Not too far
"Has trade liberalisation in Egypt gone far enough or too far?" The question is the title of a recent policy viewpoint issued by the Egyptian Centre for Economic Studies (ECES). Written by Ahmed Galal, executive director of ECES and Amal Refaat, an economist at ECES, the paper highlights the 2004 tariff reforms as "the most significant liberalisation measure since 1991." It also underlines that they are a "unilateral initiative that surpasses Egypt's multilateral commitments under the World Trade Organisation (WTO)."
The customs reforms introduced in September 2004 cut the number of tariff bands from 27 to six and reduced the average nominal tariff rate from 21.3 per cent to 12.1 per cent.
The paper shows that trade liberalisation has helped lower the effective rate of protection though it points out that the manufacturing sector continues to enjoy strong protection. And within the manufacturing sector, industries such as automotives, clothing and footwear enjoy the highest rate of protection.
With this in mind, the paper stressed that the full effect of trade liberalisation "will only materialise with additional reforms to reduce transaction costs, improve contract enforcement and enhance policy predictability." It added that restructuring strategies are needed for the industries where protection remains high.
The new tariffs have also led to a reduction in bias against exports. According to the paper, producers for the domestic market traditionally received higher returns on equity and assets than the exporter. Yet following last year's reforms, the paper showed that this has changed, particularly with the depreciation of the Egyptian pound rendering exports more competitive. However, the paper points out that should certain factors change, such as the ability of exporters to benefit from the drawback system or from export subsidies, or if the value of the pound should appreciate significantly, exporters could be at a disadvantage once again.
The study also compares Egypt's tariffs with other developing countries and finds that Egypt "compares reasonably well."
With this in mind, the writers of the report argue that at this point, further trade liberalisation is not urgent. Instead, for those industries which still enjoy a high effective rate of protection they propose detailed restructuring strategies "to put these industries on a sustainable growth path."
The report also stresses the need to maintain pro-export policies, "the most critical of which is related to exchange rate competitiveness in the context of a monetary policy of inflation targeting." It also called for measures to reduce transaction costs, improve contract enforcement and enhance policy predictability.