Thursday,19 July, 2018
Current issue | Issue 1318, (3 - 9 November 2016)
Thursday,19 July, 2018
Issue 1318, (3 - 9 November 2016)

Ahram Weekly

Runaway car prices

The demand for new cars has been dwindling in Egypt, with prices increasing by the day, reports Doaa Farid

Al-Ahram Weekly

Sales of new cars in Egypt declined in the first eight months of 2016 by 25.6 per cent, compared to the same period last year, according to data from the Automotive Marketing Information Council (AMIC), an industry group. 98,400 new cars have been sold in Egypt this year, compared to 129,900 in the corresponding months of 2015.

News of the staff-level agreement between the government and the International Monetary Fund (IMF) and the array of fiscal and economic policies that have followed to pave the road for the $12 billion loan contributed to the 30 per cent fall in car sales in August due to the uncertainty of the economic scene.

The challenging economic situation in the country, reflected in the 100 per cent gap between the official and unofficial exchange rates of the US dollar and the price hikes accompanying the application of the new value added tax (VAT), prompted car assemblers and dealers to raise their prices in October.

Car sales in 2016 will probably fall short of the Egyptian Automotive Council’s expectation of 185,000 new cars sold, compared to 297,000 in 2015. The increase in prices of cars across the board has negatively affected the purchasing power of consumers, Taher Seif, an equity analyst at Prime Holding, said.

Asked whether car prices had been affected by the new VAT, Seif told the Al-Ahram Weekly that the newly-implemented tax did not have a huge impact on passenger car sales so far as dealers were already paying higher sales taxes than on other products at a rate of 15 per cent.

“Next year when the VAT rate is 14 per cent, car purchasers will pay almost the same amount as the sales tax they were paying before,” Seif said. Instead, the hike in car prices has been mostly caused by a lack of supply due to the scarcity of the foreign currency needed to import cars.

“Car assemblers and dealers are getting foreign currency at black-market rates, and as a result they have raised their prices,” Seif explained. October witnessed a noticeable jump in car prices, with the prices of around 160 models surging by different percentages.

“I wanted to buy a new car in August, but postponed the decision until I had enough cash. When I checked the price again last month, I found it was LE20,000 more,” Mai Fawzy, an engineer, told the Weekly.

Seif attributed the rises to the fact that the dollar shortage has reached new heights in the last two months. “The dollar has been increasing by LE1 in the black market every week over the past two months,” he said.

Sales of new passenger cars were also affected when the CBE imposed new regulations in January setting affordability criteria for new retail borrowers. Under the new regulations, monthly instalments on non-mortgage housing or car loans should not exceed 35 per cent of the client’s monthly net income.

Car purchases through bank loans have been negatively influenced by this measure, Alaa Eissa, a loans department employee in one of the state-owned banks, said. He said that more than 70 per cent of car purchases on instalment systems were conducted through banks, as this was considered safer for dealers and buyers.

Egypt spent around LE21 billion in 2015 on car imports. In an effort to support the domestic industry and mitigate foreign currency spending on vehicles, the government recently approved an eight-year strategy to increase local components in assembled cars in Egypt from 45.5 per cent to 60 per cent.

This strategy should be applied along with offering tax and tariff reductions for local manufacturers to encourage them to increase the manufacturing of car components, a Prime Holding commentary said.

Local dealers and manufacturers have been primarily crippled by the dollar crunch, however. Alaa Al-Saba, CEO of car dealer Al-Saba Automotive, told the Weekly that local distributors had been forced to raise their prices.

“When dealers purchase cars now, they pay two costs: the cost of purchasing cars from abroad using foreign currency acquired through the black market at expensive rates, and the amount of cash paid in customs, calculated using the official exchange rate,” Al-Saba said.

According to Al-Saba, 60 per cent of a car’s price is the import cost and the remaining 40 per cent is the cost of tariffs.

After the forecast floating of the Egyptian pound, a condition of the IMF loan, car prices are expected to further increase as the official exchange rate used in customs tariffs will jump, Al-Saba said.

There is now a 35 per cent shortage in the automotive market, according to Al-Saba.

This has prompted some automotive and spare-part importers to use new ways to overcome the shortage, and Abdel-Ghani Mustafa, a spare-parts dealer, said he had started to import his products from African markets instead of Europe to avoid using the US dollar.

“I am trying to save my business, which I expect to be hard hit after the floating of the pound as I will still have to pay customs tariffs in dollars,” Mustafa said.

Meanwhile, the used cars market has been witnessing a boom due to high demand. Mustafa Emad, the moderator of an online platform for used car sales, explained that the last three months of every year were always active on the used cars market.

Emad said that despite the high prices of used cars during this period, “everyone wants to buy cars at reasonable prices now as they expect prices next year will be even higher.”

Car owners were also tending to sell their used vehicles in order to benefit from the higher market prices, he said.

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