Agricultural Sector Model of Egypt

Transcription

1 CIHEAM Institut Méditerranéen De Montpellier Agricultural Sector Model of Egypt Dr. Gamal Siam -1-

2 Table of Contents ACKNOWLEDGMENT ABBREVIATION AND ACRONYMS CONTRIBUTORS TO THE STUDY 1. OVERVIEW ON EGYPTIAN AGRICULTURE 1.1.Importance of Agriculture in National Economy 1.2.Land use and Cropping Pattern 1.3.Production, Consumption, Exports and Imports of Major Agricultural Commodities 1.4. Agricultural Trade 2. RECENT EVOLUTION OF AGRICULTURAL AND TRADE POLICY: 2.1. Strategy of Agriculture in the 1990s: 2.2. Structural Adjustment Program in Agriculture 2.3. Agricultural Price Policy 2.4. Food Subsidy Policy 2.5. Exchange Rate Policy 2.6. Food Security and Related Policies 2.7. Agricultural Trade Policy Reform Under UR 2.8. Egypt s Regional and Bilateral Agreements 3. DESCRIPTION OF THE AGRICULTURAL SECTOR MODEL OF EGYPT (ASME) 3.1 General Description of the ASME Model 3.2 Resources Land Labor Water Resource and other requirements for livestock 4. PRINCIPAL RESULTS 4.1. Model Validation 4.2. The 2000 Base Solution 4.3. Discussion of Model Results Pertaining to Policy Scenarios 5. PROBLEMS, LIMITATIONS AND PERSPECTIVES 5.1. Problems 5.2. Limitations REFERENCES -2-

3 ACKNOWLEDGMENT The Principal investigator and Assistants wish to acknowledge the support they have received from Prof. G. Flichman, coordinator and responsible for the Regional Sector Model Network, Mediterranean Institute, CIHEAM. We would also like to extend our gratitude to Prof. M. Gérard Ghersi, Director of Mediterranean Institute, CIHEAM, for the support he provided to the study team. Gratitude is also due to all colleagues who participated in the Workshop on Agricultural sector modeling for their valuable ideas and helpful remarks. We thank Ms. Florence Jacquet of the Mediterranean Institute for her efforts in administrative facilities. We also thank Ms Eman Nour El din of the Center for Agricultural Economic Studies, Cairo University for text processing. -3-

4 ABBREVIATIONS AND ACRONYMS ASME Agricultural Sector Model for Egypt CAPMAS Central Agency for Public Mobilization and Statistics CAP Common Agricultural Policy of The EU COMESA The Common Market for Eastern and Southern Africa ELS-Cotton Extra Long Staple Cotton. EMA The European Mediterranean Agreement ERP Effective Rate of Protection EU European Union FAO Food and Agriculture Organization Fed. Feddan (area unit = 4200 square meter or 0.42 hectares) GAFTA The Greater Arab Free Trade Agreement GASC General Authority of Supply Commodities GOE Government of Egypt LE Egyptian Pound LS-Cotton Long Staple Cotton MALR Ministry of Agriculture and Land Reclamation Mt metric tons NPC Nominal Protection Coefficient SAP Structural Adjustment Program TIFA Trade and Investment Framework Agreement WTO World Trade Organization -4-

5 CONTRIBUTORS TO THE STUDY Gamal Siam : Principal Investigator, Report writing and technical guidance to the model building, validation and running Mohamed Abu El Wafa: Research Assistant, model validation and results reporting Awatif Abd El Fattah: Research Assistant, data compiling and model running -5-

6 1- OVERVIEW ON EGYPTIAN AGRICULTURE 1.1. Importance of Agriculture in National Economy The Egyptian economy has traditionally relied heavily on the agriculture sector as a source of growth and support for non-agricultural sectors. This central role was reinforced by the strong performance of the sector in the Sixties and Seventies. During the 1980s and 1990s, this dominance has declined but agriculture still accounts for significant share in growth, exports and employment. The share of agriculture GDP fell from 28.0 percent in 1960 to 17.5 percent in The share of agricultural employment declined substantially from 54.0 percent in 1960 to 30.8 percent in Total population of Egypt reached 67.2 million people of which 37.3 percent is agricultural population in (see table 1) 1.2. Land-Use and Cropping Pattern In 1999, farm population was estimated at 25.1 million or about 37.3 percent of the total population. On per capita basis, Egypt s area of cultivated land at 0.05 ha per head is among the lowest in the world. Farm sizes are small with an estimated 70 percent of holdings less than 0.42 ha. Agriculture is almost entirely dependent on irrigation from the Nile River with a total supply of 55.5 billion cubic meter annually 80 percent of which is used in agriculture. The agricultural land-base of Egypt totaling about 3.3 million ha, consists of 3.0 million ha lying within the Nile basin and delta, and about ha of oasis and rain-fed. Of the total area in the Nile basin and delta, some 2.5 million ha are old lands, and the remaining 0.72 million ha are new reclaimed lands. There are three cropping seasons, winter (November-May), summer (April-October) and Nili (July October). In the old lands, an elaborate crop rotation system is followed. The main winter crops are wheat, berseem (Egyptian clover) and broad beans. Among the summer crops, maize, rice and cotton are dominant. Vegetable crops such as tomato, potato, cucumber, melons and others are cultivated in the three seasons. Mixed farming is common, with a variety of crops being combined with a few heads of cattle, sheep or poultry. Most agricultural land is privately owned. Reclaimed new lands, which were owned and operated by the government through public sector enterprises, have gradually been sold. Around 80% of these new lands are currently operated by private sector. -6-

7 Table 1. Egypt s Total Population, Rural and Agricultural Population Year Total Pop. Rural Population Agric. Population (Thous.) thousand % thousand % to total Pop r* : % 1.63 % % - r* = rate of growth Source: FAOSTAT -7-

8 Egypt has a long and rich history of agricultural production. The agriculture is entirely irrigated, and thus is not subject to large annual fluctuations in yields. In 2000/01 Egypt had 13.9 million feddan for crop production. The total agricultural area is 7.8 million feddan, so the cropping intensity was 178 percent. The makeup of the crop production is presented in table 2. About half the area is used for cereals with wheat representing 18 percent, maize 14 percent, and rice 11 percent. Berseem (Egyptian clover) constitutes 17 percent. Together, cereals and berseem represent two-thirds of the total cropped area. Wheat and berseem are the major winter crops, while cotton, rice, maize, and horticulture are the main summer crops. Cotton occupied 518 thousand feddan representing only 4 percent of total area in 2000/01. Fruits and vegetables together constitute about 15 percent of the total area. All other crops including sugar, oilseeds, legumes and others represent 16 percent of cropped area. Table 2. Cropping Pattern in Selected Years Crops fed. % 000 fed. % 000 fed. % Cereals: Wheat Maize Rice Others Cotton Green fodders Sugar crops Legumes Oilseed crops Vegetables Fruits Other crops Total cropped area Agricultural area Cropping intensity Source: MALR 1.3. Production, Consumption, Exports and Imports of Major Agricultural Commodities Table (3) provides data on production, consumption import, export, and selfsufficiency for the major agricultural commodities, wheat, rice, maize, sugar and edible oils during the last decade. Rice is the only major food crop with an exportable surplus, but that surplus was relatively small as it ranged between 3 to 13 percent during the nineties. The large increases in rice production were matched with equally large jumps in consumption with no significant increases in exports. For the other commodities, they are all imported with varying self-sufficiency. Edible oil has the lowest self-sufficiency ratio as local production of that commodity satisfies only about 11 percent of the total consumption, as an average for the period compared to 16 percent in the period

9 1.4. Agricultural Trade In the period the total agricultural trade averaged US$ 3.62 billion annually representing about third of (34.2%) Egypt s trade, but decreased both in absolute and relative terms in the period average US$ 2.97 billion representing 23.8% of Egypt s trade. In the last period, although total agricultural trade increased to US$ 4.26 billion. Its share is derides to only 20.5% of the total trade. Agricultural exports, as Table (4) shows, decreased from US$ 619 million in average in the period to US$ 457 million in the period and made a light increase in the period with an average of US$ 501 million. The share of agricultural exports in total exports decreased from 26.2% in the first period to 14% in the second period and to 10% in the third period. As to agricultural imports, it decreased between the first two periods from US$ 3.05 billion to US$ 2.51 billion but increased to US$ 3.76 billion in average in the third period with a share of 36.5%, 27.4% and 23.8% of the total imports in the three periods respectively. Egypt continues to record a large agricultural trade deficit, which grew from US$ 2.05 billion in to over US$ 3.26 billion in Egypt is a large net food importer, with cereals as its principal imports, including wheat, whose share declined from 29.3% of total agricultural imports in to just over 19.2% in the period , and yellow corn whose share increased slightly from 11% to 12% over this period. Other imports are edible oils, whose share almost doubled, and sugar and sugar confectionery whose share increased from 3.8% to 8.1% (see table 5). Egypt s export profile is concentrated not only in the export countries but also to some extent in the goods exported. During the 1990s overall agricultural exports and cotton exports expanded, on the average, although they were very volatile during this period. The destination of Egyptian exports in general, and of cotton in particular, is almost exclusively the European union and United States. Thus, Egypt has most of its eggs in one basket in terms of both products and trading partners. The European Union was the most important partner, with 30 percent of cotton, 50 percent of rice, 45 percent of vegetables, and 2.5 percent of fruits. Tables 6 and 7 present the evolution and composition of agricultural exports and agricultural imports respectively for the periods , and Table 8 presents exports of major horticultural commodities to the EU. Figure portrays a comparison of agricultural trade between the two periods and Egypt has excellent opportunities for expanding its horticultural crops particularly processed vegetables. Its main advantages are the quality of products, the strategic geographic location, and more importantly the long seasons of production. Orange exports to European Union market continue to be limited by a small export quota. In addition, there is strong competition from other suppliers, such as Spain and Morocco, that are closer to European markets and use land routs which are much cheaper than sea or air freight which the Egyptian exporters have to use to reach European markets. (1) (1) USDA, 1999, Egypt: Citrus Annual Report. -9-

10 Table (3) Production, consumption, Imports and Exports of the Main Commodities, Products Average Wheat Production Imports Consumption Maize Production Imports Consumption Rice Production Imports Consumption Sugar Production Imports Consumption Edible Oils Production Imports Consumption Meat Production Imports Consumption Source: Ministry of Agriculture and Land Reclamation, Economic Affairs Sector. Average

11 Table (4): Agricultural Exports and Imports and Their Shares of National Exports and Imports, (Value: million US$) Year Exports Imports Deficit National Agric. % National Agric. % National Agric. % (6250) (3046) (5745) (2671) (1932) (6537) (2652) (4800) (2637) (6617) (2649) (4203) (2140) (5243) (2149) (5074) (1906) (6722) (2207) (7853) (3117) (9498) (3643) (9788) (3493) (11771) (3030) 39.7 Av (5947) (2418) 38.4 Av (5898) (2056) 35.7 Av (10780) (3261) 25.7 Source: Central Agency for Public Mobilization and Statistics (CAPMAS), Cairo, Egypt. -9-

12 Figure 1 Evolution of Agricultural Exports and Agricultural Imports 4,500,000 4,000,000 3,500,000 3,000,000,000 $ 2,500,000 2,000,000 1,500,000 1,000, ,000 0 Imports Exports Year Table 5. Food Imports in the periods and Crops $ million % $ million % Wheat Maize Sugar Oils Beans Meat Milk Others Total Source: Calculated from FAOSTAT -11-

13 Table 6. Evolution & Composition of Agricultural Exports Total Value (m$) Growth Rate (%) Composition (%) Cotton Rice Potato Orange Onion Tomato Others Table 7. Evolution & Composition of Agricultural Imports Total Value, av. (m$) Growth rate (%) Composition (%) Wheat Maize Edible. Oil Sugar Red Meat Milk equivalent Table 8. Exports of Major Horticultural Products to the EU between the two periods and Products Annual Growth Rate Ton Ton % Potato Tomato Grapes Onion Oranges Green Beans

14 Figure 2 Trade in agricultural products, and percent (a) Exports : Total US$ Exports of Agricultural Commodities in the Average Period Exports of Agricultural Commodities in the Average period % 29.00% 30.63% 45.78% 1.08% 2.41% 9.11% 5.85% c 6.04% 0.27% 2.59% 8.52% 9.97% 19.01% Cotton Rice Potato Oranges Onion Tomato Others Cotton Rice Potato Oranges Onion Tomato Others (b) Imports : total US$ Average Value for the Major Importes commodities % Average Value for Major Imports commodities % 14% 7% 29% 10% 1% 7% 9% 12% 28% 9% Wheat Maize Sugar Red Meat 31% Wheat Flower Edible Oil Milk Powder % Wheat Wheat Flower Maize Edible Oil Sugar Milk Powder Red Meat

15 3. RECENT EVOLUTION OF AGRICULTURAL AND TRADE POLICY 2.1. Strategy of Agriculture in the 1990s The overreaching objective of the agricultural strategy for the 1990s was to complete the policy reform program which had already been initiated for the sector, to increase agricultural production and incomes, taking into consideration the overall changes taking place within both the Egyptian and international economy and the linkages between the agricultural sector and the other sectors of the economy. Within this context, the objectives were to increase agricultural productivity per unit of land and water, through more efficient use of these limited resource, reduce unit costs of production, and thereby increase national output and farmers incomes. This drive for efficiency should move forward in the context of equity and take into account issues of poverty alleviation, as well as environmental sustainability of the overall agricultural development process. Growth in the agriculture sector, combined with programs for targeting particularly women and the landless, would positively contribute towards the overall poverty alleviation strategy. In addition, growth in production and increased exports within a strongly liberalized environment was expected to contribute to the overall food security of the country. The targeted growth for agriculture was projected at an average of around 3.0 percent per annum for the 1990s. This would allow for realizing national GDP growth targets of between 4-5 percent by the end of the decade, and for positive per capita agricultural growth given a population growth rate of around 2.1 percent. The underlying focus of the strategy was to build on the momentum already created by the reforms initiated for the agriculture sector, and by the comprehensive economic reform program that has started in Certain key themes underlie the strategy articulated. The principal ones include the following: a) Need for measures aimed at ensuing efficiency and environmental sustainability in the management of the most important natural resources of the country, i.e. water and arable land; b) Emphasis on using free market considerations, in particular the promotion of the private sector, in resource allocation; c) The need for implementing an agriculture sector strategy within the context of overall rural development, which should encompass within it better involvement of rural development process, diversification of rural activities and provision of essential social programs for health and education; d) Recognition of the social and political issues, and the need for social safety nets to assist in absorbing some of the potential dislocations which would inevitably accrue through the implementation of the comprehensive reform program; and e) Initiating a program of institutional reforms, so as to streamline the array of institutions presently serving the agriculture sector, and make them more responsive to its needs. -13-

16 Table 9. Specific Actions of Structural Adjustment Program Date Action taken Removal of compulsory procurement of all crops with the exception of paddy rice, cotton and sugar cane. -Procurement made optional at floor prices for wheat maize and other crops Official ER was devaluated from US $ 1.43/LE to US$ 0.5/LE and free market ER was decreased to US$ 0.34/LE Removal of compulsory procurement of paddy rice -Optional procurement with floor price for paddy rice -Elimination of exchange rate subsidy for imported inputs -Partial reduction of input subsidy (about third) -Official and free market ER were unified at US$ 0.3/LE Cotton procurement prices were increased to 66 percent of the previous 5 year average of world price -Elimination of all crop area controls except for minimum area requirements for cotton and maximum area of paddy rice. -More reduction of input subsidy (second third) -Start liberalizing long rental relationship (transition period from ) Elimination of the remaining input subsidy (the last third) with the exception of pest control subsidy -Elimination of cotton area control (however, regional allocation of cotton varieties among districts is still at the hand of the government) Private sector was allowed to compete with the public sector in buying, selling and ginning seed cotton. The old administrative marketing system was allowed to continue (until 1996 when complete liberalization took place) Private sector was allowed to export cotton as well as buying from farmers, ginning. A minimum floor price policy for cotton was adopted with minimum price higher than world price Land rental relationship is fully liberalized as of Sept (The end of the 5- year transition period according to the new law) Source: Siam, G Impact of Structural Adjustment Program on Key Performance Indicators in Egyptian Agriculture with Corrective Policies; Working paper No.1; Center for Agricultural Economic Studies, Cairo University, June. -14-

17 2.2. Structural Adjustment Program in Agriculture 1 Economic Reform in the Egyptian agricultural sector was initiated in 1987 by applying series of procedures in the context of structural Adjustment program (SAP), that are presented in Table (9). These included liberalization of pricing and marketing of number of major crops that were under administrative pricing and compulsory procurement. More liberalizing procedures have been implemented during the early 1990 s including freeing rice cultivation, eliminating subsidies on agricultural inputs; i.e. chemical fertilizers, pesticides and seeds; and liberalizing input markets with more effective role of the private sector, elimination of input subsidies was completed by the end of 1994; eliminating subsidies on interest rate on the agricultural loans and shifting from mandatory crop rotation to farmers-decision-based rotation. The second half of the Nineties witnessed liberalization of cotton marketing and trade and liberalization of agricultural land rental values after a transition period of five years (from 1992 to 1997) to shift from old administrative to market-based rental values. In the light of these developments that took around ten years (from 1987 to 1997) there are no government controls left in agriculture except few cases. Among those, production of sugarcane is totally and compulsorily procured to the government at administrative farm gate prices, maximum area is imposed for rice and geographically parietal distribution for cotton cultivation at the district level. In analyzing the impact of SAP on the Egyptian agriculture, it should be noticed that there is other non-sap policies that might have contributed to performance. It should also be born in mind that necessary institutional reforms lagged behind SAP taking longer period than it should have the impact of SAP on both economic and social dimensions is reflected in key indicators. Among economic indicators is growth in GDP in agriculture, changes in cropping pattern, growth in crop yields, changes in structure of cost of production, and output and input prices. Social impact is reflected in income distribution and among the society and farming community by changes in prices and liberalization of land rental value as well as income stability and food- selfsufficiency. With respect to cropping pattern there has been expansion of cereal acreage, wheat, maize and rice at the expense of the cultivated area of cotton and green fodder crops. There has been no change in the relative importance of vegetable acreage to in the total cropped area. Changes in relative prices and profitability of crops that have occurred because of SAP explain most of the changes in the cropping pattern. As for crop yields, cereal crops, particularly wheat, showed significant improvement in yield per feddan. These improvements have been achieved through technological advances especially in the area of varieties that has been encouraged by incentives provided by SAP. Deferential changes in input prices under SAP have led to considerable changes in the structure of cost of production of different crops. The relative importance of the cost of both chemical fertilizers and mechanical power have increased by 100 percent for the earlier and 30 percent for the latter in average coupled with decrease (30%) in the share of labor cost. 1 This section draws upon: Siam, G., Impact of Structural Adjustment Program on Key Performance Indicators in Egyptian Agriculture with Reference to Corrective Policies; Working Paper No. 1, Center for Agricultural Economic Studies, Cairo University, June. -15-

18 As for social impact, the SAP may have caused some negative impacts in terms of income distribution within farming sub-sector as well as price and income stability, it has led to significant improvement in food self-sufficiency at the national level which is important element in food security. In the long run small farmers strategy under SAP may tend to follow higher crop intensification with its environmental implications to compensate for the losses they incur because of SAP. -16-

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20 2.3. Agricultural Price Policy Wheat, maize and rice were subject to mandatory delivery quotas in the prereform period i.e. before 1987 and subject to voluntary deliveries in the reform period; prices are weighted averages of the prices received by farmers for the quantities delivered to the government and for the quantities marketed through private channels. As for sugarcane, government sets prices and sugarcane produce is entirely procured by the government and delivered by farmers to public sector sugar mills. During the reform period (i.e. after 1987) guaranteed floor were offered for wheat and rice (after removal of mandatory marketing). The government has been attempting to maintain relatively high farm gate price for wheat and to bring them closer to, or even higher than, international prices by increasing floor prices each year. The Ministry of Agriculture has set floor prices for maize ever since the Principal Bank for Development and Agricultural Credit (PBDAC) began procuring maize through cooperatives. Maize farm gate prices are also influenced by wheat prices (because maize is a close feed substitute for wheat). The Ministry of Agriculture sets floor price for rice. Public rice milling companies have control over the modern milling capacity in which export rice is milled. Although rice exports represent no more than 10 percent of total rice production, the international prices of rice and the levels of exports affect rice farm gate prices. As for sugar the government sets its prices and has a monopoly to mill, refine and trade refined sugar through the state-owned Egyptian Sugar and Refining Company. Because sugar is subsidized for consumers, providing a higher price to growers has a negative impact on the government budget. Inefficiencies in the sugar mills, reflected in high milling costs, also undoubtedly contribute to the difficulty of raising producers prices. As result of reforms of agricultural policies, the gap between domestic and world market prices for major grain crops has been narrowed as has been discussed before. Technological progress has also led to significantly increasing yields for grains. Farmers could flexibly respond to such yield and price increases by changing cropping patterns, as evidenced in area increases of 108 percent, 51 percent and 6 percent for wheat, rice and maize respectively from 1985 to As a result, production increased by 206 percent for wheat, 109 percent for rice and 49 percent for maize over the same period. As a result of sharp increases in domestic production, imports of wheat and wheat flour have declined in recent years, and maize imports remained largely unchanged since the mid 1980s. The gross value of production has increased in the period 1984/94 by an average annual rate of 3.5% roughly in line with the average annual GDP growth of 3.4%. Analysis of the relationship between domestic (producer) prices and border prices of five major crops, namely wheat, maize, rice, cotton and sugar cane, reveals that the relationship changed more in the reform period than in the pre-reform period. The evaluation of crop farm gate prices relative to their border price equivalents. The gap between domestic and border prices began to decrease after In most cases, however, the actual farm gate price increased even more. As a result, implicit taxation of the studied commodities diminished, as was verified by calculating nominal protection coefficients. -18-

21 2.4. Food Subsidy Policy In 1995, four items remained in the food subsidy system; bread, wheat flour, sugar and edible oil; bread and wheat flour are available to all Egyptians without restriction, while sugar and edible oil are distributed monthly to consumers through ration cards. The number of ration cardholders has been reduced moderately; from 79% of the Egyptian population in 1994 to about 65% in The ration card holders are divided into fully subsidized (green cards) and partially subsidized (red card) holders. As a result of its efforts to reduce the food subsidy, the government appeared to have reduced the total budgeted cost of subsidies to LE 4 billion, or around 1.5% of GDP in This amount is distributed between the subsidized items as follows: LE 2 billion for bread and wheat flour; LE 0.5 billion for sugar, and 0.5 billion for edible oil Exchange Rate Policy In the period , just before the reform policy in agriculture, exchange rates were overvalued by 95%. Cotton was exported at the official rate. Mills were subsidized by the amount of domestic ginning and marketing, and procured their raw materials at the depressed farm gate price equal to about ½ of the export prices. Market exchange rate increased from LE 0.90 / $ in 1981 to 2.3 / $ in 1991, while the official exchange rate remained constant at LE 0.70 / $. The policy of taxing farmers through low procurement prices was enforced by the overvalued exchange rate, through the public trading companies. In the period exchange rate was overvalued by over 200% following to 47% in 1990 and parity in 1991 and beyond. Cotton exports made at official rate. The procurement price did not fully reflect the overvalued exchange rate. If full impact of exchange rate over-valuation had been passed to the farmer, procurement prices would have been less than 20-30% of the true border price. (1) 2.6. Food Security and Related Policies Egypt as NFIDC encounters difficulties in two fronts; first, heavy dependence on imports of food can lead to series of financial difficulties, due to more vulnerable balance of payment situation, regardless of the price of food. Second, investing in domestic agricultural production activities to supplement imports, and competition from dumped imports, due to export subsidies, will limit the few opportunities that similar products can enjoy both at the international and the domestic markets. Dependency on a limited number of international suppliers, particularly of staple food, often exacerbates instability and shortages brought about by climatic and economic reasons. (1) In a short-term perspective the sole possible beneficiary of imported cheap food is the consumer particularly the urban who has access to dumped food. But this benefit in many situations would be quickly eroded by balance of payments (1) (1) Khedr, H; Ehrich, R., Fletcher, L The Egyptian Agricultural Policy Reforms: An Overview; Agricultural Policy Conference Cairo, March WTO Negotiations on Agriculture Export Subsidies-Food Security or Food Dependency?; A Discussion Paper presented by Argentina, Brazil, Paraguay and Uruguay (MERCOSUR) Chile, Bolivia and Costa Rica; Document G/AG/NG/W/38, September

22 difficulties or by taxes paid to support domestic agriculture, both aggravated by the subsidized imports. In a medium and long-term perspective, the entire society will suffer the highly negative consequences including food dependency and the external vulnerability of the country. Egypt as many countries equated food self-sufficiency with food security and made it a priority national goal, viewing food self-sufficiency as the primary means to food security. The major reason behind that is the risk and uncertain tips of having to purchase in the future wills the necessary commodities be available? what will the prices be? And what is the chance that some unforeseen event (such as major purchases by another country, war or political boycott) will occur and make foodstuffs unavailable when needed. Egypt being one the largest importers of wheat in the world is adopting a food security policy, which ensure minimum selfsufficiency ratio for wheat in particular being the most important staple food in the country. Within this context, the GOE has taken all measures, which have successfully resulted in raising self-sufficiency ratio of wheat from 25 percent in the early Eighties to 55 percent at present (2000). The GOE is still hitting for adding up 10 percent through mixing maize flour with wheat flour in order to reach self sufficiency ratio at 65 percent. Egypt is expected to add some 20 million to its population over the next 20 years. This raises at least two challenges each of which places critical demand on the agricultural sector with its limited resources. The first challenge is to assure food security for the growing population, the second challenge is to improve living standards and to reduce the number of poor people in Egypt, while simultaneously protecting Egypt s most vital natural resources: land and water. In order for Egyptunder these circumstances to maintain its current levels of food situation, domestic production of food commodities should be doubled in the coming two decades. However, this is undoubtly beyond the capacity of Egypt s agricultural resources base if no dramatic agricultural technological advances would happen. Food price fluctuations usually dominating liberalized markets constitute a great challenge to household food security particularly those people with weak financial situation and unalterable groups of the society. Increase in world prices of agricultural and food products may lead to serious results as regards food security in Egypt. Low-income class in both urban sector and non-farm rural sector will face higher prices of food, which reduce their purchasing power, thus reduce their accessibility to food. As regards small farmers who constitute more the 90 percent of the population in the farm sector, they are in effect, net buyers of food, which expose them to adverse effects of higher food prices. On the contrary, large farmers who represent small portion of farmer population, are able to make surplus to sell at market i.e. net sellers, thus they can benefit from increases in agricultural and food prices. -20-

23 2.7. Agricultural Trade Policy Reform Under UR As a result of the Uruguay Round Negotiations, Egypt presented base tariff rates for over 600 agricultural tariff lines and offered to bind all agricultural tariffs compared with only 3 percent before negotiation. For most products, the bindings were in the range of 5 to 60 percent, with a commitment to their progressive reduction. It is estimated that the unweighted average of bound rates in 1998 was about 48 percent, down from 62 percent in the base period. It is expected to fall to about 28 percent by the end of the implementation period in Applied tariffs have mostly been much below the bound rates. The applied tariffs exceed the bound tariffs in a number of agricultural items representing less than 7 percent. The maximum tariff has been reduced since 1991 to 50 percent, with some exceptions such as alcoholic beverages and whole poultry. In 1998, a Presidential Decree reduced all applied tariffs by 5-10 percent, e.g. the 50 percent tariff was reduced to 40 percent and 35 percent lowered to 30 percent. The resultant unweighted average of applied rates on all agricultural products (except alcoholic beverages) was estimated to be 19 percent (21.8 percent including service fee and surcharge), against the bound rate of 48 percent. Applied tariffs on wheat, maize and sorghum were 1 percent in The disparities between applied rates and base levels were mainly on dairy products and on prepared and preserved meat and fish. See table (10) and Table 10. Bound and Applied Tariffs (%) for selected agricultural Products Items Bound Bound Applied Bound Poultry Meat Live fish Fish, dried Milk Cut flowers Potatoes seed Lentils Broad beans Bananas Citrus Wheat Barley Maize (corn) Rice Grain sorghum Soya beans Cotton seeds Sugar beet Sugar cane a: Tariff rate on raw sugar is only 5 percent. Source: Ministry of Economy and foreign Trade 2000 Egypt s Commitments for Tariffs Concessions. -21-

24 There are still high tariffs on nitrogenous and phosphorus fertilizers (30 percent) in addition to 5 percent sales tax. Tariffs on agricultural tractors were raised from 30 percent in 1986 to 40 percent in 1994 and reduced to only 10 percent in 1998 in addition to sales tax (10 percent) as shown in Table (11). Table 11. Tariffs and Sales Tax on Imports of Agricultural Inputs Tariff rates (%) Item Sales tax Nitrogenous fert % Phosphorus fert % Potash fert % Ag. Pesticides % Ag. Tractors % Harvesters % Threshers % Partially refined oil % Sulfuric acid % Citric acid % Source: Information and Decision Support Center (IDSC), Cabinet of Ministers, Cairo Egypt s Regional and Bilateral Agreements EMA-Egypt Agreement The European Mediterranean Agreement (EMA) for Egypt has been signed in initials in January It follows the agreement signed in 1995 between the EU and Tunisia and Morocco and its basic objectives are to (i) support economic growth and integration throughout the Mediterranean region, (ii) achieve free trade in manufactured goods between the EU and Egypt, and (ii) grant preferential access to agricultural products. Vegetables accounted for 88 percent of Egypt s agricultural exports to Europe. On the import side, imports only accounts for 0.25 percent of European total agricultural imports (Casing et al., 1998). This agreement seeks to establish a free trade area for industrial products over a 12- year period. However, agricultural trade is dealt with as a special status since exports to the European market are handled through preferential access clauses in the Agreement. The last version of the Agreement included enlargement of quotas and widening the seasonal windows for Egyptian exports (see Table 12). Continuing restrictions on Egypt s access to the EU agricultural market are the most important barriers restricting expansion of Egypt s agricultural exports. Egypt tends to have comparative advantages mainly in fruits and vegetable, however they have only limited access to EU market. As per processed food exports in which Egypt also has comparative advantage tariff escalation remains an important barrier to entry to the EU. There tend to be higher tariffs on manufactured food than on the raw agricultural products. This is an -22-

25 issue Egypt has to put on the negotiating table given its comparative advantage in the processed products. Access to European agricultural and food markets has been more restricted. The EU through the Common Agricultural Policy (CAP) has extensively used trade instruments such as variable levies and export subsidies and has restricted foreign access to the European market. The Common Market for Eastern and Southern Africa In 1998 Egypt became a member in The Common Market for Eastern and Southern Africa (COMESA), which exposes Egypt to 19 new markets in Africa with more than 350 million consumers. According to this agreement Zero-rate tariffs have been implemented for intra-comesa trade since October 2000 with a Customs Union to take effect in With expected competition from south Africa, Egypt is forced to improve product quality and shipping facilities to bolster competitiveness and productivity and to meet the anticipated increase in intra-regional trade. The first step in this direction was taken in August 1999 when the first direct maritime route to eastern Africa was established. The shipping line will link the Suez Port to the Eastern African ports of Mombassa, Kenya and Djibouti. Table 12. Quotas and Seasonal Windows for Major Items Offered by EU to Egypt under Partnership Agreement Compared to Existing Protocol. Existing Preference Partnership Agreement Product Quantity (tons) Calendar Quantity (tons) Calendar Cut flowers NI NI /10 15/4 Potatoes /1 31/ a) 1/1 31/3 Fresh onions /2-31/ /2-15/6 Dried onion Leguminous vegetables /11 30/ /11 30/4 Garlic (fresh) NI NI /2-15/6 Frozen vegetables 15/8 30/ Sweet potatoes NI NI 3000 Fresh or dried oranges /1 31/ /1 31/5 Table grapes, fresh 1/2-30/6 1/2-15/7 Frozen fruit & nuts NI NI 3000 Molasses NI NI Fruit juices NI NI 1000 Rice Frozen & Preserved 3000 Vegetables NI: not included. a) Quota as of the third year Source: Ministry of Foreign Trade, Egypt-EU Partnership Agreement. -23-

26 The Greater Arab Free Trade Agreement In January 1998 Egypt began implementing Greater Arab Free Trade Agreement (GAFTA) reached with Arab League members in connection with the Arab Common Market Treaty of the 1960 s. According to this agreement tariffs will be gradually phased out over a 10-year period starting January 1, Agricultural Agenda and rules of origin are among the topics that are still subject to negotiation between the 14 Arab countries that signed the agreement. Bilateral Free Trade Agreements The Egypt-Tunisia Free Trade Agreement was initiated in It exempts 58 Egyptian and 42 Tunisian products from customs duties and a gradual exemption for all other items by A 20 percent reduction in custom duties was also granted to a group of other commodities for five years. The Egypt-Turkey Free Trade Agreement was also signed in It intended to boost trade, investment ties and cooperation by using Turkey as a gateway for Egyptian products into markets European. In turn Egypt will serve as gateway for Turkish commodities to the Middle East and Africa. Free trade agreement have also been created on bilateral basis between Egypt and Jordan, Lebanon, Morocco, Libya and Syria. In May 1998 Egypt and the United States agreed to begin talks on a Trade and Investment Framework Agreement (TIFA), which is expected to be an intermediary step before strategy talks on a free trade agreement at the future. 3. DESCRIPTION OF THE AGRICULTURAL SECTOR MODEL OF EGYPT (ASME) The following is a general description of the non-linear programming Agricultural Sector Model of Egypt (ASME) and its use for policy evaluation. The first section deals with the model structure and data: the second section discusses the data input very briefly, and the final section suggests alternatives for policy analysis as well as cautions about model interpretations. The model is written in GAMSTM 2.25 language and uses the MINOS 5.4 solver1). The 1999 version of ASME is the result of close cooperation between APRP/EPIQ, MALR (Economic Affair's Sector). Cairo University and NWRP/MWRI (Planning Sector). The model has been revised and updated from the model's 1995 format reported by Bender (1997), both in terms of data (now on a 1997 basis) and in terms of model structure. Appendix A includes a brief discussion of some of the specific characteristics of the GP, MS model that should provide the reader with sufficient information to understand many' of the specific statements of the model itself. The reader should note that a GAMS structure includes: 1) Brooke, A., D.Kendrick, and A. Meeraus (1992): GAMS a User's Guide. The Scientific Press. -24-

27 Sets. Which identify' the indices or specific identifiers in the model. For example the set "R" identifies the regions in the model, and includes U-EGYPT (upper Egypt), M-EGYPT (middle Egypt), E-DELTA (eastern delta), M- DELTA (middle delta). W-DELTA (western delta), SCNLAND (new landsandy soil-canal irrigated), CCNLAND (new land-clap calcareous soil-canal irrigated), SGNLAND (new land-sandy' soil-groundwater irrigated), NEWVAL (new valley land), SINAI (new lands in the Sinai), and SEA (a pseudo region for outflows of water); other examples are the set XC (the planted crops and C (crop commodities for consumption); Variables. The values of which are endogenously' determined in the optimal solution and which are defined by' names and indices. For example, QCNSC(C) which is the total consumption of crop commodities C; Parameters. Which are the exogenous data included as coefficients in the equations and which mar occur as separate numbers, or in tables. For example. LNDREQ (R.XC, PT, TM), is the land requirement by planted crop, region, water regime and time. Where PT and TM refer to the timing of water applications and the calendar month: and Equations. Which establish the constraints on the variables, given the parameters. For example. DSBAL(C). Which is the national supply and demand balance equation for each crop C. Note that the ASME97 model is composed of several modules, including BASE97.GMS (which is the overall model command), BMODEL.INC, DATASET.INC, WATER.INC, YIELD.INC, POLICY.INC, CHECKS.INC, REPORTS INC, as well as other modules (*.INC), which serve to provide sensitivity tests, and reporting of specific solution values. A post-processing TABLES.GMS is used to prepare summary tables showing actual 1997 and projected model results. 3.1 General Description of the ASME Model The ASME model is a static partial equilibrium model in which social welfare in the form of consumers, plus producers, profits (surplus) from agriculturally-based consumption commodities, both crops and livestock, is maximized subject to resource, technical production, balancing, and policy constraints. The following discussion will give a general description of the model in sections along with the identification of specific parameters or tables of parameters including (1) resources; (2) technical relationships; (3 ) balancing constraints; (4) policy constraints; and (5) the objective function. A schematic of the model is found in Figure

28 Figure 3. Schematization of the Agricultural Sector Model 3.2 Resources Land The resource limits in the model consist of land, labor and water. Egypt is divided into eight main regions: 5 old land regions consisting of Upper and Middle Egypt, and East, Middle and West Delta, three "old new lands" regions (SCNLAND), the groundwater irrigated areas (SGNLAND) and Nubaria (CCNLAND), and two new land regions, SINAI and NEWVAL. Sinai and New Valley with their potential for land reclamation have been included but are not active in the present data set. A final "SEA" region serves as a residual "deposit activity for water and is not a productive region (see BMÓDEL.INC). Land in each category has an upper bound [found in the table QLNDSUP(R)]. Old new lands generally follow input requirements for Middle Egypt, although some data (water requirements, yields, and fodder byproducts) are unique Labor Labor in the model consists of family and hired (temporary) labor. First, the number of families is given for each region. Available family labor (in man-days) is the number farm families in the specific region multiplied by a factor indicating average number (1.5) of full-time equivalent workers per family [found in table FARMERS(R) and parameter QLABSUP(R)]. Temporary labor can be hired at a specified reservation wage (average male wages) with no restrictions. That is, the supply of temporary labor is assumed infinitely elastic at the going regional wage rate [found in table WAVG(R)]. Family labor is assumed to have a reservation wage of 85% of the going wage. Thus, the model should use family labor up to its maximum availability, and then use hired labor as long as the objective function is increased. -26-

29 3.2.3 Water These data are found in the W'ATER. INC module. Water is limited by the releases from the High Aswan Dam (55.5 billion cubic meters [bcm] found in parameter MAXREL) plus groundwater pumping [table MAXGW(R)]. Water is diverted for crop use based on water needs (see below). Return flows go to the drains (except for Middle and Upper Egypt where model to overlap these growing seasons. However, nothing in the model prevents a single rotation from dominating all production in any region, so that typical multi-year rotations are not assured. Crops may also be grown earlier than normal, at a normal time, or later than normal, with accompanying changes in yields (see below). Note that the cropping intensity can rise above 2 (double cropping plus nili cropping) Resource and other requirements for livestock Although the livestock parameters (requirements) are generally nationally, rather than regionally, specified, the structure of the livestock sections in the model are more complex than the cropping structure, consistent with multi-season, multi-year livestock production. Large livestock include buffalo, cattle, and sheep/goals. The relationships among breeding stock (female and male), culling and morality rates for breeding stock (tables. CULLR and MORTR), and weaning rates (the net rate of production of young animals - WEANR). are modeled as a long run equilibrium (that is, the proportions of each cannot be varied endogenously). Population dynamics are captured in the calculation of replacement rates for breeding stock. Each general type of animal may have several categories of marketable animals (veal and three levels of fattened animals for buffalo and cattle, for example) as well as livestock commodities (beef meat and milk, poultry meat and eggs, etc., indicated in the set CA). Draft animals are included in the livestock activities, but in a much less complex way. The number of draft and working animals (camels, horses and donkeys) per region in the old lands is fixed, and no draft animals are included for old new lands or for new lands. Labor Each type of livestock, including draft animals, has a labor requirement in terms of man-hours per season (table LLABOR). In addition, there is a labor requirement for milking of buffalo. Cattle and erotic breeds (table MLLABOR), and for carious kinds of livestock products. These requirements are converted to man-days per month in a series of equations and parameters. First. there is a requirement per unit of livestock for men, women and children. These requirements are then converted to man-day equivalents for livestock husbandry and milking (equation LLABOR and LL.ABORM. respectively). Note that the conversion rate differs between women (WLAB) and children (CLAB). Thus. for each unit of livestock. the seasonal labor requirement includes all three categories of labor. Which will water returns to the Nile itself) and are based on application rates, field efficiency (parameter FEFF, see below), and distribution and conveyance efficiencies [parameter IEFF(R)] by regions. A specified percentage of drain water may be reused. Municipal and industrial uses are set as parameters and return flows are a fixed percentage of diversion [tables MUNDEM(R), INDDEM(R), MUNRET(R) and INDRET(R), respectively]. These -27-