Mubasher: The Egyptian government's price range or profit margin control would eventually backfire on the economic situation, according to a Sunday's report by Pharos Research.
Last week, the government formed a "cabinet level" committee to set profit margins in order to control basic goods’ price increase.
Although the premier stated it clear that "this is not a price control", the research agency believes "profit margin control is effectively a price range control mechanism that ultimately leads to the same outcomes of price controls."
This approach would give negative indicators for foreign and local investors by the time the government is working hard to raise ease of doing business in Egypt, the research agency reported.
Moreover, an effective allocation of resources to monitor profit margins will be challenging and will definitely not be implemented efficiently enough to guarantee reasonable pricing.
Pharos cited the USA 1970 application of wage and price controls to fight high inflation (around 5%) and it ended up with considerable failure as the US annual inflation rate went double digit by late seventies when controls were removed.
In Venezuela, the government imposed a 30% maximum profit margin in 2014, which was two years later followed by thousands of Venezuelans corssing the borders to Colombia to buy food and medicine
This proves the fact that "such a measure temporarily raises public inflation expectations in the future, which in return increases demand and decreases supply", Pharos concluded.
In this respect, the research firm recommends three strategies for dealing with the double digit inflation.
First, it suggests controlling the budget deficit as the ongoing deficit monetization increases inflation.
Second, market competitiveness and efficiency should be improved.
"Fighting monopolistic practices, through Egyptian Competition Authority, rather than direct intervention in the market will enhance market functionality. Accordingly, haphazard price escalation would be avoided, but efficiently", Pharos explained.
Third, The Central Bank of Egypt should maintain price stability over the medium term rather than the exchange rate stability or budget deficit.
