Subsidies reach record high in further steps to reign in prices

Reem Nafie
5 Min Read

CAIRO: With government efforts on the high to curb food prices ahead of Ramadan, subsidies jumped to LE 76 billion from July 2007 to May 2008, 130 percent increase over the same period in fiscal year 2006/2007.

According to Al-Alam Al-Youm newspaper, Minister of Finance Youssef Boutros Ghali attributed the unprecedented subsidy increase to a hike in international prices of energy and food products in fiscal year 2007/2008.

“Total revenues increased to LE 186.5 billion, while total expenditures reached LE 233.5 billion in fiscal year 2007/2008. Quarterly public debt data showed a decline in government debt to 61.6 percent of GDP in March 2008, compared to 63.8 percent in March 2007, the newspaper said.

Demand for food is expected to rise in August as consumers prepare for Ramadan, due to begin Sept. 1. As the month is characterized by an increase in consumption, increasing subsidies seems to be the only resort to ensure that the poorer segments of society can afford foodstuffs.

However, pumping money into the system may not be the answer to supply shortages that have become a norm during the holy month. “Every year before Ramadan, food prices increase because of the increased demand, sometimes we run out of certain products because people stock up on them, Mohamed Medhat, manager at Maadi Metro market said.

Demand is usually the highest for dairy products, rice, bread, meat and poultry, he added.

To ensure that producers provide sufficient supply and to help stabilize the prices of these products during times of high demands, the government recently announced its intention to remove the sales tax on a number of inputs used in the production of dairy products, poultry, meat and rice and demanded that poultry producers keep prices low.

Nevertheless, inflation fears linger as urban inflation recorded 20.2 percent in the year to June, up from 19.7 percent in the year to May, driven by monthly price rises in food and entertainment.

Although overall price increases slowed on a monthly basis with food and beverage price increases slowing down in June – rising 0.8 percent compared to 3.6 percent a month earlier – experts are skeptical about inflation rates within the next few months.

“The slowdown in price increases is not an accurate indicator to what may happen in the leading months. Inflation rates are expected to rise with the approach of Ramadan and unfortunately the poor are the bracket that will be most affected, Heba Mashhour, an economics professor at Cairo University said. According to Beltone Financial’s daily market report, “subsidies have been rising since fiscal year 2004/2005 as the government increased food and energy subsidies significantly, raising total subsidies to LE 54 billion in fiscal year 2006/2007 and an expected LE 84 billion in fiscal year 2007/2008, from LE 41.2 billion in fiscal year 2004/2005.

Beltone argues that the food and energy subsidies surpassed their expected rise after oil prices increased over $100 a barrel. As a result, “the government has increased subsidies several times in 2008, adding to food and energy subsidies in February and May 2008.

“There is no doubt that the increase in subsidies has created a burden on the government’s budget deficit, but international price increases have led to a need for more subsidies or a revision of the entire subsidy program, Mashhour said. The budget deficit currently stands at 6.9 percent of GDP.

Beltone expects the government’s budget deficit projection to hold in fiscal year 2007/2008 and remain at similar levels in the current fiscal year as the government increases its expenditures, possibly missing the target of reducing the budget deficit to 3-4 percent of GDP in fiscal year 2010/2011.

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