Profit margin caps: Reining in monopolies or a push toward a new black market
 
 
Courtesy: Adrianne Wadewitz, via Wikimedia
 

Egyptian households are struggling to meet basic needs amid an economic crisis that features the continued erosion of foreign currency reserves and subsequent strain on import procedures, as well as inflation rates that have reached record highs, price increases coupled with food shortages and an expected currency devaluation. The Egyptian government has rolled out an economic reform plan to address the country’s economic woes, with its latest initiative being a proposal to cap profit margins for basic commodities. However, many experts view the policy as outdated, difficult to enforce and failing to address the principal causes of inflation.

The government issued a decree on October 9 to form a ministerial committee charged with determining the appropriate profit margin cap on imported and domestically produced basic commodities.

The committee’s work will involve creating “an advanced system to price commodities in cooperation with the Federation of Egyptian Industries and the Federation of Egypt Chambers of Commerce, as well as preparing a detailed study to include execution mechanisms,” according to the decree.

However, the Federation of Egyptian Industries has publicly rejected the policy, according to media reports.

The Federation of Egypt Chambers of Commerce has also rejected the decree, says El-Basha Idris, a member of the federation’s board and the head of its agricultural crops division.

“It is very difficult to determine the profit margin. It requires knowing the production cost of each industry and of each factory, which is almost impossible,” Aliaa al-Mahdy, a member of Cairo University’s Economics Faculty, says.

It is also unclear how the government plans to reach out to hundreds of thousands of small and medium enterprises in the trade sector, she adds.

American University in Cairo (AUC) Economics Professor Samer Atallah does not think the government is capable of undertaking such a task.

Ministry of Industry and Foreign Trade spokesperson Yasser Gaber says that the committee has yet to convene and will only be able to detail the requisite measures and mechanisms once it does.

“The profit margin caps will be non-binding,” Gaber adds.

Souad al-Deeb, a board member at the Consumer Protection Agency, sees the policy as a symbol of the necessary regulation that must be implemented to protect Egyptian consumers from emerging monopolies and price gouging. However, she did not indicate the specific ways in which the policy could be implemented.

Egypt’s economy is struggling from high inflation rates, which are currently in the double digits and increasing. The annual inflation rate rose to 14 percent in September, and the International Monetary Fund (IMF) projects that it will rise to 17.3 percent in 2017. The core inflation rate – which represents the long-term trend in general price levels as it excludes volatile determinants – rose to 13.94 percent in September from the 13.25 percent posted in the previous month.

Monopolistic practices

While there is some consensus that the micro factors contributing to the increase in the price of basic commodities are a mix of market speculation, emerging monopolies and a drop in supply, how to devise an effective strategy to curtail the effects remains a point of divergence.

“There are several reasons for the rise in general prices, with some commodities rising in price due to monopolistic practices,” says Atallah.

To solve that issue, the Egyptian government must introduce strong anti-monopoly legislation and an effective agency to enforce it, he adds.

Legislation regulating economic competition and monopolies was introduced in 2005. However, Atallah does not believe the existing law is strong enough to stamp out current monopolistic practice.

“The only way to lower profit margins is through more competition,” says Mahdy, who argues that increasing the scale of production would be a more effective means of curbing inflation than instituting profit margin caps.

Rather than stamp out emerging monopolies, Mahdy argues that the profit margin caps will cause the formation of black market for basic commodities.

Rice, an unavailable surplus staple

The price of rice has risen on the domestic market amid increasing scarcity, despite Egypt producing more of the staple commodity than is consumed on the domestic market, according to media reports.

Egypt produces an estimated 5.1 million tons of rice per year, with the domestic market consuming only 3.95 million tons of this haul. Nonetheless, the country’s farmers refused to sell their crop to the government at the state-suggested price of LE2,400 per ton, according to a Reuters report published earlier this month.

In response to its failure to adequately stock its reserve supply, the Egyptian government decided to import 500,000 tons from international suppliers as unregistered traders price it out of the domestic market.

According to Idris, these unregistered traders have bought rice from farmers at a price of LE3,000 per ton and hoarded their purchases, while speculating that the price will rise further.

The government should “get the rice from those random traders,” he says.

“The government cannot determine the profit margin in the agriculture sector. It is very difficult,” says Mahdy, suggesting that it is more practical to buy from traders and farmers at reasonable prices and then supply the crop to the public than to set fixed prices.

Flexible exchange rate and a dynamic global market

“Everything we import is subject to demand and supply, exchange rate and global markets,” says Idris.

It is unclear whether the government committee would factor in the official exchange rate set by the Central Bank of Egypt or the unofficial exchange rate on the black market when calculating production costs, he adds. The Federation of Egyptian Industries has similarly demanded that the committee set the profit margin cap according to the exchange rate on the black market.

The erosion of foreign currency reserves in the aftermath of the January 2011 revolution has prompted currency traders to turn to the black market to buy and sell hard currency, creating a marked disparity between the government’s fixed rate and what is readily available.

Now at 8.88 Egyptian pounds per US dollar, the official exchange rate has fallen by almost 14 percent since the beginning of 2016, while the rate on the black market has significantly depreciated, having fallen around LE7.8 in mid-January to LE15 last week.

The Central Bank of Egypt auctions foreign currency to banks once a week to facilitate import procedures for basic commodities and production inputs. However, importers often resort to the black market when there is not enough hard foreign currency available.

Additionally, prices in the global market change regularly according to demand and supply, making import costs dynamic and more difficult to be tracked by the government, says Idris.

“The government’s declared policy is based on free market principles,” says Atallah, asking how a profit margin cap is consistent with this stance.

 

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