Egypt will be to meet the financial need for irrigation system and to provide incentives for
efficient use of water.
Scenario Design for Egypt
Three policy scenarios are simulated using the ASME model (Siam, 2001): (1) a water pricing
policy; (2) an input tax policy; and (3) an output tax policy. Table 1 summarizes the scenarios.
The water pricing scenario observes the effects under different water pricing levels (cost
recovery Pw1, and two shadow price levels Pw2 and Pw3). Pw1 (0.011696 Le/M3) is the cost
recovery water pricing level calculated by Perry in 1996. Pw2 (0.036 Le/M3) and Pw3 (0.083
Le/M3) are shadow prices derived using ASME under 5% and 10% reduction of water capacity
levels, respectively. Input factor tax scenario includes three sub-scenarios: Nitrogen fertilizer (N-
fertilizer), pesticides, and energy. The output tax scenario taxes paddy rice and sugar cane
production since these crops are irrigation water intensive and have lower profit levels among all
other crops in Egypt. Because the agricultural sector model used here is an endogenous price
model, commodity supply equals demand. Domestic demand and prices are endogenous.
However, export quantities and export prices are exogenous. In order to observe the response on
the supply side from policy shocks, upper bounds on the exported quantities for all commodities
in the model are increased by 20% before testing policy scenarios. Therefore, changes in exports
are given a minimum (base level) and maximum (20% more than base level) bound. This allows
the model to have a better environment to obtain insights into Egyptian export opportunities
combined with the policy under consideration.
The results of the policy simulation are presented in four categories: 1) farmers’ response
modeled as cropping pattern change under different policy scenarios; 2) welfare change in terms
11
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