U.S. Copts Association

Rising food cost has plunged government into crisis with far-reaching social consequences.
By Alain Navarro - CAIRO

As popular anger over rising inflation threatens to boil over, the Egyptian government has opted for a solution that could actually add fuel to the fire - raising both salaries and taxes.

On Monday, the government voted to raise the cost of fuel and tobacco by between 30 and 50 percent, in order to finance a May 1 decision by President Hosni Mubarak to raise public workers’ salaries by 30 percent.

Mubarak’s surprise move, itself announced to defuse simmering popular anger ahead of a planned day of protest on Sunday that came to naught, risks pushing inflation even higher, economists say.

Egypt’s inflation seemed under control until the start of this year, but by March had surged to 15.8 percent year on year on the back of skyrocketing food prices.

The rising cost of foodstuffs on the world market, particularly for wheat, of which Egypt is a major importer, has plunged the government into a crisis with far-reaching social consequences.

Spending by the average Egyptian family has risen by 50 percent since the start of the year, according to the UN’s World Food Programme.

The lack of subsidised bread focused social frustration in this country of glaring economic inequalities, where 44 percent of the population lives at or below the poverty level of two dollars a day.

Three people died in riots last month in the Nile Delta city of Mahalla during protests over price hikes and low wages.

But for the business-oriented government of Prime Minister Ahmed Nazif the positive figures resulting from liberal economic reforms speak for themselves: a seven percent annual growth rate and foreign investment rising by 38 percent a year.

In order to reduce a deficit of seven percent of GDP, the government has sought to reduce subsidies inherited from the policies of Egypt’s first president Gamel Abdel Nasser, two-thirds of which go on fuel.

But faced with the rising price of bread, of which Egyptians are the world’s biggest consumers at an average of 400 grammes a day, the government had little choice but to raise subsidies once more.

The government also banned the export of rice and in April eliminated import tariffs on 111 basic products, ranging from butter to cement.

While the unpopularity of Mubarak, in power for 27 years, appears to be growing, his May 1 salary increase was designed to have more of a psychological effect than an economic one.

According to experts, the salary increase will cost state coffers 11 billion pounds (two billion dollars) a year, but it is doubtful that there will be a knock-on effect on private sector wages.

“No, you can’t compare the treatment of a policeman who earns 200 pounds (37 dollars) a month and a young bank worker with a starting salary of 2,500 pounds (470 dollars),” says Guy Poupet, head of NSGB, one of Egypt’s biggest private banks.

“Price increases were becoming unbearable for the less well-off classes and the government had to do something without putting in danger their sound economic strategy,” he said.

To combat rising public expenditure, Monday’s tax hikes are set to bring in an extra six billion pounds (1.1 billion dollars) annually.

“This is going to feed inflation, it’s using one hand to give to those with low and middle incomes while taking away with the other,” Ahmed al-Sayyed, economist at Cairo’s Al-Ahram Centre for Strategic Studies, said.