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Setting the market back on track

Youssef Sidhom

19 Mar 2017 9:09 am

 

 

 

 

Problems on hold

 

 

 

 

 

No one can tamper with market laws, least of all the time-honoured law of supply and demand. This law is the measure that truly reflects market conditions with no falsification, exaggeration, or understatement. Opinions which attribute the current painful price hikes in Egypt to ‘greed of traders’, and hence demand government ‘control’ over the market, are misinformed and non-feasible. We should realise that all the government can do on that score is to publish reference price lists, to help consumers make up their minds on whether or not to buy a given product.

Understandably, a hike in the price of commodities such as basic foods or medicines causes intolerable suffering on the social level; it is not advisable that the government leaves them solely to the mechanism of supply and demand, but should intervene with social support programmes to ease the pain. Prices of non-essential goods, however, must be left to supply and demand, given that consumers might be able to postpone or refrain altogether from buying them till the market automatically corrects itself.

Last November, the Central Bank of Egypt decided to float the Egyptian Pound and free the foreign exchange rate. The EGP / USD exchange rate bounded from EGP9 to EGP20 for USD1, that is it more than doubled. The result was an immediate proportional hike in the price of goods. This included, in addition to basic commodities, durable goods such as electrical and household appliances; cars topped the list. Even though the increase in prices was justifiable and understandable, the public was furious and accused the traders of greed because they raised the price of goods that had already been imported before freeing the exchange rates.

Predictably, consumers refrained from buying cars and durable goods since the new prices far outstripped their purchasing power. This took the market into a recession that hurt both producer and consumer. No one could fathom how to get out of this dilemma which kept worsening by the day; traders felt it was not in their power to bring prices down, and consumers preferred to play it safe and put off purchasing non-essential goods. Some traders reviewed the pricing of components not directly related to the currency exchange rate. Others attempted to temporarily reduce their profit margin until the crisis eased. But all these endeavours failed to achieve any significant impact on the final price of goods or to move the market closer to its pre-EGP-float level. The currency exchange rate had affected the prices of imported goods on two counts: their direct price and the customs duties paid for them.

When the exchange rate was freed last November, experts predicted a huge leap in the value of the USD versus the EGP. In time, however, the currency black market would be driven out of business and the banks would gain control over the currency market. Once this occurred, the experts said, the EGP / USD exchange rate would stabilise at a level that reflects the supply of and demand on the dollar. Only then, they said, would the market witness an ease in exchange rate. These predictions were fulfilled when by the end of February the USD went down to EGP15.75. This had a direct impact on the automobile and durable goods market. Traders heaved a sigh of relief and rushed to advertise substantial discounts on their goods, hoping to lure consumers and revive the market. However, with the approaching month of Ramadan, the Muslim holy month of fasting during which many visit the Islamic holy lands for the lesser pilgrimage and, in addition, demand on imported goods usually rises, the EGP witnessed additional pressure as the USD again soared.

Observers will not fail to see that the determining factor underlying the price oscillations had nothing to do with ‘compulsory pricing’ or ‘control’ by the State. It was nothing but the timeless natural law of supply and demand taking charge of the market.

 

Watani International

19 March 2017

 

 


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Setting the market back on track

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