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Cablegate: Inflation Reaches 12.1% in February

VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #0530/01 0771200
ZNR UUUUU ZZH
R 171200Z MAR 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 8567
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0390

UNCLAS CAIRO 000530

SIPDIS

SIPDIS

STATE FOR NEA/ELA, NEA/RA AND EEB/IDF
USAID FOR ANE/MEA MCCLOUD AND DUNN
TREASURY FOR MATHIASON AND CONNOLLY
COMMERCE FOR 4520/ITA/ANESA/OBERG

E.O. 12958: N/A
TAGS: ECON EFIN EG
SUBJECT: INFLATION REACHES 12.1% IN FEBRUARY

REF: A. Cairo 282 B. Cairo 330

-------
Summary
-------

1. (U) Inflation surged to 12.1% year-on-year (y-on-y) in February,
up from 10.5% y-o-y in January. Food prices led the rise,
reflecting rising global food prices. Local analysts believe the
Central Bank will raise interest rates again this month, but predict
that greater exchange rate flexibility may also be needed to control
inflation. The GOE increased its allocation for food subsidies, but
bread prices continue to rise, caused by shortages of subsidized
bread at public bakeries. Residents of the Nile Delta town of
Mahalla told us that they were not enthusiastic about joining
workers from the local textile mill in demonstrations over high
prices, preferring instead to seek work overseas.

-----------------
Inflation Surges
-----------------

2. (U) Egypt's inflation rate surged to 12.1% y-o-y in February, up
from 10.5% y-o-y in January, according to the GOE's Central Agency
for Public Mobilization and Statistics. February's rate is the
highest since April 2007, when inflation peaked at 12.6% y-o-y.
Food, which constitutes 40% of Egypt's consumer basket, continued to
drive inflation. Food prices rose 16.8% y-o-y in February, up from
16.2% y-o-y in January. Edible oil led the way, surging 39.8%
y-o-y, from 26.4% y-o-y in January. Bread and grains followed,
rising 26.5% y-o-y, though this was down from 34.9% y-o-y in
January. According to a report by EFG-Hermes, Egypt's largest
investment bank, the rise in edible oil and bread prices is mainly
driven by high international prices for palm oil and wheat, which
jumped 70% in 2007.

3. (U) The Central Bank's Monetary Policy Committee (MPC) will meet
March 20, and local analysts are predicting an interest rate
increase of about 75 basis points. The MPC raised rates 25 basis
points at its last meeting in early February (ref A). Analysts are
skeptical, however, that another interest rate hike will control
Egypt's inflation, given weak monetary policy transmission
mechanisms between the Central Bank and the rest of the financial
system, and excess liquidity in banks. If rate hikes do not halt
inflation, EFG-Hermes predicts the Central Bank may be forced to
allow greater exchange rate flexibility, which would likely lead to
lower import prices.

-----------------------------------
Bread Prices Rise Despite Subsidies
-----------------------------------

4. (U) The GOE continues to use subsidy spending to keep domestic
food prices low. Parliament increased the allocation for food
subsidies by LE 4.7 billion ($840 million) in February (ref B),
bring the total food subsidy bill for FY 2007/08 to LE 14.4 billion
($2.5 billion). The official price for one piece of subsidized
bread is still 5 piasters ($.01), though recent press reports claim
that the government is considering raising the subsidized price.
Despite the subsidies, bread prices continue to rise, driven by
shortages of the subsidized bread at public bakeries. Public
bakeries produce limited amounts of subsidized bread, using only
part of their government-allotted quota of subsidized flour and
selling the rest on the black market. Buyers unable to buy
subsidized bread at public bakeries - often after standing in line
for several hours - are forced to turn to private bakeries, which
charge up to 25 piasters/piece.

----------------------------
Unrest and Apathy in Mahalla
----------------------------

5. (U) We recently visited the main food market in the Nile delta
town of Mahalla, scene of wildcat labor strikes in 2007 and
demonstrations in January and February against rising prices.
Prices in the market were roughly equivalent to those in Cairo's
markets. Low-grade cooking oil was selling for LE 9.50
($1.72)/liter, up from the LE 8 ($1.45), observed during out last
visit to a Cairo market in mid-February. A kilo of pasta was LE 4
($.72)/kilo, up from LE 3.5 ($.63), lentils were LE 8 ($1.45)/kilo,
up from LE 7.20 ($1.30), and beans were LE 7 (1.27)/kilo, up from LE
6.30($1.14). Butchers told us the price of meat has held steady at
LE 13.80 ($2.50)/kilo since the major Muslim holiday Eid al Adha in
December 2007.

6. (U) At a public bakery, we saw a familiar scene of approximately
20-30 people standing in gender-segregated lines, waiting to buy
subsidized bread. Buyers told us the bakery sells a maximum of 20
pieces of bread per person at the subsidized rate. Fights over
bread sometimes break out, according to one buyer, especially toward
the bakery's closing time, usually 2-3 hours after opening. Despite
the prospect of standing in line for hours and coming up
empty-handed, he said he understood why bakeries sell their allotted
bags of subsidized flour on the black market. "I would do the
same," he said. The subsidized bread in Mahalla was of noticeably
better quality than the bread we observed at public bakeries in
Cairo.

7. (U) Many buyers in the Mahalla market told us they were aware of
the recent protests over rising prices, but had not participated.
Only workers at the textile mill are willing to demonstrate, they
said. The workers are convinced the government is now afraid of
them, and they can accomplish anything by demonstrating. The rest
of the people in town, however, do not believe protesting will do
any good, one poultry vendor told us. He cited government
corruption as the most important problem in Egypt, worse than
inflation. He was especially critical of privatization, saying it
was increasing poverty and destroying the middle class. Several of
the people we spoke to said they were planning to seek work abroad,
or had family members who were planning to do so. Libya was most
often cited as the destination.
RICCIARDONE

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