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Cablegate: Subsidy Bill Squeezes National Budget

VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #0330 0521013
ZNR UUUUU ZZH
R 211013Z FEB 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 8227
INFO RUCPDOC/USDOC WASHDC 0381

UNCLAS CAIRO 000330

SIPDIS

SIPDIS

STATE FOR NEA/ELA, NEA/RA, EB
USAID FOR ANE/MEA MCCLOUD AND DUNN

E.O. 12958: N/A
TAGS: ECON EAID ETRD EG
SUBJECT: Subsidy bill squeezes national budget

Ref: Cairo 0282

1. On January 31 Egypt's People's Assembly (PA) approved a bill
adding LE 4.7 billion ($840 million) to the FY 2007/2008 budget to
cover the rising cost of subsidies on imported food commodities.
High international prices are driving Egypt's 10% inflation rate,
and high wheat prices in particular are forcing the GOE to increase
the food subsidy allocation to keep bread prices stable. The new
allocation raises the total food subsidy budget from LE 9.4 billion
($1.7 billion) currently to LE 14.1 billion ($2.5 billion), out of a
total FY 2007/08 budget of LE 244 billion ($43.3 billion). Two
additional bills, approved today by the Shoura Council and now on
their way to the PA, would increase food subsidies by an additional
LE 1.7 billion ($309 million) and fuel subsidies by LE 20 billion
($3.6 billion). Passage of the two bills would bring the total
budget for food and fuel subsidies to LE 80.8 billion ($14.6
billion). Given rising international commodity prices, the increase
in the subsidy bill is not unexpected. However, the increase is
double the amount the IMF estimated in its November Article IV
Report.

2. Subsidies, wages and interest payments already account for
almost 89.5% of total government revenue for FY 2006/2007, according
to Standard & Poor's. Food and fuel subsidies alone amount to 22%
of total expenditures, equivalent to 7% of GDP. In an effort to
reduce the cost of subsidies, the government has announced a
phase-out of subsidies to energy-intensive industries and has
contemplated further fuel subsidy reductions and removal of
subsidies on fertilizers. Food subsidies are Egypt's "third rail,"
but a press story on February 13 reported, for the first time, an
official plan to reduce the food subsidy bill by doubling the price
of "baladi" bread, the main staple of the Egyptian diet, from 5
paisters ($.01) to 10 piasters ($.02) (reftel).

3. Comment: Doubling the price of baladi bread would be very
unpopular and likely prompt sharp popular reaction. We doubt such
an increase is planned for the near future, but the February 13
article may have been a trial balloon to gauge public reaction to a
possible rise in bread prices. So far, reaction has been muted,
though protests over high food prices continue to occur, mostly in
Nile Delta towns (septel). Though the food subsidy is expensive, it
is dwarfed by the cost of the energy subsidy, which continues to
rise with high global energy prices. A cut in this subsidy alone
would free significant resources and help the GOE meet its stated
goal of reducing the deficit by 1% each year between now and 2011.
The current 7.5% deficit is one of the highest among middle income
countries like Egypt. The IMF and other financial advisors have
argued that reducing the fuel subsidy (a regressive tax which
largely benefits the wealthy) is the best way to make inroads on the
budget deficit. Given public anger over rising prices and
perceptions that economic reforms only benefit the elite, however,
the GOE has limited room for maneuver.
JONES

© Scoop Media

 
 
 
 
 
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