Scobie, Food Subsidies in
Like many developing nations the
Egyptian government intervenes in their food industry and markets. However, the
level of intervention in
Since the revolution in 1952 the state has been increasing its efforts in domestic economic management and foreign trade. Cohesively the domestic food policies have been expanded to many products. To maintain the subsidies provided to a growing population, the government must rely on imports and increase the expenditure on subsides. However, the increasing government expenditure (subsidies) has had a negative effect on the balance of payments resulting in budget deficits. As studies have shown that a 10% rise in expenditures on subsidies has resulted in a 5% increase in inflation, 2% decrease in international assets and a 3% devaluation of free market exchange rate. All this affects the prices in both domestic and foreign (imported) goods, the redistribution of income, the volume of trade, the level of investments and economic growth, the balance of payments and they leave a mark on foreign policy.
History and the Study of the Food Policy
During World War II ration cards were
issued for various goods such as tea, sugar and kerosene. Since then the system
has grown into an extensive price control through rationing and subsidies on
consumer goods. In 1973 subsidies grew rapidly in conjunction with world
prices, but prior to 1973, the government drastically cut subsidies in order to
allocate more funds to the military build-up from 1967-1973. The build-up ended
after the October War with
The increasing reliance on imports decreases the foreign exchange reserves. Should the Government decide to reduce the amount of these reserves to food imports, they should consider that imports are relatively insensitive to changes in subsidies for those commodities with low price elasticity of demand.
Monetary Approach and the Effects on the Industrial Sector
The cost for the subsidies was financed through government revenues, foreign aid, concessional loans, external borrowing and domestic credit through government liabilities at the Central Bank. These financing instruments were accompanied by increasing inflation rates, declining foreign assets and the devaluation of currency. This approach was to determine the balance of payments and exchange rate
Foreign trade was nationalized in 1961 and foreign exchange has been allocated based upon an annual foreign exchange budget. Excess in demand for foreign exchange was transferred to an organized free (black) exchange market under various governmental sanctions. The black market now reputedly handles a third of the entire foreign currency transactions.
The argument for this monetary approach was that when imbalances and disequilibrium arose in the commodity market due to government interventions, the public would stimulate the flow of foreign currency transactions by their desire for a mix of domestic and foreign assets.
The aim of the food subsidies was to protect the Egyptian public from international fluctuation in prices. However, subsidies in real terms continue to rise in 1979-1981 when world prices fell. In fact the level of subsidies was twice as high as the levels during the “crisis” years of 1973-1975.
The rapid increase in costs to the Central Bank in order to finance the food subsidies has contributed to budget deficits which in turn have been met by domestic and foreign borrowing. The expansionary monetary policy has led to an excess of money supply leading to the increase in demand for goods, both local and imported. The demand on foreign goods includes services and has increased the demand for foreign exchange, driving up the free market price of foreign currencies.
Summary by Shaun Liu