteenth of May City in the Helwan governorate with 20 distribution points and 13 vehicles distributing from 15 bakeries. Each governorate is in charge of establishing its own distribution system based on the El-Masryeen model, and send their bills to the MOSS.

In early April, opposition MPs called for the resignation of the government over its mismanagement of the current bread crisis at a Peoples’ Assembly (PA) session. Independent MP Talaat Al-Sadat said, “The government should leave,” and asked the Minister for Social Solidarity Ali El Moselhi to “jump off the sinking ship.”

That ship has many captains, Mostafa claims. “The problem of the MOSS is that it has so many branches with no skeleton in the operation of producing bread. The job of importing wheat is in the hands of the Ministry of Trade and Industry. Storage of wheat is in the hands of the Ministry of Investment. If it’s local wheat, the sacks are stored by the Ministry of Agriculture. Milling is done by companies related to the Ministry of Investment or private companies. Baking is by The General Company of Grand Cairo Bakeries or done privately.”

There is no denying that the MOSS has taken tremendous strides to contain the problem. No longer do we see the bakery in Sudan Street in Mohandiseen with queues of over 200 people at midnight.

Nevertheless, as Rich Bake CEO Helmy notes, “the price of wheat […] will never go down to what it was. You have consumption growing all over the world, and you have shortage.”

Unless domestic production of wheat doubles — not a likely prospect — the nation is tied to international wheat prices. At the same time, as Sobhi notes, the national budget and Nazif’s liberal monetary policy, intended to promote foreign investment that will create jobs and help move people out of poverty, is being hit hard by subsidy costs. The government is between the proverbial rock and a hard place.

As inflation tightens its grip on not just high-end markets such as real estate but the low-end supermarket with the staples people need to live, Hajj El-Shafii thinks the subsidy must go on: “The oot (sustainer) of the nation is bread. You can’t even get termes (lupin) now except for LE 0.50; bread is the only thing that’s really subsidized. Without it, Egyptians would starve to death.” et

One Response

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  1. hossam.eldin said, on May 16, 2008 at 1:07 am

    Excellent criticism


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