Tuesday,17 October, 2017
Current issue | Issue 1281, (4 - 10 February 2016)
Tuesday,17 October, 2017
Issue 1281, (4 - 10 February 2016)

Ahram Weekly

‘Setting priorities’

If you cannot do without imported fruits and nuts, or your pet will only eat dried food, then expect to pay more at the cashier next time you visit the supermarket, writes Niveen Wahish

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Al-Ahram Weekly

This week a presidential decree went into effect raising customs tariffs on hundreds of finished goods. Items targeted by the new decree have either a local alternative or are considered unnecessary, says a Ministry of Finance press release. Tariffs on raw materials, capital goods and production inputs remain unchanged.

The list includes everything from refrigerators and kitchen appliances to cosmetics and pet food, and tariffs will be raised on average by 10 per cent.

Customs duties, which used to be levied on such goods at a rate of between 10 and 30 per cent, will now impose charges at between 20 to 40 per cent.

The decree was strongly anticipated. For the last two months news reports have appeared saying that a list of goods on which tariffs would be increased was being prepared.

Importers claim the decision threatens to put 850,000 import agencies and four million other traders out of business.

“It will be the poor citizen who will bear the brunt of this decision,” says Ahmed Shiha, head of the importers division at the Cairo Chamber of Commerce. Local manufacturers, he says, will use the restrictions placed on imports to inflate their prices.

Following the hike in tariffs, customs revenues are expected to increase by four per cent to reach LE26.7 billion, says leading investment bank Prime Securities. Customs revenues reached LE22 billion in fiscal year 2015-2015 and the government is hoping to take in LE27.4 billion for the current fiscal year.

Prime Securities also expects the tariff rise to curb imports by around $1.5 billion for the remainder of the current fiscal year. Egypt imported $60 billion worth of goods in fiscal year 2014-2015, compared to export earnings of only $22 billion.

Sherif Fahmy, senior director at N Gage Consulting, a company offering public strategy advice, says the new tariffs should not impact overall inflation rates.

“Most of the products on the list are non-essentials or else have locally produced alternatives, which means that supply will not be affected,” says Fahmy. He also points out that 80 per cent of Egypt’s imports are from countries with which it has preferential trade agreements and the new tariffs will not apply to them.

The effect on prices should, in the end, be determined by the level of demand among consumers, says Omneia Helmy, a professor of economics at Cairo University. Unfortunately, she warns, traders have a history of taking advantage of the lack of regulation in the domestic market to use exceptional measures like a tariff hike to charge higher prices for everything.

“The inability of the government authorities to control domestic market prices as a second-round effect of the decision may have negative effects,” says Prime Securities.

Inflation, which had hovered around eight per cent during the summer, rose to 11.1 per cent in November 2015, and remained the same in December.

Importers, says Fahmy, are likely to halt business with states that do not have most-favoured nation status, meaning imports from China and the Far East will be the worst affected.

The tariff increases comply with Egypt’s commitments as a member of the World Trade Organisation (WTO), said Magdi Abdel-Aziz, head of the Customs Authority, in the Ministry of Finance’s press release.

WTO rules allow members to act to safeguard their external financial position and balance of payments. Under the 1994 General Agreement on Tariffs and Trade a country may restrict the quantity or value of merchandise permitted to be imported for various reasons, including “to forestall the imminent threat of, or to stop, a serious decline in its monetary reserves”.

Egypt, which has applied lower tariffs on some goods than its WTO commitments require, also has room for manoeuvre when it comes to raising tariffs, says Helmy.

The changes in custom duty rates are part of a coordinated package of measures being undertaken by the Ministry of Finance, Central Bank of Egypt (CBE) and Ministry of Trade to cut down Egypt’s import bill and halt the run on hard currency reserves. Net international reserves stood at $16 billion at the end of December 2015, enough to cover three months of imports.

Hard currency receipts have been badly battered in the five years since the 2011 Revolution. The Russian plane crash in Sharm El-Sheikh in October 2015 was the last straw for an already ailing tourist industry. Capital Economics estimates that tourist receipts could fall by as much as $3.5 billion over the next 12 months. While tourism revenues in 2014 rose to $7.5 billion from $5.9 billion on the previous year, even this was well down on the $12.5 billion earned in 2010.

Foreign direct investments came in at $6.4 billion in fiscal year 2014-2015, their highest since 2011, while Suez Canal revenues remain around $5 billion despite the recent doubling of the canal’s transit capacity.

Egypt has agreed a set of loans with the World Bank and the African Development Bank to prop up its reserves. The first tranche of loans are valued at $1.5 billion. China has also agreed to provide a further $1 billion.

Falling hard currency revenues have piled pressure on the pound. Though it is officially traded at LE7.83 in banks, the dollar can cost up to LE8.8 on the black market.

Measures intended to streamline imports include a new system for approving foreign factories exporting to Egypt. They must now obtain registration from the Ministry of Trade. The ministry says the measure was introduced to guarantee the standards of imported goods.

Fahmy warns that the step could be viewed as an unnecessary non-tariff trade barrier and might incite other countries to apply the same measures to Egyptian companies, thus posing a challenge to Egyptian exports.

The CBE has introduced its own measures to regulate imports. All import-related payments must now take place through banks. Failure to comply means importers will not be able to receive their goods from customs. Importers must also deposit the full value of any imports with the CBE in Egyptian pounds before they are released.

In an attempt to stop importers falling back on the black market to access dollars, the CBE maintains a ceiling on daily and monthly dollar deposits. The daily ceiling is $10,000. And while the monthly limit was recently raised from $55,000 to $250,000, the increase only applies to importers of strategic goods.

Prime Securities argues that the tariff hikes and the other decisions aim at “preparing a decent base of foreign currency before the long expected deep devaluation takes place”.

Though many commentators agree with Capital Economics’ view that the continued propping up of the Egyptian pound has “weighed on the competitiveness of exports and held back foreign private investment”, not everyone agrees with the need to devalue the pound.

One banker, who preferred to remain anonymous, says the measures taken are all about “setting priorities”. He argues that what is important is that raw materials, capital goods and production inputs and the import of strategic goods are not affected.

“As long as the needs of these traders are covered by banks it does not matter what the rate is on the black market,” he says. He believes that just as price hikes in the last few years are changing consumer habits, so will the new tariffs.

In the meantime, he says, local manufacturers should grab the opportunity to boost production and exports.

Helmy agrees, though she warns that local manufacturers will have to keep their eyes firmly on quality and price and not use import tariffs to allow a fall in the standard of their products.

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