Grant M. Scobie, Food Subsidies in Egypt: Their Impact on Foreign Exchange and Trade



       Like many developing nations the Egyptian government intervenes in their food industry and markets. However, the level of intervention in Egypt has historically been much higher in the form of subsidies and controls in basic food items and staples. The policy to maintain domestic prices lower than world prices resulted from three primary reasons.

  • A rapidly growing population of approximately 1 million per year.
  • Increase in real incomes, shifting the demand and consumption towards animal products.
  • Ironically the very same domestic food policies contributing to an increase in consumption.

       Since the revolution in 1952 the state has been increasing its efforts in domestic economic management and foreign trade. Cohesively the domestic food policies have been expanded to many products. To maintain the subsidies provided to a growing population, the government must rely on imports and increase the expenditure on subsides. However, the increasing government expenditure (subsidies) has had a negative effect on the balance of payments resulting in budget deficits. As studies have shown that a 10% rise in expenditures on subsidies has resulted in a 5% increase in inflation, 2% decrease in international assets and a 3% devaluation of free market exchange rate. All this affects the prices in both domestic and foreign (imported) goods, the redistribution of income, the volume of trade, the level of investments and economic growth, the balance of payments and they leave a mark on foreign policy.


History and the Study of the Food Policy

       During World War II ration cards were issued for various goods such as tea, sugar and kerosene. Since then the system has grown into an extensive price control through rationing and subsidies on consumer goods. In 1973 subsidies grew rapidly in conjunction with world prices, but prior to 1973, the government drastically cut subsidies in order to allocate more funds to the military build-up from 1967-1973. The build-up ended after the October War with Israel in 1973 and severing of ties with the severing of economic and political ties with the Soviet Union and the Eastern Bloc. This step brought in aid from the United States, increase in exports and economic policy garnered towards foreign trade and investments. In this advent, government expenditure on social policies including consumer subsidies increased. A significant proportion of the total subsidies are allocated to wheat and flour. Between 1975 and 1980 imports of staple food rose from 115 kilograms per capita to 154 kilograms per capita. During this time the average growth rate of subsidies to commodities ranged from 19% for edible oils to 62% on fish and meat.

       The increasing reliance on imports decreases the foreign exchange reserves. Should the Government decide to reduce the amount of these reserves to food imports, they should consider that imports are relatively insensitive to changes in subsidies for those commodities with low price elasticity of demand.


Monetary Approach and the Effects on the Industrial Sector

       The cost for the subsidies was financed through government revenues, foreign aid, concessional loans, external borrowing and domestic credit through government liabilities at the Central Bank. These financing instruments were accompanied by increasing inflation rates, declining foreign assets and the devaluation of currency. This approach was to determine the balance of payments and exchange rate

        Foreign trade was nationalized in 1961 and foreign exchange has been allocated based upon an annual foreign exchange budget. Excess in demand for foreign exchange was transferred to an organized free (black) exchange market under various governmental sanctions. The black market now reputedly handles a third of the entire foreign currency transactions.

       The argument for this monetary approach was that when imbalances and disequilibrium arose in the commodity market due to government interventions, the public would stimulate the flow of foreign currency transactions by their desire for a mix of domestic and foreign assets.

       Egypt’s food subsidies rely heavily on imported food, and the domestic price and elasticity of demand for imported food are relatively low. Hence, the changes in world prices of food (ex. wheat) will have little effect on the level of import of wheat. Should the prices of world wheat prices increase, more foreign currency would be required to meet import quantities. The increase in foreign exchange allocation to wheat may be acquired by reducing the allocation to other imports. An unexpected change in the level of imports of raw materials would destabilize industrial output leading to under utilization of capital stock. The result would be the same if priority is given to food import over import of capital stock and machinery. Firms will have trouble obtaining foreign exchange for raw materials and spare parts.



       The aim of the food subsidies was to protect the Egyptian public from international fluctuation in prices. However, subsidies in real terms continue to rise in 1979-1981 when world prices fell. In fact the level of subsidies was twice as high as the levels during the “crisis” years of 1973-1975.

       The rapid increase in costs to the Central Bank in order to finance the food subsidies has contributed to budget deficits which in turn have been met by domestic and foreign borrowing. The expansionary monetary policy has led to an excess of money supply leading to the increase in demand for goods, both local and imported. The demand on foreign goods includes services and has increased the demand for foreign exchange, driving up the free market price of foreign currencies.


Summary by Shaun Liu