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Egyptian Food Subsidy SystemStructure, performance and future perspective

World Bank Conference

Dr Anwar M. El Nakeeb

June 2009

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Contents Background Main components of food subsidy system in Egypt Key Data of Subsidized Bread Structure of Subsidized Bread industry (Supply Side) Demand Side of Balaldi Bread Key Data of Ration Cards Ration Card system Egypt and Food Price Crises Government response to the food price crisis (Current reform) Future plans

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Background

The Egyptian government’s involvement in consumer food subsidiesstarted as early as the years following World War I.The food subsidy program is one of the key safety nets implemented by theGoE, and has been an important source of food security for a large portionof the population. Implemented since WWII.Food rationing began as a temporary measure in Egypt in 1941, designed tohelp Egyptians cope with scarcity and inflation resulting from World WarII. The initial system was not targeted to the poor or subsidize price but wasset up to provide everyone with necessities such as sugar, kerosene, coarsecotton textiles, edible oil, and tea .The food subsidy system expanded in the 1960s and 1970s, becoming partof a broader set of consumer welfare programs that also subsidizedtransport, housing, energy, water, health, education, and some nonfoodconsumer products, such as soap and cigarettes.In the mid-1960s, ration cards were introduced for a small number of goodsin response to rising domestic prices and shortages.

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Main components of food subsidy system in Egypt

The current food subsidy system in Egypt covers:

1- Baladi bread (Country Style): available to everyone2- Ration Card: that allows families to obtain pre-determined monthly quotas of subsidized commodities,especially cooking oil, sugar, tea and rice

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Key Data of Subsidized Bread

Total amount of required Wheat = 13 Million (MT/year)Total amount of procured Wheat = 6 Million (MT/year)Total amount of imported Wheat = 7 Million (MT/year)Coverage = +75 MillionNumber of bakeries = 18,000 (92% are privately owned).Number of mills = 145 mills ( 70% of them are state owned enterpriseswhile the rest are privately owned).Number of Loaves /day = 220 MillionPer capita consumption (rural) = 1.9 LoavesPer capita consumption (urban) = 3.11 LoavesTotal Cost = 16 Billion L.E./Yearthe weight of loaf is 130 grams.

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Structure of Subsidized Bread industry (Supply Side)

The procurement phase: The General Authority for Supply Commodities (GASC), an agency of MOSS, is the government agency that absorbs most of the food subsidy costs through its budget:The GASC is responsible for all imports of subsidized wheat.The Principal Bank for Development and Agricultural Credit(PBDAC) is responsible for purchasing wheat from local farmers.

Milling phase: millsreceive the wheat fromGASC at LE 455/MT

Baking phase : Bakeries pay 160LE/t for subsidised flour. (lessthan 15% of the free market priceThe public bakeries have anaverage throughput of 7 tons offlour per day while the privatebakeries average 1 ton per day.Bakers are required to produce 10loaves of baladi bread perkilogram of flour.

Distribution Phase : In the past, most bakeries sold theirbread to the public at the bakery.In recent times, small distribution outlets has beenestablished to sell the bread. They are owned and run bythe local governmentAt present, approximately 60% of bread goes throughthese outlets.A home delivery service has been introduced in somedistricts. A household needs to register for it and pay afee per month. This can be 3, 4 or 5 LE per month.A home delivery services are run by local government orby local NGOs.

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Demand Side of Balaldi Bread

Subsidized baladi bread is available without restriction toall consumers living in Egypt.The fixed price of baladi bread is currently 5 piasters per

loaf (approximately one US cent) throughout the country(That price has remained fixed since 1989/The marketprice for a similar loaf is approximately 25 piastres)No official limits are set on the quantity or frequency ofpurchases at this price.

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Key Data of Ration Cards

• Number of beneficiaries (coverage) = 62 Million• Number of RC’s/number of families = 16.5 Million• Total cost = 5.5 Billion L.E./Year• Ration cards provide very vulnerable households with 60

percent of their consumption of sugar, 73 percent of oilconsumption and 40 percent of rice consumption.

Free Market PriceSubsidized PriceMonthly quotaItem

1 Kilogram= LE 3

1st Kilogram= LE 0.62nd Kilogram= LE 23rd Kilogram= LE 2.252 kilogramsSugar

1 Kilogram= LE 6

1st 1/2 Kilogram= LE 0.50.5 Kilogram= LE 1.750.5 Kilogram= LE 2.51.5 kilogramscooking oil

1 Kilogram= LE 3 1st Kilogram= LE 12nd Kilogram= LE 2 2 kilogramsRice

LE 1.1 LE 0.6550 gramsTea

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Ration Card System

Purchasing, importationSugar from domestic production is supplied to the subsidy systemthrough the Food Industries Holding Company (FIHC).Subsidized sugar comes entirely from domestic production Since1991/92 . The GASC makes payments to the FIHC for thedomestic.The bulk of cooking oil was imported. Imports are mostly in theform of semi-refined or crude oil, which is refined locally.In the case of cooking oil, the FIHC both imports and procures oilfrom domestic production

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Ration Card system (cont…..)

Distribution of ration Cards CommoditiesSugar and cooking oil are distributed on a monthly quota basis toconsumers through ration cards (betaka tamween).Consumers holding ration cards buy subsidized sugar and oil at outlets(tamweens) located in private groceries.The tamweens are registered by MOSS to receive rations fromgovernment wholesale companies operated by the ministry and otherministries.Ration card holders register their cards with the grocer of their choice.The grocer records monthly purchases of sugar and oil on the card, whichhas space for recording purchases over a full decade.It is the responsibility of the card holder to report changes in family sizeto local offices run by MOSS. Deaths or migration of family membersmust be reportedThe government stopped registering newborn children for the rationsystem since 1989

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Egypt and Food Price Crises

From 2005-2008, prices of food and other basic goods and services, whichconstitute the consumption of the poor, increased much faster than the prices ofnon-essential goods and services. The cost of the minimum food basketincreased by 47 percent in 3 years, much faster that the overall CPI (31%).The sharp increase in international wheat export prices back in February 2008was one of the direct factors leading to the Balady bread crisis in Egypt.As Egypt is the world-wide largest importer of wheat, the price increase of thiscrop triggered a significant rise of the budget allocated for subsidized Baladybread in the fiscal year (2007/08) from LE 8 billion to LE 11 billion.The Increase in other food commodity prices led to increased consumption ofsubsidized bread, as a substitute for such goodsThe high difference in subsidized and free market prices of flour and bread ledto an increase in the leakage of subsidized flour.in some cases, Balady bread is used as animal and poultry fodder because of theincrease in fodder prices.The sharp increase of food goods led to the increasing importance of subsidizedfood commodities, especially for the poor, therefore, the State interventions wasnecessary to help the poor to cope with the food price increases.

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Government response to the food price crisis (Current reform)

Financial resources for food subsidiesIn response to the food price crisis, Financial resources forfood subsidies increased from 1.4 percent of the GrossDomestic Products (GDP) in 2005 to 1.8 percent in 2008.

The amount of resources spent on the subsidy programincreased from 10 billion EGP in Fiscal Year (FY) 2007-08to 21.5 billion in FY 2008-09.

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Government response to the food price crisis (Current reform)

Balady BreadMany intervention mechanisms were carried out by GOE/MOSS to deal with bread

crises and increase efficiency and decrease flour leakages:Delegation of responsibility to Governors and Local Municipalities in response tothe crisis.Separation between production & distribution of Balady bread. In this case they donot allow the bakery to sell bread directly to the public, and instead require that thebread be delivered to an independent distribution outlets. This led to eliminatebread queues and overcrowding of bakeries and improve people’s access to bread.Improve supervision and quality control of Balady breadBuilding large scale automated bakeries with a production capacity of around 1

million loaves per day. In this case the government is planning to build 22 largebakeries in public-private partnerships (PPPs), with the aim of producing 10% ofnational production These bakeries should have lower costs and also shouldprovide a degree of insurance against supply problems.Home delivery system

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Government response to the food price crisis (Current reform)

Ration CardsIn response to the food price crisis, the government expanded the coverage of thesubsidy program from 39.5 million to 63 million beneficiaries.Government expanded eligibility for ration cards to all those born since 1989.Ministry of Social Solidarity has opened the door for registering all those personswhose date of birth falls within (1989-2005) on the ration cards of their parents.

The reasons behind this decision is to include all eligible households/ householdmembers born after the last ration card registration with the aim to provide a safetynet umbrella to all poorest households to combat soaring food prices and to preparefor carrying out the selection criteria (targeting mechanism) in the medium term.The ration card system currently holds a total of 16.5 million ration cards,representing a total number of 62 million beneficiaries. 22 million persons havebeen included after re-opening the registration and added to the 40 million personsin the prior system.The GoE also piloted the smart card system for distribution purposesMost vulnerable people were allowed to apply for a new ration card.Food items that were on the card that were not in great demand were removed andquotas for some commodities were increased.

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The GoE also piloted the smart card system for distribution purposes

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percent of ration cards holders 2005

percent of ration cards holders 2008

percent change in coverage

Chronic Poor 75.6 85.0 +12

Into poverty 63.6 78.9 +24

Out of poverty 73.8 78.1 +6

Never poor 58.5 66.8 +14

All Population 61.9 70.4 +13

Government response to the food price crisis (Current reform)

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Future plans

Baladi BreadTendering for flour directly from the mills (phase 1)

In this case the government aims to avoid problems in the flour supplychain by having a competitive tender for flour to be delivered to bakeries.They plan to purchase the flour at “market prices” and sell it to bakeries atthe subsidised price. This is being trialled in four Governorates.

Purchasing the bread directly from bakeries (phase 2) In this case the Government plans to purchase bread directly from bakeries

at “market prices” and then sell it at subsidised prices in the outlets. Theywill still continue with a flour tendering system but they will sell the flourto the bakeries at the tendering prices (that is, not subsidised) and bakeriescan choose to buy flour from elsewhere if they wish..

Bread distribution The intention is that 100% of households will eventually have access to a

home delivery service.