Thursday,23 May, 2019
Current issue | Issue 1300, (16 - 22 June 2016)
Thursday,23 May, 2019
Issue 1300, (16 - 22 June 2016)

Ahram Weekly

Prices during Ramadan

The main source of the current rises in food prices is mismanagement on the part of the government, making it essential that policies are reviewed, writes Nader Noureddin

Prices during Ramadan
Prices during Ramadan
Al-Ahram Weekly

With the advent of Ramadan, and even several weeks before it, the huge hikes in food prices in Egypt sparked numerous questions. This article will try to answer some of the most important of these and look at how effective government policies have been in controlling rising prices.

 

Are the price rises the result of production or distribution problems?

They stem primarily from problems in production. Our water resources and cultivable land areas are limited, therefore, our food production is limited. The gap between our food production and food consumption is around 60 per cent, and it costs us around $10 billion a year to import much of the food we need. We depend on imports, which places us in a position of food dependency. We must free ourselves from this situation before we become vulnerable to dictates on the part of the food-exporting nations.

 

Are we making optimal use of our available water resources and agricultural land to increase food production? 

We need to restructure our agricultural policies with an eye to producing more strategic food commodities. We can easily make ourselves immediately self-sufficient in five of the eight strategic food commodities that we import.

For example, in the current summer planting season, about 1.5 million acres are being cultivated with rice and less than a quarter of a million acres are being cultivated with long-staple cotton (which we do not need, while our factories do need short-staple cotton, which attracts investment from readymade clothing industries).

The remaining six million acres of land are lying empty. Of this, we could easily allocate 1.5 million acres to food oil production, from sunflower seeds to soybeans. By producing this commodity locally, we would reduce its prices and save about $1.5 billion on what we spend importing it. We would simultaneously be supporting the Egyptian economy by the same sum because we would be producing the commodity domestically.

In like manner, we can become self-sufficient in yellow-corn feed, of which we import six million tons a year to the tune of $1.26 billion. This governs prices of poultry and red meat, eggs, dairy products and other livestock products. By producing the feed locally, we can bring down the prices of these goods.

It makes no sense for, say, a kilo of chicken breasts to double in price from LE30 to LE60 in the space of a few months, or for a kilo of red meat to soar beyond LE100 and a litre of milk to climb above LE10. These unprecedented prices are disproportionate to average incomes in Egypt and are becoming unaffordable. We must act now to halt inflation.

In the winter planting season we can achieve self-sufficiency in lentils by allocating 90,000 acres to cultivating them using ordinary fertiliser, or even half that area using multi-nutrient fertilisers. Similarly, we could become self-sufficient in fava beans, which we import to cover 70 per cent of our needs, by putting less than half a million acres under cultivation using ordinary fertilisers, and half this area using multi-nutrient fertilisers.

To become self-sufficient in sugar would require increasing the area under sugarcane cultivation by only 90,000 acres. Alternatively, we could shift to sugar beet, which requires less water, and allocate an additional 220,000 acres to its cultivation. Such cultivable land is available in the Al-Salam Canal area, west of the Suez Canal, which serves the sugar refineries in Sharqiya and Ismailiya. There remains wheat. If we dedicate sufficient efforts and resources, we can reach 70 per cent self-sufficiency in this vital commodity.

 

What is the cause of the current food price crisis? 

The main source of the problem is mismanagement on the part of the Ministry of Supply, as opposed to the rising pound to dollar exchange rate, as some imagine. When the ministry stops making oil and rice available on food subsidy cards for five months in a row (since December), it is effectively compelling a very large segment of consumers, some 73 million subsidy card carriers, to purchase their rice and oil needs from ordinary grocers and supermarkets. As a result of this huge increase in demand, prices inevitably shot up.

I find it difficult to imagine that the minister of supply was not aware of the powerful impact withholding rice and food oil from the food subsidy system would have on prices. He must have been fully aware of the effects of his decision, taken on the grounds of freeing the poor from dependency on the subsidised distribution of certain essential goods by restricting those available to food card holders to products such as canned tuna and salmon, canned meat, detergent, halva and jam.

Such a policy departs from the very philosophy of food subsidies, which is to make only essential food needs available to the poor, namely rice, food oil, sugar, macaroni, fava beans, lentils, pulses such as haricot beans and black-eyed peas, tomato sauce and perhaps onions and potatoes, thereby ensuring they can meet essential nutrient needs, which do not include jam and sweets.

 

Is this the sole cause of the price rises that have affected all types of food?

The massive rush at the Ramadan goods exhibition, which the prime minister recently opened, was an indication of the current state of the poor due to the prices that have soared beyond their means. People are desperate for any price reductions, even if by only a pound. Most people’s salaries are fixed and raises, if they occur, lag way behind inflation. It follows that prices should be more stable so that poor and limited-income breadwinners do not feel at a loss as to how to put sufficient food on the table.

In fact, it is with the plight of such people in mind that the UN, in a report on “The New Face of Hunger”, introduced the term “hidden hunger” to refer to situations where food commodities are available in the markets but at prices beyond the financial capacities of the general public, which means that in practical terms the commodities are not available.

The situation is thus very simple, and the government should deal with it objectively. We do not have a “rice crisis”. We have a crisis in the rising prices of rice. We do not have a “food oil crisis,” but rather a crisis in soaring food oil prices, and so on for all other basic food commodities that every Egyptian depends on.

There are five essential food groups: grains and pulses, poultry and meat, food oils and fats, dairy products and sugars and starches. Together they comprise 55 basic goods. It is important to bear in mind that food prices do not go up individually — they go up in bundles; a price rise in one drags up others along with it.

 

The Ministry of Supply says that in a free-market system there should be no government intervention.

This is somewhat deceptive. International trade laws prohibit monopolistic practices and certain forms of speculation, fraud, hoarding and other manipulative practices. But they also give developing countries leeway to intervene in order to regulate markets, whether through competition by government outlets of subsidised goods or by fixing maximum profit margins on certain goods.

Therefore, in our current crisis with rice, which is a totally locally produced product that is not dependent on imports and, therefore, not contingent on the exchange rate, it is not sufficient for the minister of supply to say that the cause is that Egyptian rice is being smuggled to neighbouring countries and that some merchants are engaging in stockpiling to drive up prices during Ramadan when food consumption is nearly triple that during the rest of the year.

Instead, he should have notified the agency responsible for fair practices and encouraging competition and instigated an investigation into the monopolistic practices of the major rice dealers. He should also have notified all customs points and instructed them to tighten inspections to prevent rice smuggling. Apparently, the minister did not take such actions.

More importantly, the government needs to be proactive, rather than be merely triggered into acting when people begin to complain too loudly. The government has 3,500 food cooperative stores plus the outlets of the Ministry of Agriculture and the Armed Forces. It has 43 companies belonging to the Food Industries Holding Company (FIHC). Six of these are government firms that produce edible oils, while six others are rice mills, and this is not to mention the other processing plants for dairy products, fish, pasta and other foods. It also holds an even more important key: the General Authority for Supply Commodities (GASC). The law establishing this authority states that it is responsible for ensuring that all the Egyptian people’s essential food needs are available, whether from the local markets or through imports.

It thus has a licence to import and it could, for example, import quantities of food oil, the prices of which have plummeted in international markets, and corn feed, which makes up 75 per cent of animal fodder, as well as butter, poultry and meat, and pulses. According to the UN Food and Agricultural Organisation (FAO), the prices of these goods have decreased to the levels they were at seven years ago.

As a government organisation, the GASC could obtain dollars at the official rate, import goods at their current low market prices and distribute them in large quantities through the food co-ops and thousands of other subsidised food outlets, thereby asserting a strong regulatory grip as opposed to leaving the markets prey to ruthless merchants ready to exploit the poor.

I have a story that demonstrates how successful this policy could be. When I was advisor to the minister of supply some merchants conspired to raise the price of the two-kilo can of dairy ghee to LE12, or double its previous price. GASC received instructions to import large quantities of this type of ghee and make them available at government outlets at LE6 per two-kilo can. The merchants were forced to bring their prices back down to their former level because they could not compete with the state, especially when the cause was just and served the poor.

 

Does government intervention and compulsory pricing distort the market?

No. Even the World Bank at the time of the spike in food prices in 2008 asked some countries to reduce their grain exports in the hope of checking further anticipated price increases and ensuring that sufficient quantities were available for their own people. In other words, even the option of export bans is available, and some capitalist countries apply it, and firmly.

Saudi Arabia, for example, issued a decree limiting the profit margin on imported barley to 25 per cent of its import cost as a means to keep down the price of livestock that feed on that type of grain. Similarly, during the 2010 food crisis the UAE, internationally reputed for its robust free markets, issued a decree prohibiting price rises on goods imported at their old rates and restricting price increases on recent imports to the equivalent of the recent price increase and then only on the basis of proof in the form of receipts for the imported goods.

Therefore, the argument of the Ministry of Supply regarding the need to allow market forces to prevail ignores international commercial laws and denies the essential regulatory role of governments to protect the more vulnerable segments of the public in particular.

Reactive responses, such as the decision to compensate the poor with a LE3 increase on their food subsidy entitlements, are too little too late. It makes the government look weak, as it leaves the markets prey to merchants, as if the role of the state were solely to provide some unfair compensation to the poor after prices have already begun to soar.

Intervention is an authentic right and duty of the state, and the latter could prohibit the export of certain goods such as rice and sugar or ban the imports of some commodities such as cotton and sugar until local production has been exhausted.

The interests of merchants looking for profits and the interests of consumers looking for just and affordable prices are in permanent conflict. I should stress that the UN has frequently cautioned that social stability in poorer countries is directly connected with the prices of food, electricity and fuel, and that outbreaks of rioting in developing nations have been caused by the rising costs of food or energy.

It seems that the stability of prices as a major component of national and social security is a concept that is entirely lacking in the thinking of the minister of supply who, in light of his previous work with the Chambers of Commerce, seems to be biased in favour of the merchants.

Moreover, government co-ops have effectively been converted into retail outlets for private merchants, as opposed to the goods produced by the companies of the GASC, now that the minister has increased the prices of the goods produced by these companies to the level of their equivalents in the private sector, causing the co-ops to lose their clients from the poorer and limited-income sectors.

Nor do these stores serve to distribute the goods imported by the GASC now that this authority’s import function has been restricted to importing wheat for government-made bread and small quantities of Sudanese beef. These government-subsidised beef imports have done nothing to check rising meat prices, which have soared from LE70 to over LE100 per kilo since the current minister assumed his post and after consumers ascertained that the imported meat was flavourless.

When it became clear that people would rather purchase half a kilo of tastier homegrown beef at higher prices than a kilo of tasteless beef at a reasonable price, butchers jacked up their prices, confident that they faced no real competition.

Surely it would have been better to support the poultry and livestock industries at home in a manner that would both support the Egyptian economy and ensure the availability of the type of meat that Egyptian consumers prefer at prices they can afford. Sadly, even the prices of important alternative sources of protein, such as lentils, fava beans and other pulses, have shot up by 40 per cent in the last two months alone.

The conclusion is that the government needs to work to stabilise prices and combat monopolistic and exploitative practices on the part of merchants. Price stability equals social stability, which is a component of national security.

Therefore, instead of granting merchants 800 plots of land, some situated on agricultural land in Gharbiya and Daqhaliya, so that they can build supermarkets, the government should allocate these plots to the construction of more co-op stores, placed under professional management, in order to bring prices under control.

It makes no sense for the government to import 60 per cent of the country’s food needs and to destroy arable land to make way for supermarkets at a time when it is seeking tougher legislation to safeguard existing agricultural land. 


The writer is a professor of soil and water sciences at Cairo University’s Faculty of Agriculture.

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