Egyptians are bracing for another wave of price rises, writes Niveen Wahish
Noha Mahmoud, a primary school teacher, had wanted to buy a kitchen chopper for months but kept putting it off because there were other priorities. Last week, she decided to go ahead and buy it.
Has she waited any longer she would not have been able to afford it as the value of the pound has been dropping steadily over recent months, meaning that everything is becoming more expensive.
The pound has lost 11 per cent of its value since January 2015. Over the past five years it has lost a third of its value, going from LE5.86 to the dollar to LE7.93.
Any drop in the value of the pound is almost immediately felt in the marketplace. The price tags on products, whether on the shelves, in warehouses or in ports, are automatically changed to reflect the new value, said Ahmed Sheiha, head of the Importers Division at the Egyptian Federation of Chambers of Commerce (EFCC).
This is necessary, he said, to ensure that the trader or importer concerned does not lose the value of his capital.
The continuous drop in the value of the pound has put a dent in Mahmoud's salary. "My salary has increased by only five per cent this year," she said, adding that she cannot keep up with the needs of her two children, let alone put anything aside as savings.
This will eventually lead to a drop in the living standards of Egyptians from the lower segments of the middle class, according to Salwa Al-Antary, former head of research at the National Bank of Egypt. She added that the price hikes will also drastically affect the 27 per cent of the population who live below the poverty line.
Even before last week's depreciation, with the pound going from LE7.73 to the dollar to LE7.93, inflation was already beginning to spike. Annual urban consumer inflation increased to 9.2 per cent in September from 7.9 per cent in August on the back of a rise in the price of volatile foodstuffs such as fruit and vegetables. A depreciating pound will mean higher inflation.
Egypt imports over half of the wheat it consumes in addition to a wide range of other commodities such as cooking oil and tea. Its dependence on food imports has increased over the years, especially for cereals and wheat. The country is now the largest wheat importer in the world, according to a July 2015 report entitled "Demand and Supply Challenges of Food Security in Egypt" by Racha Ramadan for the Egyptian Centre for Economic Studies (ECES).
Egyptian households, especially lower-income ones, spend around 40 per cent of their expenditures on food, making them more vulnerable to price shocks, says the ECES paper. And although globally food prices are at their lowest in years, the exchange rate factor has meant that prices in Egypt have remained high.
The UN Food and Agriculture Organisation (FAO) food price index is 18.9 per cent lower than a year ago. The food price index measures the monthly change in the international prices of a basket of food commodities including cereals, vegetable oil, dairy products, meat and sugar.
The higher exchange rate will also mean higher costs for local manufacturers who use imported production inputs and machinery, which will mean a hike in the price of locally produced goods.
Even if Egypt does not import maize, for example, its price will increase because there will be more demand for it as people will buy it as an alternative to wheat, says Karima Korayem, an economics professor at Al-Azhar University in Cairo.
"Government cooperatives alone will not be enough" to take up the higher demand for cheaper goods, she said, referring to the government-owned supermarkets that provide a range of food and household items at reduced prices. The market needs more competition to prevent prices from skyrocketing, she said.
Moustafa Al-Dawi, head of the Grocery Division at the EFCC, agrees. He said that ever since hypermarkets started opening in Egypt there has been a difference in prices because consumers know that they can get items cheaper elsewhere if their usual vendor is too expensive.
But the market also needs tougher anti-competition measures, Korayem said, through which the price of each product would be carefully calculated, taking into account profit margins at every stage of production. If the prices of products are found to be more than these calculations, the vendors should be penalised, she said.
In the meantime, Korayem said no additional burdens should be imposed on the consumer, referring to government plans to replace the existing sales tax with a value-added tax (VAT). This year, the government is counting on the new VAT to bring in some additional LE30 billion in tax revenues.
The funds are needed to finance Egypt's budget deficit, which reached 10.8 per cent of GDP in 2014-2015. The targeted deficit for the current fiscal year is 9.5 per cent.
Application of the tax is expected to cause a one-time increase in the consumer price level and will not be an annual occurrence. The government originally planned to impose the tax in the second quarter of 2015-2016. It recently, however, said that more consultation is required.
© Al Ahram Weekly 2015
