As the seasonal shortage of fertilisers is hitting the market, the Egyptian government reveals its plans for liberalisation, reports Wael Gamal The minister of foreign trade and industry, Rasheed Mohamed Rasheed, stunned participants in a meeting at the headquarters of the General Federation of Industries last Saturday to discuss the cyclical crisis of fertilisers by announcing a sector restructuring plan. According to the plan, devised by the ministries of agriculture and finance, the price of fertilisers, currently decided by the government, will be liberalised while providing fellahin with cash subsidies. A group of six ministers is still discussing details that have yet to be approved by the cabinet. "We have been patching up the problem for a long time and now it is time for radical solutions," argued Rasheed. "We will not be touching the fellahin 's subsidies. This is a political decision. We are only revising the subsidy mechanism. A cash subsidy mechanism will give us the chance to liberalise the market and solve the supply-demand gap, while keeping support to fellahin, which is not an exceptional phenomenon on the international level," he added. The government hopes the new mechanism will be simpler and more effective. "Subsidies do not really reach the fellahin now. There is the black market filter. Financing the new form will not be a problem because then we will be able to privatise the fertilisers' companies and provide financing. Also, the current situation keeps away needed investments in the sector," Rasheed said. Fertilisers are considered an essential input in the agriculture process -- they increase crop yields and replenish the soil with the natural nutrients it loses following every harvest. Because the per capita share of productive land in Egypt is about one-tenth the global rate, fertilisers are used intensively in Egyptian agriculture. The sector at large accounts for 44 per cent of the workforce and makes up 26 per cent of the country's gross domestic product. The Egyptian fertiliser industry enjoys certain advantages on the international market; Egypt enjoys the second largest reserves of natural gas in the region and also has skilled manpower, a strategic location, and state-of- the-art technology. Nevertheless, there is a chronic supply shortage in the local market resulting in cyclical crises. The sector is the one of the least liberalised in the country. Domestic fertiliser prices are determined by the Egyptian government order to support farmers and prevent any fluctuations in fertiliser prices. In light of global economic events and the OPEC decision to reduce oil output, international oil benchmarks swiftly rose, in turn bringing up international fertiliser prices. Accompanied by the gradual depreciation of the Egyptian pound against the US dollar between 1999 and 2002, and the liberalisation of exchange rates that came into being in January 2003, the gap between export and local prices has widened. "Now, the international price is about $250 per ton, while the local price doesn't exceed $85, in spite of it being of the highest quality," said Sherif El-Gabali, the president of Fertilisers Distributors Association. This led the existing companies to favour exporting and new investments to concentrate in free zones, to avoid producing for the local market. This situation led to a series of restrictive actions on exports which did not solve the local shortage problem. A distribution quota system dividing shares between the Bank of Development and Agricultural Credit, cooperatives and the private sector on a 35:35:30 per cent basis, has failed to stop the black market. Moreover, the situation led the government to extend its subsidies to the industry, through the price of natural gas is already well below international prices. The new government plan is based on the idea that by liberalising prices, investments will flow to the sector, eliminating the supply shortage and enabling the government to sell off the public sector enterprises. The domestic fertiliser sector is highly concentrated, with only eight principal manufacturers (nitrogen fertiliser accounts for six of these, while phosphate fertiliser accounts for the remaining two companies). Just days ago, the Egyptian government offered to sell 88.25 per cent of the Egyptian Company for Fertilisers, with paid-in capital amounting to $147.5 million, to the anchor investor or group of investors offering the highest bid. But this step is not that momentous because the company's share of the market is very small, and it is located in the northwest Gulf of Suez region and subject to the rules of the special economic zone there. The government plan met sharp opposition, with many participants in the meeting criticising various aspects of the plan. "The cash subsidy has to be produced to products and not inputs. This is the fair, acceptable and easier way of doing it. Why is it that the government supports tomato farmers, who earn high profits, just as it supports wheat farmers?" asked Mohamed El-Gabali, an agricultural economics professor. Others expressed their worries that the bulk of the cash subsidies would line the pockets of agricultural tycoons instead of those of the fellahin. Moreover, if cash subsidies were approved, its implementation will not take place until 2007, as the government's five- year plan is due to end next year. "We must have a transitional plan to deal with the market imbalances during this period," said Sherif El-Gabali. He suggests certain measures to be taken on the short term to raise the share of the private sector to 60 per cent of distribution, revising the rate of using nitrogen fertilisers and eliminating restriction on importing by the private sector. These recommendations represent the interests of the private producers and distributors, but are viewed with hostility by the fellahin, the bank and the cooperatives.
