Constraining the market
Balancing a commitment to free market economic policies and maintaining political stability is producing somewhat original solutions. Dena Rashed investigates government measures aimed at limiting the inflationary effects of devaluation
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For decades consumer cooperatives provided most Egyptians with subsidised basic goods; today, the retailers are being "honour-bound" to pay their share of the subsidy
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"According to the pact signed with the Ministry of Supply, and under the commands of the governor of Giza, we announce that we are selling the basic commodities according to the new benchmark pricing list the government has fixed," read a colourful banner hung on the door of one of Giza's wholesale shops. Al-Ahram Weekly found an unhappy owner within the shop. With the new pricing list, business is plummeting, said Nasser Ghalab, the owner of the supermarket.
The price list was issued by the Council of Ministers in an attempt to fix the prices of basic commodities considered to be indispensable to the Egyptian household, including sugar, cheese, tea, flour, macaroni and oil. The government's initiative began in response to the devaluation of the Egyptian pound on 28 January 2003 and the resultant increases in the prices of many commodities.
The latest government price index released by the Central Agency for Public Mobilisation and Statistics (CAPMAS) documents the inflation. The prices of foodstuffs have risen by 4.9 per cent. Milk and dairy product prices are up by 6.5 per cent. The price of sugar has risen by 3.8 per cent, and fresh fruits and vegetable prices are as much as 10.2 per cent higher than they were prior to the devaluation of the pound.
The government has described the price increases as unjustifiable because, it argues, many products do not include foreign components and thus no currency needs to be converted. However, most Egyptian manufacturers need to import at least some of their production elements, such as machinery parts.
For small business owners such as Ghalab, the new price- fixing system means less profit. "I sell commodities at close to the same price at which I buy them. My profit is made by selling bulk; if a customer buys only one package of macaroni, I lose because I will be paying for each plastic bag given to the customers." Ghalab argues that smaller supermarkets as well as wholesale markets are being negatively impacted by the new system. "I even stopped selling some of the commodities that are on the list, like a certain brand of tea that we are now being asked to sell for less than its to-retailer price," he added.
Some shops are faring better than others, however. In a wholesale shop larger than Ghalab's, business is booming. "We abide by the new pricing list for the basic commodities, but for us the loss is not as great as it is for smaller shops. If I sell, for example, the seven commodities that are on the list, I have hundreds of other commodities in the shop that cover the loss incurred from the sale of the listed commodities," said Ahmed El-Gendi, the owner of a large wholesale outlet.
The price-fixing measures come more than 10 years after the implementation of a full structural adjustment and economic liberalisation campaign which has resulted in the withdrawal and reduction of government subsidies for basic commodities and services. It is ironic that within a "liberal market economy" the government is now seeking to set prices. "To date, steps taken to liberalise the economy have been marred by inconsistencies, the new pricing list being only one of them," said Ahmed El-Naggar, the editor-in-chief of Al-Itighat Al- Iktisadia Al-Istratigia (Strategic Economic Trends), a quarterly journal published by Al-Ahram.
According to El-Naggar, much of the economic liberalisation that is said to have taken place is theoretical. "The only positive effect that was supposed to result from the devaluation of the Egyptian pound was the decrease in the prices of Egyptian local goods, but what happened was the opposite. The set price system is an attempt to save face."
It may mean much more. On 18 and 19 January 1977, the worst riots since 1952 broke out after the government increased the prices of basic commodities, including bread, in an effort to reduce the cost of subsidies. Memories of the uprising are still fresh in the minds of many Egyptians. Today, while the economy continues to suffer from recession and increased unemployment, the introduction of international market prices for basic foodstuffs has worried many.
The new pricing system has not yet been applied nationwide and so far Giza is the first governorate to enforce the new regulations, which have been implemented in over 1,000 stores under a so-called "pact of honour". The governorate has dedicated a hotline to receive complaints about any increases in prices. Vendors abiding by the new system told the Weekly that the price fixing should be only temporary because they are cutting deeply into their profit margins. With the economic recession and low sales volumes, these losses can deal a fatal blow to some retailers. Some small to medium-sized grocery stores may soon face bankruptcy if sales do not improve.
However, Sayed Abdeen, head of the grocery division at the Egyptian Federation of Chambers of Commerce, thinks the price fixing measures are acceptable. "The increase that happened in the prices after the devaluation of the Egyptian pound was unjustifiable and unexpected. Even with the new pricing list, the prices are still not back to their pre- devaluation level," he said.
Contrary to the opinion of many vendors, Abdeen believes that small businesses are not incurring losses as a result of the new list. He argues, however, that both the source of inflation and the solution for the problem lie elsewhere. "We need to know who is actually responsible for the price hikes in the first place: the importer, the wholesale vendor or the retailer. This cannot be done because there are no accredited bills between the various commodity dealers and hence we cannot track the price increases." Abdeen added, "We have repeatedly asked the Ministry of Supply to monitor the initial bills in order to help stabilise the prices."
El-Naggar fears that in spite of the new measures, prices will continue to rise. "One of the solutions is to boost the power of consumer protection associations. Another is to create a system intent on protecting consumers and providing people with their basic needs as opposed to a system set out to exploit."
