Import Regulations: Tariff Increase

Introduction Post January 2011, the Egyptian economy has been suffering from a severe shortage in foreign currency liquidity, owing to the recession in the most vital economic sectors on which foreign currency reserves relied. The past five years have witnessed foreign capital flight, as well as a big drop in foreign direct investments inflows (from $13.3 billion in 2007 to $2.2 billion in 2011, while later witnessing a relative increase to $6.4 billion in 2014). Furthermore, Suez Canal revenues faced some stagnation (averaging $5.2 billion during the said period), whereas tourism revenues slumped (from $11.6 billion in 2010 to $7.4 billion in 2014). In addition, the steady increase in local consumption, together with reduction in local production (due to security tensions and difficulty of securing factors of production or their increased costs), have led to a heightened imports bill of goods and services (from $48.9 billion in 2010 to $60.8 billion in 2014) and a drop in the value of exports of goods and services (from $23.9 billion in 2010 to $22.1 billion in 2014). This has resulted in a surged trade balance deficit (from $25.12 billion to $38.78 billion between 2010 and 2014). Consequently, the year 2015 ended with a huge drain on foreign currency reserves at the Central Bank of Egypt, after its intense utilization to secure foreign currency needed for local demand (for consumption and production), to support the Egyptian pound in exchange for foreign currencies, and to serve external debt (particularly those accrued to the Paris Club and foreign partners in the petroleum sector). Data show that foreign currency reserves shrunk by around 50%; from $35.2 billion in 2010 to $16.45 billion by the end of last December. The ratio of reserves to imports[1] decreased from 8.6 months in 2010 to 3.3 months in 2013 (while later witnessing a relative increase to four months in 2014). The foreign exchange market also suffered from great fluctuations, especially in 2015, resulting in a 9% depreciation of the Egyptian pound with respect to the dollar. The year ended with the official exchange rate recording 7.8301, as compared to 7.1803 in 2014 (the black market rate ranged between 8.55 and 8.9). In light of the above, both the Egyptian government and the Central Bank resorted to measures that would enhance the availability of foreign currency in the local market and rebuild foreign currency reserves. Such measures include increased external borrowing (most significantly are the two Development Policy Loan Agreements signed with the World Bank and African Development Bank worth a total of $1.5 billion), specifying a list of priority products for importation (such as food, medicine, machinery, and equipment items), holding special dollar auctions, and imposing a limit for cash deposits in foreign currency for juristic persons at $50 thousand (later elevated to $250 thousand). For that purpose, the President enacted two decrees to increase customs tariffs for a wide set of products, and by the Minister of Trade and Industry, to amend the rules for registering exporters of products into the Egyptian market; which are both the subject of analysis and commentary in the following section. Presidential Decree with Custom Tariff Increase on Specific Imports The Presidential Decree No. 25 of 2016[2] raised the customs tariff rate for a wide set of goods, including some fruits, electrical household appliances, stationary and others (around 600 goods); to be officially implemented as of February 1st, 2016. While the elevated rate differed, it brought the total customs tariff on goods mentioned in the Decree to rates ranging between 20 and 40 percent (from 10 and 30 percent), depending on the good and its type. The said Decree amended the previous Harmonized Tariff issued by the Presidential Decree No. 184 of 2013[3]. In accordance to Article 6 of Customs Law No. 66 of 1963[4], the President is exclusively eligible to determine and amend tariff rates. Consequently, the President is entitled to amend tariffs imposed upon some goods, whenever needed, without issuing a full Harmonized Tariff covering all goods. The President shall revise periodically tariff rates through issuing the Harmonized Tariff covering all goods. This periodic harmonized tariff aims to eliminate confusion due to several amendments on tariff rates, which makes it easier to apply for employees and customers. Reviewing the list of goods subject to tariff increase shows that they are mostly final consumer goods. This reflects the legislator’s avoidance of raising tariffs on raw material and capital goods; a welcomed approach, since it aims at not increasing burdens on Egyptian producers. On another front, one of the main objectives of imposing customs tariffs is protection of infant local industries; hence, such decision aims at securing some protection and advantage to local producers through lessening external competition. However, for some of the goods specified in the Decree, Egyptian producers have no competitive advantage. Thus, no significant benefits are projected for producers in Egypt. Besides, this measure alone will not sustain protection for infant industries, unless accompanied by other measures to modernize and develop local products to enable them to effectively supplement imported products. The claim that raising tariffs would augment governmental revenues, at a time of surged fiscal deficit, is not quite accurate, since the quantities of imported goods subject to new tariffs do not allow them to make significant increases in governmental customs revenues. On the other hand, such measure could induce a black market for goods subject to increased tariffs; hence, increased inflation and customs evasion rates. For that reason, increased tariffs must be coupled with strict measures for controlling customs ports and internal markets. With respect to decreasing pressures on foreign currency, which is usually the mainstream justification for tariff increases, raising tariffs would result in increased prices of imported goods thus decreasing their demand. This could be positively echoed in enhancing foreign currency liquidity and reserves. Although this view is theoretically valid, its utilization in the current situation could be inaccurate for two reasons. Firstly, and as mentioned above, the volume of the goods specified in the Presidential Decree is not significant. Therefore, any accumulation in foreign reserves would not be that notable. Secondly, most of the goods specified in the Presidential Decree are of a consumption nature for high income consumers (luxurious goods). Hence, increasing tariffs, mostly by 10 percent, is not anticipated to occasion the desired slump in demand since consumers of such goods can easily bear the price increases. Consequently, demand for foreign currency may not decline much based on continuous importation needed to meet local demand.   [1] The number of months of imports of goods and services reserves could pay for. [2] Presidential Decree No. 25 of 2016, Official Gazette, Issue 3 bis (b), 26 January 2016 [3] Presidential Decree No. 184 of 2013 issuing the Tariff, Official Gazette, Issue 12 bis, 26 March 2013. [4] Presidential Decree-Law No. 66 of 1963 issuing the Customs Law, Official Gazette, Issue 142 continued, 26 June 1963.