Subsidies intact despite price hikes

Higher exchange rates are pushing prices up, but the government is holding on to its subsidy commitments. Mona El-Fiqi reports
Dismayed supermarket shoppers have been seeing the prices of almost everything on the shelves rise during the past two weeks. Meanwhile, press reports informed people that the government is facing difficulties in raising the foreign currency needed to import essential subsidised foodstuffs, such as flour, sugar, tea and cooking oil, distributed to consumers through ration cards.
In his People's Assembly policy statement, Prime Minister Atef Ebeid was quick to reassure the public that the government intends to continue subsidising essential commodities and services. Ebeid said the government pays LE18.8 billion annually to provide the entire array of subsidised goods and services to the public, including health care, education, electricity, gas cylinders and foodstuffs.
Also to allay consumer fears, Minister of Supply and Internal Trade Hassan Khedr announced that the government is committed to keeping the prices of subsidised goods stable. He said food subsidies will make a dent amounting to between LE4 and 4.5 billion in state coffers.
Subsidies aside, supermarket prices are definitely on the rise. Mohamed Abu Zikri, owner and manager of a wholesale supermarket chain, said that during the past few weeks, prices have risen between 15 and 60 per cent.
Rice has gone up from LE1 to LE1.6 per kilo, cooking oil from LE2.25 to LE2.8 per litre and macaroni from LE3.5 to LE4.3 per kilo, he said. Prices of flour, sugar, cheese, sweets and household detergents have also risen.
He said the hikes have kept some customers at home. "Our sales have dropped by about 20 per cent in the past few weeks," he complained.
According to Abu Zikri, the changing exchange rate has affected both locally produced and imported goods.
The fear now is that the rising dollar rate will exacerbate the ongoing recession. "Producers are not ready to bear the brunt of the rising exchange rate on their own, so, as usual, the consumer will be paying the price," Khaled Hamza, chairman of the Imports and Customs Committee at the Egyptian Businessmen's Association (EBA), said. "Since consumers' income has not risen, the result will undoubtedly be more recession."
Hamza cites another reason for the price hikes -- the banks' dollar shortage, which has rendered them unable to provide letters of credit for imports used in manufacturing local products. This has led to a further increase in prices and a shortage of locally- produced goods.
He said the government's decision at the beginning of the year to impose a new exorbitant tariff on imported garments is expected to increase the prices of locally made ones.
The pound's fall against the dollar, coupled with the foreign currency shortage, have resulted in an overall reduction in imports from $17 billion in 2000 to $16 billion in 2001, Hamza said.
Hamdi Abdel-Azim, a professor of economics and vice president of the Sadat Academy for Management Sciences, attributed the rise in prices of local and imported goods to two factors: the pound's devaluation by 30 per cent and the application of the second and third stages of the sales tax last year.
Foreign direct investment (FDI) is also at risk of being negatively affected, Abdel- Azim said, since a market in recession where raw material prices are comparatively high will not attract investors. FDIs have already taken a dive from $1.5 billion in 1999 to $450 million in 2001.
While agreeing with the view that the pound's devaluation will raise the prices of locally produced goods, Ahmed Galal, executive director of the Egyptian Centre for Economic Studies, said that the economic slowdown will limit the escalation of prices.
He said the government should introduce certain measures to improve the situation, such as reducing interest rates, allowing the exchange rate to move within an acceptable range, supplying foreign currencies and carrying on with its economic reform programme.
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