Long ago, I once congratulated one of Egypt’s ministers after the government raised the price of one of the country’s subsidised fuel products. I forget which product it was.
Just about everyone in the political classes seemed to understand that the enormous amount the government spent on fuel subsidies – more than 20 per cent of all expenditure – was not only unsustainable, but mostly benefited the wealthier classes at the expense of the poor. It was admirable that the government had finally summoned up the political courage to take such an unpopular yet necessary step.
But then I asked him why it had raised the price so much all at once. Wouldn’t it have been better if it had done it gradually, with a series of increases over a longer period so people and businesses would have time to adjust?
His answer: “Machiavelli says that when you chop off the tail of a cat, you should not do it in bits”.
I’ve never been quick at repartee, and it was only after I went home and thought about it that I came up with two objections.
The first was that Machiavelli never made such a statement, or at least in any reference I could find.
The second was that chopping the tail off once and for all is not an option with prices, because this particular cat’s tail keeps growing back.
Inflation in Egypt has been increasing by roughly 10 per cent a year for ages. This alone tells you that the prices of fuel, including petrol, natural gas, fuel oil and diesel are, in general, going to increase by a similar amount. This is likewise true of just about every price set by the government.
If prices are not allowed to keep up with the general level of inflation, then over time they gradually lose touch with any sort of reality, creating a host of problems: the budget deficit widens, suppliers no longer find production appealing, and consumers become overly reliant on particular products, creating huge distortions in the economy.
A good example is energy. The roofs of buildings in most Mediterranean countries sport solar hot water heaters – but not in Egypt, where natural gas is priced unnaturally cheaply, pricing solar out of the market. Egypt as a whole would be wealthier if prices matched reality.
In a best-case scenario, the government would free prices altogether and let supply and demand decide what products should cost. But if the government decides this is politically impossible, a second best solution would be to build in automatic increases based on the consumer price index, which seems to be a fairly accurate measure of inflation.
The more gradual and frequent these price increases are, the better. Under current practice the government tends to do nothing for years, then as a financial crisis looms it hikes prices massively and suddenly. Wouldn’t it be better if the increases were made quarterly, or even monthly, to match inflation?
One example is Cairo metro tickets, which have cost one pound (40 fils) for years. The result is that the metro system is forever starved for funds, service has deteriorated and there is little financial incentive to build desperately needed new lines.
Another is taxis. When it introduced a new metering system a decade ago, the government set the price of flagging a taxi at 2.50 Egyptian pounds. Since then, it has allowed only one increase, to 3 pounds, and this was to compensate drivers for an increase in the price of subsidised petrol, not to adjust for inflation. Taxi drivers are finding it harder and harder to make a living, and it’s no surprise that many of them now refuse to turn on the meter.
A number of medicines have disappeared from the market because the government has fixed their prices and drug makers no longer find these medicines profitable to produce.
Technology is making it easier to institute price changes. The government has introduced smart cards that could regularly increase prices by a sliver. The price of bread, long a political minefield, could be raised by an infinitesimal amount each month. The metro could begin selling passengers smart cards in place of the current ticket system, with the price per trip rising by a piastre or two each month. Ditto petrol, bread, and myriad other goods and services.
While nobody likes prices to rise, it unfortunately is a fact of life, and most salaries tend to increase to keep up with the higher cost of living. Once the new systems were in place, consumers would build the expectation of gradual and automatic increases into their thinking, and the pricing issue would largely be depoliticised. At the same time, this could free money up for more crucial services, such as education and health.
Patrick Werr has worked as a financial writer in Egypt for 25 years.
business@thenational.ae
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