Al-Ahram Weekly Online   22 - 28 October 2009
Issue No. 969
Published in Cairo by AL-AHRAM established in 1875

Recession brings inflation?

One year after the peek of the international financial crisis that pushed prices down worldwide, Egypt seems to be grappling with inflation. Mona El-Fiqi investigates why

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The Central Agency for Public Mobilisation and Statistics (CAPMAS) announced last week that the inflation rate in Egypt increased in September 2009 to reach 10.8 per cent compared to 8.4 per cent in August.

CAPMAS Chairman Abu Bakr El-Guindi explained that the reason behind the increase was higher prices of basic commodities, particularly food products presenting 47 per cent of total products.

According to CAPMAS figures, during September meat and chicken prices rose by 15.2 per cent, fish and seafood by 11.9 per cent, dairy products, cheese and eggs by 4.8 per cent, fruit by 54.7 per cent, vegetables by 42 per cent and sugar by 15.8 per cent.

September was a season of high consumer demand. The holy month of Ramadan and the advent of the Eid Al-Fitr holiday coincided with the beginning of a new school year. Normally high Ramadan food consumption, along with parents buying the new clothes traditional to Eid, were compounded by the necessity of buying school uniforms and stationary at the same time.

Some experts, however, believe that higher demand was not reason enough for rising prices. They attribute the price rise to the failure of the government to control the local market.

Gouda Abdel-Khalek, professor of economics at Cairo University, said there are two reasons behind the price increases. The first is that local markets are chaotic. Monopolies of producers and importers go unchallenged. "A free market economy does not mean that producers and traders are free to determine prices as they wish, particularly the prices of essential products such as food commodities, steel and cement," said Abdel Khalek.

Moreover, the Consumer Protection Authority plays "a very humble role" in protecting consumer rights against monopoly price gouging.

The second reason for higher inflation rates, according to Abdel-Khalek, is the increase of the budget deficit to 10 per cent of total GDP in the fiscal year 2009/2010. Abdel-Khalek explains that in the wake of the international financial crisis, revenues from the Suez Canal, oil exports and tourism were reduced.

At the same time, the government decided to reform local markets. The reform programme runs to LE15 billion, of which LE13.5 billion will be provided to fund infrastructure projects while the remaining LE1.5 billion will be given to exporters as financial support.

Although, Abdel-Khalek added, the fund would be provided to exporters aiming at retaining their labour, no conditions will be set to guarantee that exporters will not fire employees after receiving financial support.

Since the rate of inflation is one of the most important indicators of macroeconomic performance, experts underline the importance of analysing the reasons behind its increase. Nader Noureddin, professor of agriculture at Cairo University, said it was concerning that prices keep rising in Egypt -- as well as in other African countries -- despite reductions in international prices.

According to figures from the Food and Agriculture Organisation, the price of food in African countries -- including Egypt -- is up by 40-80 per cent compared to prices in Europe where labour costs and land prices run high.

Noureddin agrees that the main problem is the absence of government control over local markets. "The government has the right to intervene to control prices for the benefit of consumers, as other governments do," he said. Noureddin noted that following the international crisis, and to protect consumer rights, the United Arab Emirates issued a decree that importers, producers and traders were not permitted to raise prices of any product unless they got official approval from the Ministry of Trade. Traders and importers were obliged to present acceptable reasons before any rise in prices was approved.

Unfortunately the story is completely different in Egypt, Noureddin said. A few weeks ago the international price of sugar increased and on the same day sugar prices in the local market increased although the sugar available was imported before the rise in prices. Noureddin added that, in this respect, the private sector is not to be blamed alone since the government raised the price of sugar sold via its outlets on the first day international price increases were announced, from LE2.75 to LE3.5 per kilo. At private sector supermarkets, sugar went from LE3.5 to LE4.5 per kilo.

Noureddin notes that the price increases at government outlets came amidst government claims that it had enough sugar in store to cover local consumption for six to nine months.

"It seems that prices in Egypt only move upwards," Noureddin said. "When the international prices go down, prices in local markets remain high." For example when the price of cars dropped in international markets due to the international financial crisis, Egyptian traders and importers refused to reduce prices accordingly.

Noureddin blames the government for providing exporters with financial support and ignoring farmers who are the core producers. Noureddin cited an example last year when the government paid LE18 billion due to an increase of wheat prices in the international markets. "It would have been better for the government to provide LE9 billion, half of that amount, to support farmers and to encourage them to cultivate strategic products aimed at increasing agricultural production."

Hamdi Abdel-Azim, professor of economics at Al-Sadat Academy for Administrative Sciences, agrees with Noureddin that farmers need to be supported. Abdel-Azim added that profits always go to the wholesaler, exporters and importers, not to farmers, which constitute 80 per cent of Egypt's poor. "Supporting farmers will help to increase local production and reduce imports, which reach 60 per cent of local food consumption," Abdel-Azim said. To reduce prices the government should be more proactive in regulating relevant markets, according to Abdel-Azim.

As for expectations for inflation in the coming period, a report issued by CI Capital Research, a CIB Group member, said that the absence of seasonal effects and moderate spending in October is expected to pull inflation downwards. Inflation, according to the study, is expected to reach 10.2 per cent in October and to average 10.4 per cent in 2009 as a whole.

According to a study conducted by the Egyptian Centre for Economic Studies measuring inflation in Egypt, CAPMAS, the official statistical agency that produces price indices in Egypt, has made important efforts to improve Consumer Price Index (CPI) quality. The study, entitled "Assessment of CPI Accuracy," confirmed that Egypt's authorities demonstrated strong commitment to improving macroeconomic statistics by adhering to internationally accepted statistical standards. Yet the study explained that the gap is still wide between public perception of inflation and officially announced figures. One useful way suggested by the study to improve the credibility of official figures is to make the methodology and calculations adopted in the construction of the CPI available to the public for independent verification.

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