State considers price controls

ABDALLA F. HASSAN | Business Monthly | April 2003

The word on everybody’s lips these days—since the January 29 devaluation of the local currency—is inflation. Everyone complains about paying, while no one will admit to making more.

 

Galal Ibrahim Salem, a street vendor who sells fuul and taamiya in Cairo’s Attaba district, said he had found it difficult to raise prices on his trademark 25-piastre sandwiches, as his customers are reluctant to pay more. Instead, he has been forced to cut costs.

 

Rather than buying bread for 20 piastres a piece like he used to, Salem now waits in line—for an hour—to buy the subsidized variety at five piastres a loaf. 

 

But the rampant inflation is not affecting only the economy’s lower rungs.

 

Everybody hurts

The government, mired in the subsidies trap, could be in the worst position of all.

 

The General Authority for Supply Commodities (GASC), Egypt’s official wheat buyer, hard-pressed for foreign currency, is working out a barter deal with Russia, through which it will receive one million tons of Russian wheat in exchange for Egyptian agricultural commodities.

 

With the 30 percent increase in dollar exchange rates, imported wheat—which accounts for 65 percent of GASC’s annual budget—now costs the supply authority that much more in Egyptian currency. 

 

For consumers, meanwhile, the heavily subsidized price of bread is sure to remain fixed. (The last time baladi bread saw an increase—from two to five piasters—was in 1989.) The government, knowing people feel squeezed now, has promised to keep bread prices flat, and can therefore expect to bear the brunt. 

 

Industries, especially those that rely on imported raw materials, are also taking a beating. Mona Gazzar, a fashion buyer for a clothing company, complained that “fabric prices have gone up 15 percent in the past two months since some of the threads and yarns that go into production are imported.” The price of accessories, such as the trimming and lining of garments, has also gone up, she added. 

 

Even big multinationals are feeling the squeeze. They, more than most, depend to a large degree on imports. 

 

Car assemblers will be forced to increase their local retail prices in order to keep up with the price of the dollar. “Even though we have very heavy local content, many of our suppliers import part of their content,” explained Dan McCarthy, chairman and managing director of General Motors Egypt. “They are getting parts and sub-assemblies out of Europe and elsewhere, so it increases costs across the board.” 

 

McCarthy noted that inflation can add to expenses even when a carmaker has already placed orders for dollar-denominated parts. “You’ve got material ordered—and indeed received—at the old price, and yet your payment terms are out in the future,” he explained. “You’re going to pay at a higher price, and you may have already sold those cars.” 

 

Price commanders

It’s hardly gone unnoticed that certain prices have increased for locally produced goods, with some traders raising prices even on stock they had in inventory before January 29. Similarly, private microbuses on several routes have hiked fares by 5 to 10 piastres—even though the cost of gasoline, a subsidized commodity, has not increased. But with the cost of living going up, microbus drivers have felt pressed to ask passengers for more.

 

In an attempt to stem the rising tide of inflation—particularly in the case of “unjustified” price hikes—the government announced recently that it would take the radical (some might say reactionary) step of controlling prices from above. 

 

In mid-March, the cabinet was discussing methods to ensure price stability, in response to the widespread post-devaluation price spikes. 

 

According to ArabicNews.com, a March 11 meeting chaired by President Hosni Mubarak produced a list of measures that the government intended to implement. Besides vowing to continue the subsidization of basic commodities, the government also undertook to control the prices of several non-subsidized products. 

 

Hassan Khedr, minister of supply and internal trade, reportedly agreed with chambers of commerce and major wholesalers on prices for certain goods, which will henceforth be used as a benchmark by all.

 

According to the minister, manufacturers and traders made a commitment to bring their prices—for a period of at least three months—back to what they were before January 29.

 

This knee-jerk, protective move is characteristic of a government that is eager to keep its citizenry happy. After all, with higher inflation, real income declines.

 

While controlling prices could offset inflation in the short term, the longer-term effects of such a move—like currency pegs, rent controls or any attempt to command an economy—could be dire. 

 

“Controlling prices doesn’t work very well, as it ends up creating black markets,” explained Ahmed Galal, executive director of the Egyptian Center for Economic Studies. 

 

Traders and producers might retaliate by keeping more stock in inventory, thus creating higher market demand and an artificial need for price increases. “This would result in black markets, dual price systems and parallel markets,” as well as other symptoms associated with short-sighted measures aimed at combating inflation, said Ahmed Farouk Ghoneim, assistant professor of economics at Cairo University.

 

It’s the natural thing

Raising prices is not inherently evil—even when it doesn’t reflect a reliance on imports. 
A barber, for example, might charge a little more for a shave, despite the fact that his job has nothing to do with imports.

 

“Such a person may increase his charge a little bit to compensate for the increase in inflation,” explained Galal. “He wants to buy the same goods that he used to buy yesterday. Now he sees inflation rising, so he sees his real income coming down. So he says, ‘I want to charge a little more.’” 

 

And this is where the trusty laws of supply and demand come in. Rather than employing heavy-handed police tactics to ensure fair pricing, the state could simply leave traders to the mercy of the market. You can always get your hair cut elsewhere.

SIDEBAR

How inflation is measured