Egypt Military Offers Food at Discount After Fuel Price Hike

Jul 07, 2014 9:59 am ET

(Updates with analyst comment in sixth paragraph; deal with Carrefour in 12th)

July 7 (Bloomberg) -- Egypt’s military said it will use its buses to transport civilians and sell food at a discount amid concerns that a weekend decision to raise energy prices will fuel a surge in the cost of consumer goods.

The military will sell “ample quantities” of food products to help “alleviate the economic burden of the great Egyptian people,” spokesman Mohamed Samir Abdel Aziz said on his official Facebook page.

President Abdel-Fattah El-Sisi, who had served as defense chief before his election to office in May, raised gasoline prices by as much as 78 percent, saying the measure was needed to save a nation “drowning in debt.” Subsidies consume about 25 percent of state spending in Egypt. The move has already led to increased taxi and minibus fares. It was followed by increases in cigarette and alcohol taxes.

El-Sisi’s decision to reduce subsidies without introducing measures to protect the poor from price rises will test whether the president has secured enough public backing after leading the ouster of President Mohamed Mursi a year ago. He takes on a subsidy system that successive governments have steered clear of tampering with for fear of a backlash in the impoverished nation.

In 2011, rising food prices and poor wages were contributing factors to the uprising in Egypt that witnessed the overthrow of the last military-backed president.

Shock Therapy

“El-Sisi is delivering shock therapy to the country,” that has required the military to step in with the offer of transport and to guarantee cheap food, said Theodore Karasik, director of research at the Institute for Near East and Gulf Military Analysis in Dubai, by phone. While the measure may ensure calm, they could reinforce the impression that the military continues to run the country, Karasik added.

El-Sisi has vowed to repair an economy growing at the slowest pace in two decades, and called on Egyptians to make sacrifices, saying he’ll accept only half his own pay. The government is seeking to narrow a budget deficit that has exceeded 10 percent of economic output.

Yields on nine-month government debt sold at an auction yesterday rose 16 basis points, or 0.16 of a percentage point, to 11.1 percent. The benchmark stock index, which has gained more than 60 percent since El-Sisi led the army takeover, was little changed today after adding 0.8 percent yesterday.

Prime Minister Ibrahim Mahlab told a press conference on July 5 that Egypt spent 687 billion pounds ($96 billion) on energy subsidies over the past decade, and will save 51 billion pounds from the new measures.

“No one likes to see higher prices, but we need to give El-Sisi a chance,” Nasser Ismail, a 32-year-old carpenter waiting to catch a morning minibus to work, said. “These are difficult times and difficult decisions need to be made.”

Fuel Measures

The fuel measures, announced July 4, came a day after an increase in electricity prices, and are set to trigger secondary rises in other goods. The head of the Cairo Chamber of Commerce’s poultry division said chicken prices will rise by 25 percent within days because of added transportation costs, the state-run Al-Ahram reported. Mini-bus and taxi fares were raised by about 13 percent, according to state media.

Drivers of service taxis in Giza went on strike in protest over the increases, the state-run Ahram Gate website reported, adding to an earlier smattering of protests since the increases were announced.

The Supply Ministry has agreed with hypermarket chain Carrefour SA to provide 30 basic goods at discounted prices, the state-run Middle East News Agency reported. These could include poultry, sugar and meat, MENA said, citing Mamdouh Abdel Fattah, vice chairman of the General Authority for Supply Commodities.

Under the new fuel pricing, 95-octane gasoline increased to 6.25 pounds a liter from 5.85 pounds, while 80-octane, which many drivers favor, rose 78 percent to 1.60 pounds. Diesel, used in trucks and minibuses, was raised 64 percent to 1.80 pounds, according to Al-Ahram.

El-Sisi also raised taxes on alcohol and cigarettes, MENA reported. The price of locally-made Marlboro cigarette climbed today to around 20 pounds per pack at kiosks from 17 pounds a day earlier.

“If they keep raising cigarette prices, it’ll be cheaper to smoke hashish,” Ayman Abdel-Ghani, 24, said as he switched from his preferred brand to slightly less expensive LM cigarettes.

Safety Nets

The price increases “will probably have a negative impact on consumption in the short term,” Mohamed Abu Basha, a Cairo- based economist at EFG-Hermes Holdings SAE, said by phone. He said the government is “paving the way for more fiscal sustainability and for putting the economy on a path toward recovery.”

While a major backlash isn’t likely, “the government still doesn’t have the required social safety net in place, which is of concern,” Abu Basha said.

Supporters of Mursi, who denounce the removal of the Islamist politician his as a coup, said in an e-mailed statement that the price increases are a “deliberate collective punishment of the people.”

El-Sisi told editors-in-chief of national newspapers that a “terrorist group” was using the new measures to disrupt efforts to mend the economy, MENA said. The government has declared Mursi’s Muslim Brotherhood a terrorist organization.

--With assistance from Abdel Latif Wahba, Mariam Fam and Tamim Elyan in Cairo and Mahmoud Habboush in Abu Dhabi.