Last month, the Egyptian government took the courageous steps of liberalising its currency and raising fuel prices. But just when you think it has begun to repair the economy, it adopts yet another misguided policy. What on earth is it thinking by jacking up import tariffs?
Recent Egyptian governments, for some hard-to-fathom reason, have been undoing a lot of economic good that was done by the government of Ahmed Nazif, which slashed and streamlined tariffs soon after it came to power in June 2004 then reduced them again in 2007, 2008 and 2009. The only items on which it charged more than 40 per cent duty in 2009 were alcohol, tobacco and vehicles. This policy, along with the currency flotation of 2004, helped push growth up to more than 7 per cent a year.
Over the past few years, all of this has been unravelling, with tariff increases in March 2013, January of this year and yet again last week.
The increases in 2013 and in January had some sort of logic, if misguided. People were taking advantage of the overvalued pound to buy cheap imports, creating a dollar shortage. Rather than let the currency weaken, the government mistakenly believed it could ease the shortage by making imported goods more expensive.
This logic fell apart when the government floated the pound last month. The official price of the pound fell by half almost overnight, and imports were suddenly twice as expensive, putting them out of reach of people’s budgets. Local products became far more attractive.
This is why last week’s tariff increases are so confounding. They are counterproductive to the government’s efforts to stimulate growth and painful to consumers already trying to absorb austerity measures imposed over the past two months.
In most of the cases, tariffs that were 30 per cent in 2007 were increased to 40 per cent in January and then to 60 per cent last week. More than 350 items were affected, the bulk of which would fall especially hard on people putting finishing touches on newly purchased homes.
Imagine a couple who bought or are planning to buy a semi-finished flat and now must make it habitable, a typical scenario in Egypt’s real estate market. Not only has the pound’s flotation pushed up the price of imported goods by 100 per cent, tariffs have added yet another 60 per cent to the cost of anything imported.
Among the goods affected are marble, granite, ceramic tiles, porcelain sinks, window glass, aluminium door and window frames and water taps. Once homeowners put these in, they will probably want to buy stoves, air-conditioners, refrigerators, gas or electric water heaters, dishwashers, washing machines and cookers. After that they’ll want smaller appliances such as fans, vacuum cleaners, blenders, juicers, radiators, microwave ovens, toasters, coffee makers and televisions, not to mention kitchen and other household articles, door locks, carpets and rugs and drinking glasses.
Virtually all of these as of last week will be subject to the new import duty, as will goods even poor Egyptians might occasionally buy, such as oranges and mandarins, plums, chocolate, bread, biscuits, processed nuts and fruits, dental hygiene products, cosmetics and soap.
Since the 2011 uprising the government has said it could not devalue the pound because this would increase the price of imports and hurt the poor. Its thinking now seems to have taken a 180 degree turn.
The government seems to be trying to protect local industry from foreign competition. This approach doesn’t work. The handful of local producers, shielded from foreign competition, will see this as an opportunity to raise prices on their own goods. Egypt has been imposing tariff protections for well over half a century, only to see its industry crumble.
The only possible benefit from tariffs might be that they are a fairly easy way to raise revenue for a government desperately trying to balance its budget deficit, now running at about 12.5 per cent of GDP. But if the finance ministry feels it is in such critical need of funds, a far better approach might be to issue the long-overdue executive regulations for its newly imposed value-added tax, further reduce Egypt’s enormous subsidies on energy and tighten up its tax collection.
It is vexing that, rather than wasting time protecting a few local manufacturers at the expense of the rest of the economy, a country at the crossroads of the world is not developing its trade and services with an eye towards becoming a global entrepot. A major chunk of world trade passes through Egypt via the Suez Canal, while new highways connect the country to North Africa and Sudan. Should the political hurdles be overcome, Egypt might soon be connected to Asia via a bridge to Saudi Arabia.
That is where the big money lies.
Patrick Werr has worked as a financial writer in Egypt for 26 years.
business@thenational.ae
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