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Monday, 26 December 2016

Amid FX crisis, 2016 was the Year of Shortage

2016 could also be called the year of shortages: From wheat to pharma products, baby formula, and sugar, the country has seen shortages due to difficulty in sourcing USD, a plummeting EGP, and limits on banking facilities for importers. This shortage has been a major driver of consumer inflation — which (as we noted above) is public enemy number one as far as the reform agenda is concerned.

The government’s flip-flop summersault on ergot contamination levels in wheat didn’t help. In February, the government okayed ergot in wheat, went back to a zero-tolerance policy of ergot in June. This was followed by a directive accepting 0.05% ergot the following month, before banning ergot again in August, followed by a final reversal in September. That whole flap meant that Egypt canceled multiple wheat shipments needed for the country’s reserves. The domestic wheat harvest was also tallied by a corruption scandal as there were discrepancies between the reported harvest and what was actually found at shounas. Investigations started in June and culminated in the Supply Minister’s resignation in August. Blumberg Grain Storage facilities which were supposed to come online in April have not been operational as they were not provided with the electricity needed to function and track grain storage. Private sector silos will be used in the 2017 wheat harvest collection season. Blumberg is bidding for phase two of the shounas program, with competition from a consortium led by Russia’s Melinvest.

Egyptians were also faced with shortages of meds, 90% of which the country imports. Following the March devaluation, and the November float, pharma companies have not tired of speaking out about the inability to make profits and continue getting products into the market. Multinationals threatened to exit the market, and shortages of imported products can still be found in pharmacies nationwide. A baby formula shortage sparked anger, prompting the Armed Forces to step in and import it in September. The government allowed hiking prices on meds costing less than EGP 30 by 20% in May and after tough negotiations, the Health Ministry reportedly allowed price hikes on meds in December.

A population with a heavy sweet tooth also couldn’t find sugar on shelves, and if found, was overpriced. Despite the government and media’s best efforts to pin this on the private sector, the Egyptian Competition Authority vindicated the companies. That didn’t stop the government from trying as Edita and Pepsi had to shut down production on some lines after the government raided their factories and seized (legally owned) sugar.

For sugar and other commodities, part of the government’s response has been to cut customs and build reserves for up to six months. But more frightening are hints of potential price controls. A government committee had been formed to explore capping profit margins on basic goods. It downplayed the move by saying it was merely exploring the option, all while legislation was being driven through the House that would give the cabinet the authority to move on prices. These include provisions in the Investment Law and Consumer Protection Act. Signs point to this being the policy if inflation continues to pin the cabinet’s back against the wall.

A possible lifeline for the government is if FX reserves stabilize in 2017, and since the float, it is looking like it is heading there. But if that doesn’t happen, it is becoming clearer that the private sector may be the government’s only way out — whether it is relying on it for greater efficiency on imports or maximizing exports to draw in FX. Perhaps not scaring them with pricing controls might do more to encourage them to take a temporary hit, as many companies have shown they are willing to hold off on raising prices.

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