CAIRO With croissants, baguettes and bagels spilling off metal trolleys at the bakery where Mohammed Alif works in central Cairo, food is not scarce, but profits certainly are.
The Egyptian pound has lost more than 8 percent of its value against the U.S. dollar since the end of December as concern deepens about the state of the economy, which is being undermined by political instability and rioting.
This, along with a general rise in global food prices, has pushed up the amount which bakeries like Alif's have to pay for imported ingredients traded in dollars, which in turn risks feeding back into discontent with the new leadership.
The spectre of steep food price inflation driven by a weaker pound is of particular worry to President Mohamed Mursi as he grapples with spasms of unrest two years after the uprising that toppled Hosni Mubarak and was itself partly driven by a sense of mounting economic hardship in a country long steeped in poverty.
Flour and sugar are 50 percent more expensive than they were a year ago, said Alif, and for now the bakery feels it has no choice but to absorb the increase rather than passing it on to customers:
"I can't make it more expensive because people cannot pay," he said, pausing between filling shelves with freshly baked rolls and serving a steady flow of shoppers on the pavement.
Higher prices would drive away customers, and there is a bigger underlying risk: if prices were to rise too quickly or if supply were to start thinning out, there could be even more unrest in a country with a history of bread riots.
That is one reason why, despite a heavy burden on the state budget, Mursi's government is maintaining supplies of heavily subsidised flat bread, which is sold for less than 1 U.S. cent per piece and is aimed at the poor.
But there are no subsidies for products like those sold in Alif's bakery, which caters to relatively affluent customers, so his and other businesses bear the burden of price rises.
Some bakers have started shrinking the size of loaves and cakes in an apparent attempt to protect margins. As data released by the government this week showed, others have started passing on part of their higher costs to consumers.
Annual consumer price inflation in Egyptian cities leapt to 8.2 percent in February from 6.3 percent in January, reaching the highest level since May. Food and drink prices rose 9.3 percent year-on-year last month.
Nancy Fahim, economist at Standard Chartered in Dubai, predicted the weakness of Egypt's economy may limit any rise in overall inflation, however; average national inflation in the current fiscal year to June may yet be lower than last fiscal year's average of 8.7 percent, she said.
But Fahim added that inflation coupled with high unemployment, officially estimated at 13 percent, was likely to pressure the government into maintaining subsidies, despite their increasing burden on state finances.
The government spends over $5.5 billion a year on food subsidies, which also cover items such as rice, oil and sugar. Curbs on bread subsidies triggered severe riots in 1977, and as recently as 2008, Mubarak faced protests over shortages.
In 2003, a sharp decline in the value of the pound caused the price of non-subsidised bread to soar, leaving more Egyptians buying the cheaper, subsidised flat loaves and triggering supply shortages.
Despite the weakness of the currency, bread supplies appear ample. Still, wheat imports are down sharply this year as the economic crisis makes it harder for Egypt to arrange payments; between January 1 and February 20, the country bought around 235,000 tonnes, roughly a third of what it purchased in the same period a year ago.
Wheat traders in Cairo said Egypt appeared to be running down strategic stocks of nearly 2.3 million tonnes to avoid having to use foreign exchange for imports.
In the next Egyptian harvest, which is expected to start at the end next month, the government aims to raise the amount of local wheat which it obtains to 4 million tonnes by boosting its purchase price by 5 percent. In previous years, its targets ranged between 2.4 and 3.7 million tonnes.
But the success of this strategy will depend on weather, bureaucratic efficiency and other factors. As the world's biggest wheat buyer, Egypt relies heavily on imports to feed its 84 million people; half of the wheat they consume is imported.
In 2010/11, one Egyptian in four was living beneath the national poverty line of $1.65 a day, according to UNICEF. Economists say many more live just above the poverty line.
For Cairo shopper Mohammed Ali, price rises in recent months have left only enough money for basic necessities. Standing at a bread stall on a busy street in the capital, he said he could not even think about spending cash on luxuries such as travel.
"Food prices are rising, the economy is sick and the politicians just sit on their chairs," he said, miming a man lounging back and stroking his chin.
"I have just enough money for food, but nothing else," he said, leaving with a small plastic bag stuffed with rolls to feed his family.
Bakers who normally receive government subsidies to cover low-cost loaves and higher fuel prices say they have not been paid as regularly as before. The government owes such bakeries payments dating back six months, the head of the bakers' association said in February, threatening strike action if the problem was not solved.
Prices at general stores have also gone up. Alfa Market, a supermarket chain catering to wealthier Egyptians, has been forced to raise prices several times over the past two months, owner Mohamad Zada said. The price of cooking oil has gone up on three occasions in that period.
"There is a 20- to 30-percent increase in prices ... for everything," he told Reuters.
For now, Zada has not heard complaints from customers about the price rises, but Alfa has been careful to limit the price of its bread, even though this is eating into profits: "People say changing the price of the bread would be a crime," he said.
The fall of the Egyptian pound has also become a headache for Hatem Zidan, sales and marketing manager at milling company Flour Land, which produces flour, pasta and biscuits with imported wheat.
In two months the price he pays for a tonne of flour has risen 16 percent to 3,250 pounds ($480). The volatility of the exchange rate is making his work next to impossible, he said.
"I can make a deal and then I have the surprise that I lose money. Now I am working day by day," he said. "I cannot make contracts for three months with businesses like I used to."
Samir Radwan, an economist and former finance minister, says Egypt must learn from its troubled past. "The history of revolts in Egypt is the history of the price index," said Radwan, citing a pattern dating back to 1919. "I worry a lot about this.
"Poor people really have their back against the wall."
(Additional reporting by Omar Fahmy; Editing by Andrew Torchia and Alastair Macdonald)
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