CAIRO: Although Egypt’s GDP growth rate is expected to rise to 5.2 percent in 2010 and 6 percent by 2011, high food imports represent a significant burden on the economy, according to a recent World Bank report.
The Global Economic Prospects 2010 report evaluates the economic climate post-financial crisis on the national, regional and global scale.
Santiago Herrera, the lead economist for the World Bank in Egypt, commented on the country’s food imports as a matter of food security.
“To minimize the burden of food imports and the risk arising from volatile food imports, the country has to have a strong export-based economy, Herrera told Daily News Egypt.
“That way, the dollars needed to pay for the food imports will be there, hence, creating the conditions for a competitive business sector that can compete in international markets to generate [needed] foreign currency, he added.
Attempts to boost Egyptian exports have long been incorporated into Egypt’s trade strategy, with expanded trade relationships with the US, China, Russia and India planned or under implementation. A free trade agreement with Russia, for example, has been expected and should be implemented this year, according to the Ministry of Trade and Industry.
But the slowdown in global trade during the crisis remains a concern.
An additional report by the World Bank evaluated each country on a rubric of its relative “ease of trade, ranking infrastructure, customs, timelines, logistical competencies, and tracking on a scale of 0 to 5.
Egypt’s Logistics Performance Index (LPI), at 2.61, ranked significantly better than worst performer, Somalia at 1.44 LPI. Even the top country, Germany, achieved a total score of only 4.11 LPI. Egypt’s ranking was approximately equal to the Middle East’s performance as a region.
The Ministry of Trade and Industry maintains an Egyptian Exports Development Strategy, wherein “impediments preventing exports from flourishing were transparently and objectively addressed and, constructive systems to mitigate such impediments have been initiated according to the ministry’s website.
Hedging import risks
In the meantime, Herrera pointed out, Egypt can hedge the risks of volatile food prices.
“For any importer the volatility of the import’s price is a risk, he explained.
Egypt’s risk to the volatility of wheat prices became abundantly apparent during the 2007/2008 “food fuel crisis, cited by the GEP report as disproportionately affecting the entire region, which was simultaneously punished by the low price of petroleum and the rising cost of food.
“The safest strategy is to hedge the price risk. using the futures market, Herrera went on. He acknowledged that following the financial crises, the futures and derivatives market have a poor reputation, and in markets with minimal experience in futures trading such as Egypt, anxiety is high.
“Futures are risky when used incorrectly, Herrera reassured. “It’s like driving a car… It’s the driver who’s the problem, not the car. The financial derivatives that led to the crisis were of a more complex kind than the derivatives used in commodity markets. Wheat, especially, is less complicated. Egypt would be seeking to diversify and minimize risk.
He contrasted this to derivatives traders in the US and UK who intentionally exposed themselves to increased risk, looking to make high returns.
Herrera also acknowledged that governments sometimes draw criticism for purchasing commodities futures, because if prices fall, they have wasted public money. However, he compared purchasing wheat futures to having fire insurance: a small price to pay for peace of mind.
Another alternative for establishing food security and lessening the burden of food imports is the practice of purchasing agricultural land abroad for the express purpose of growing crops intended for Egypt. The trend is growing worldwide, with Egypt particularly focusing its attention on agricultural investment in Africa.
Herrara agreed that the practice could help minimize Egypt’s import burden, he said, “If using public money [to purchase land] my concern is choosing between all the other needs the country has. I don’t know that the priority of government investment should go to invest in other countries.
In his opinion, such investments are more suited to private companies, or potentially through public/private partnerships.
Global perspective
From a global perspective, the primary findings of the GEP report indicate that while GDP growth is rising, the pace of recovery will “depend on private sector demand and the withdrawal of fiscal stimulus.
The global economy is poised to grow 2.7 percent this year after shrinking in 2009, the World Bank said, highlighting risks to a “fragile recovery, AFP reported.
Financial analysts all over the world have warned that although 2010 looks to start strong, economic growth may falter as effects of stimulus packages wear off, simultaneously across the globe.
Chief Economist at the World Bank Justin Lin commented on the GEP report, emphasizing the impact of the global crisis on poverty, “The crisis has deeply impacted virtually every economy in the world, and although growth has returned, much progress in the fight against poverty has been lost.
“More difficult international conditions in the years to come will mean that developing countries will have to place even more emphasis on improving domestic economic conditions to achieve the kind of growth that can durably eradicate poverty.
Key impediments to growth are troubled financial markets and sluggish private sector demand amid high unemployment, the report said.
Overall, global gross domestic product (GDP) – a broad measure of the output of goods and services that fell by 2.2 percent last year – is expected to expand 2.7 percent in 2010 and 3.2 percent in 2011, AFP reported.
Rich countries, impacted the most by the global financial crisis, would not recover so quickly.
Developed economies, which experienced a 3.3 percent plunge in GDP last year, were projected to grow 1.8 percent in 2010 and 2.3 percent in 2011.
The United States, the world’s biggest economy and the epicenter of the financial crisis that triggered the downturn, would see 2.5 percent growth in 2010 and 2.7 percent in 2011.
Hans Timmer, an author of the report, said data indicates that unemployment will only get worse.
Developing countries are suffering a high human cost because of the crisis, the bank said.
As many as 50,000 additional children may have died of malnutrition in 2009 and by the end of 2010, 90 million more people are expected to be living in poverty than would have been the case without the crisis. -Additional reporting by AFP
