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Customs reductions hint at sea change

Wide-ranging reductions to customs tariffs implemented September 7 portend a whole new game for the Egyptian economy. “Too much protection isn’t good for industry, and it’s not good for the people,” Minister of External Trade and Industry Rachid Mohamed Rachid told members of the American Chamber of Commerce in Egypt (which publishes Business Monthly) on September 12.

The presidential decree reducing tariffs, canceling customs fees and streamlining the tariff system, addresses one of the business community’s longstanding complaints. The reductions brought down the average tariff rate on a wide range of items from 14.1 percent to 9 percent. Customs fees on imports and exports, formerly levied at 1 percent to 4 percent, are no more, while the number of tariff bands was reduced from 27 to six. The Customs Authority is also beginning implementation of a pre-clearance system and general simplification of inspection procedures, according to a September 8 press release issued by the ministry.

The ministers holding economy portfolios – including external trade and industry, investment and finance – announced the details of the new decree during a joint press conference, evidencing the much-talked-about “harmony” of the pro-free market faction appointed in July’s cabinet shuffle.

According to Rachid, 80 percent of the reductions were on production inputs. The measure was thus directed at three main goals: reducing the price of consumer goods, enhancing export competitiveness, and increasing exports. He said that a mere 4 percent of Egypt’s manufactured product is consumed by international markets, business daily Al Alam Al Youm reported September 9. Minister of Finance Youssef Boutros-Ghali, meanwhile, conceded that the reductions were expected to lower customs revenue by £E 3 billion annually, but expressed confidence that the shortfall would be indirectly offset over the next 18 months, the daily reported.

Minister of Investment Mahmoud Mohieldin expressed optimism that the move would increase investor confidence, adding that it highlighted the need for more transparency, as investors will want to know whether there will be additional reductions, Al Alam Al Youm reported.

Production inputs weren’t the only gainers (see charts). Leading the pack were passenger vehicles with engine capacities of up to 1,600 cubic centimeters, the duties on which fell from as high as 104 percent to 40 percent. A mere 42,000 cars were sold in Egypt last year, Rachid said at the AmCham event.

While the business community hailed the decree as a giant step in the right direction, at mid-month manufacturers were scrambling to confirm the reductions on their respective inputs and exploring the broader implications for their operations.

Mohamed Ali Ahmed, owner of the General Egyptian Motor Company, which produces washing-machine motors under license from British company Tyco, was still seeking confirmation on the reductions. Ahmed noted that, before the tariff cuts, he was facing stiff competition from foreign companies deploying highly automated production lines, which, he said, “are possible for factories producing hundreds of thousands of motors a year, while we make about 50,000.” As for obtaining motor components, his company had been looking to the east for several years.

After the tariff amendments, though, he is hopeful, as electric motors stand to benefit from the rectification of what the government calls “distortions” in the tariffs system. Like most importers, Ahmed had countless horror stories about imported items being lumped into higher tariff brackets, requiring months of effort to obtain refunds. This happened time and again, as components at the top end of a 5-percent bracket were slapped with 30-percent duties – the rate for the next bracket up.

The bigger players, too, are working out the implications of the amendments.

General Motors (GM) Egypt, which produces two types of passenger car as well as other, larger vehicles, is still “studying the matter,” said Sherif Magdy, GM Egypt’s director of government and public relations.

Medhat Saleh, operations director at Johnson & Johnson Egypt, which manufactures and distributes toiletries, also said his company was still trying to get its head round the implications. “We’re not 100 percent sure if the impact is going to be negative or positive for us,” he said. The company is currently studying “which products to continue manufacturing locally and which ones to import,” he added. As a distributor, the firm is also concerned about the impact of the 50 percent price increase on diesel fuel – widely used by transport trucks – announced on September 9 (see story, page 30).
For the Nag-Hamady company, which produces medium-density fiberboard, the amendments may well mean stiffer competition from abroad. Previously, there was a 32-percent tariff on the material; now it’s 12 percent. Meanwhile, decreased tariffs on inputs won’t help Nag-Hamady directly, said company owner Mahmoud Khalil Soliman, as “imported parts represent a very small part of our costs.” Nonetheless, he noted, “The market isn’t stable yet, so it’s too early to tell the impact.” Soliman, too, expressed concern over rising fuel costs.

Textiles industry consultant and fiber importer Mohamed Rabie also said it was too soon to tell where the chips will fall. While praising the reductions in principle, he noted that there were several international and domestic factors that could mitigate the potentially positive impact of the move. In his particular industry, for example, the anticipated closure of two major foreign factories producing the raw materials used in acrylic fibers could serve to drive up prices of thread and fabric.

The exchange rate is another concern. Predicting that imports would increase owing to the new tariff schedule, thus stepping up demand for hard currency, Rabie said, “The price of the dollar is expected fly.” This, in turn, could mean delays in obtaining letters of credit, he predicted.

As for consumers, when and whether they will see a decline in commodity prices is also unclear. Minister of Supply and Internal Trade Hassan Khedr was quoted by Al Alam Al Youm September 21 that he expected it would take three to four months before lower income segments would feel the positive effects of the reductions.

Rachid also expressed optimism that it was only a matter of time before prices fell. “Once some companies start lowering prices, others will follow,” he said at a press conference after the AmCham event. As for grumbling that prices are unlikely to drop, he said, “It’s dangerous for us to say ‘they won’t go down.’ God willing, they will go down, and each one of us will go out and buy something less expensive.”

Willa Thayer

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