Stirring stagnant waters

By Ahmed El-Sayed El-Naggar

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Though the NDP conference fell short on political reform, it came out strong on economic change.

The decision to reduce tariffs was correct though rather belated. It is also contained some deficiencies which could have an adverse effect unless redressed.

The new tariff cuts will provide imported consumption goods at lower prices. This will rein in inflation which more than doubled over the past two years. The even greater reduction of tariffs on imported machines and capital goods will provide a suitable environment for local and foreign investment. It will provide projects a real opportunity to lower their product prices and raise their competitiveness. It will likewise constitute pressure on local producers to reduce prices and improve their standards since they will be operating in an open market and competing with foreign products.

However, because of the tariffs cuts, the state treasury will incur a loss of some $3 billion. There is no guarantee that this will go into consumers' pockets and revive the economy. Importers might benefit from the tariff cuts if they reduce commodity prices in a manner not congruent with the tariffs reductions they will enjoy. The government must engage in a dialogue with importers and the Union of the Egyptian Chambers of Commerce and agree on a fair profit margin for importers.

The government must also get ready for pressure to be exerted on the exchange rate because of the expected inundation of foreign imports. If it does not, it could jeopardise the precarious stability attained recently in the foreign currency market.

The decision to raise the price of diesel fuel, a production input, will raise production costs, thus dissipating some of the positive impacts of tariff reductions. There is also the risk of the adverse social and political effects of increasing transport costs.

Raising the tax exemptions ceiling on the other hand was a step in the right direction, as it lifted the burden from the limited and middle income groups. What is even more important is that taxes be collected. While the upper classes benefit most from public expenditure on infrastructure, they do not pay to the state or society the due taxes.

* The writer is an expert in Al-Ahram Centre for Strategic and Political Studies.