“Would you rather build your country and become part of a strong country or go around looking for potatoes?” asked President Abdel Fattah al-Sisi in November 2018, addressing people’s complaints about the rise in the price of vegetables.
Egypt under Sisi has embarked on a series of large-scale development projects. It has built the largest mosque in Egypt’s history and the highest tower in Africa. In light of these monumental projects, the president felt empowered in that moment to downplay the din of criticism about price surges for vegetables.
In reality, however, the complaints Sisi was addressing were not just raised by households, but also by the business community that is supposed to be “building the country” and leading development.
This agitation is a small flare up that provides insight into a much deeper problem at the heart of Egypt’s so-called “economic reform” plan: while the the government and International Monetary Fund have set out to introduce fiscal and monetary policies to liberalize the economy, they have largely left problems ingrained in Egypt’s wider political economy untouched.
Without addressing these key problems — for example, dynamics in the agriculture sector — this “reform” has trapped the country in cyclical austerity, where citizens and the business community never see the promised “prosperity.”
To understand why the business community was concerned by the rise in prices, however, we should take a step back to just after the Egyptian pound was floated in November 2016, when the IMF anticipated that inflationary repercussions would be limited.
But these projections made by the experts in sophisticated international institutions were wrong, and inflation rates hit their highest levels since the 1980s.
The IMF pushed the Central Bank of Egypt to raise interest rates in tandem with the currency float, in order to curb the anticipated rise in inflation rates. The argument that led to this course of action was centered on following a classic monetary policy rule: raising interest rates on deposits encourages people to save money, thereby lessening the likelihood that people will spend their money. Accordingly, aggregate demand on goods is meant to decrease and prices then increase at a slower pace than they would have in the absence of this measure.
During these tough times, one crisis after another unfolded, particularly during the first few months of 2017, when the prices of imported goods surged on the back of the plunge in the value of the pound. The subsidy bill also increased exponentially, and the state found itself needing to impose massive interest rate hikes as the cost of living continued to rise.
Interest rates were hiked by 7 percent following the liberalization of the currency, which was significant enough to upset the business community, as it raised the cost of borrowing. This distress was expressed by businessman Mohamed al-Sewedy — who is also head of the largest coalition in Parliament and a supporter of President Abdel Fattah al-Sisi’s policies. In his capacity as the head of the Federation of Egyptian Industries, Sewedy addressed the rise in interest rates in a press release, saying it is “limiting the industry’s capacity for horizontal and vertical expansion and its capacity to develop.”
But many experts still felt that the rising rate of inflation would ultimately recede from its peak in the second half of 2017 as the market absorbed the shock of the floatation, which indeed took place.
In February and March 2018, the central bank began gradual monetary easing, a process it then suddenly halted shortly afterward. By the end of 2018, interest rates had only been cut by 2 percent, and the general level of prices began to rise again.
The 2 percent cut was limited compared to the 7 percent hike. As such, the cost of borrowing remained high when compared to the pre-float period. Consequently, over the past year, the business community hoped for prices to stabilize to allow the CBE to cut interest rates. But toward the end of the year, it became clear that inflation would accelerate again, driven by an unexpected rise in the price of vegetables.
And here is the second factor: Prices of tomatoes and potatoes increased suddenly during the second half of last year. This rise had a direct impact on the inflation rate due to the significant weight of the foods Consumer Price Index basket.
The annual headline inflation rate increased to 15.6 percent in November 2018, and state statistics agency CAPMAS cited the rise in the prices of vegetables as the main factor. Then, in December, the annual inflation rate fell to 11.1 percent before rising again to 12.2 percent in January, an increase precipitated again by the price of vegetables.
December’s dip in the rate of inflation brought the cumulative figures for the last quarter of 2018 within the central banks’ targets, which served as a go-ahead for the central bank’s monetary policy committee to cut interest rates in February. This move brought total interest rate cuts to 3 percent, still not a significant improvement to assuage the frustrations of the business community in the face of the high borrowing costs.
To address these concerns and make financing available to the business community, the state should have considered every possible path to address the price surges that were driving up the inflation rate.
But what did it do in practice?
When vegetable prices surged, the state took a tried-and-true route: accuse traders of monopolistic practices and force them to sell products held in reserve.
But this failed to address a much much more pervasive problem, one rooted in the state’s agriculture policy.
When it comes to agriculture, there are factors behind the rise in vegetable prices that are more ephemeral in nature. For example, the tomato harvest was influenced by a shipment of imported seeds that had a virus that damaged the crop. The state supposedly handled this problem.
But the over dependence on imported seeds presents a more substantial problem that leaves food prices in Egypt vulnerable to economic fluctuations in the countries exporting seeds. This is what happened, for example, to the prices of vegetables last year, when seeds exports from Europe decreased for reasons internal to the European market.
The reliance on importing seeds also makes locally planted foods dependent on fluctuations in the currency exchange market, which was the case after the pound was liberalized.
Given these dangers, why has Egypt reached this level of over dependence on foreign markets? It was not random. This has been in the pipeline for decades.
Briefly, what happened was that farmers traditionally depended on using the seeds of crops left over at the end of a harvest, replanting them during the new season. It was a low-cost, simple process that was passed down from one generation to the next.
With the introduction of genetically modified organisms in agriculture, multinational companies introduced what is called termination technology. Effectively, this allowed companies to produce and sell sterile seeds. The seeds produce crops that cannot be harvested for replanting.
There is clearly a profit incentive for these companies as they have used patent rights to turn millions of farmers worldwide into clients, forcing farmers to share their seasonal profit to buy seasonal seeds.
Granting patents rights on seeds began in 1978 through an intergovernmental agreement called the International Union for the Protection of New Varieties of Plants, or UPOV, which aimed to protect the intellectual rights of companies that register a patent for specific seeds.
The activities of the UPOV developed gradually until it enjoyed hegemony over world agriculture markets. Egypt began to integrate into this market gradually during the 1980s and 1990s. In 2002, Egypt introduced its first law to protect plant varieties. One of the cards used to pressure Egypt into abiding by the UPOV was making it a condition for the EU-Egypt Association Agreement, according to Abdel Mawla Ismail, an environmental and agricultural rights activist.
According to Ismail, Egypt issued several ministerial decrees in the 1980s and 1990s that allowed for the trade of imported sterile seeds and began legalizing these activities in 2002. The law introduced a list of 20 agriculture crop varieties that were allowed to be planted with genetically modified seeds. Vegetables were the most prominent category in the list.
Afterward, domestic legal firms worked to register the intellectual property rights of genetically modified products, according to Ismail.
As multinational companies began to sell sterile seeds in Egypt, farmers were seduced by low prices and the promise that they were more productive. This promise was true, but it was also not in the interests of farmers in the long term, as the land’s capacity to increase production had a limit, while the rise in the prices of seeds did not. In addition, the genetically modified products were, in several cases, of lesser quality in terms of nutritional value compared to traditional products, Ismail adds.
In the coming years, the government list of allowed sterile seeds expanded, reaching 100 varieties in 2015.
As a result, according to Ismail, products such as tomatoes and potatoes came to depend entirely on seeds imported from multinational companies. As a result, the price of the seeds of some types of tomatoes increased from LE900 per feddan in the period from 2011 to 2014 to LE2,000 in 2017.
Where does the state stand in relation to all of this?
Well, the Ministry of Agriculture still produces seeds but in very limited capacity. The variation in cost between the state and the private sector becomes clear when the comparison is made between a sack of government corn seeds (around 5 kg), which costs LE50, and a sack of private sector corn seeds, which costs LE300.
It is unfortunate, then, that the state does not invest enough in the Agricultural Research Center, and that the only active part of state-affiliated agriculture research is the Institute of Agricultural Genetic Engineering Research, which is in partnership with one of the international seed producers. The research center is not allowed to circulate seeds that are produced under these partnerships to any party external to them, according to Ismail.
This is one of the aspects of the impact of the neoliberal policy on food prices in Egypt.
Of course, there is also the fact that farmers face significant pressure whenever there is an increase in the cost of production. The government has remained adamant in its refusal to grant exemptions to farmers in the lifting of fuel subsidies through smart cards, which was part of the original plan.
These policies have made food prices vulnerable to volatility in the currency exchange market and international seed markets. And more crucially, it has affected Egypt’s development path, contributing to the rise in inflation rates that have pushed the central bank to raise interest rates and thus hinder producers’ ability to acquire financing. This is a waste for citizens who need investment to create new job opportunities or better wages.