The Ministry of Finance has raised the customs dollar exchange rate for non-essential and luxury goods, tying it to the Central Bank of Egypt’s (CBE) dollar exchange rate for a month, starting on 1 December.
The customs dollar exchange rate had been fixed at LE16 to the US dollar for the past 13 months. It is used to calculate customs duties on imports.
The decision “helps increase revenues from value-added taxes on non-essential and luxury commodities,” a ministry statement said. These items include caviar, shrimps, lobsters, ornamental fish, parrots, alcohol, cat and dog food, cosmetic goods and cigars.
Increasing the customs dollar exchange rate will raise revenues from the value-added tax (VAT) by LE2.5 billion and will lead to an increase of LE6 billion in customs revenues, the ministry said.
“Our goal is not only to collect more taxes, but also to encourage local industries by providing them with fair competition with imports,” said Minister of Finance Mohamed Maait on Saturday.
“Exempting the staples necessary for the largest number of people reflects the government’s keenness to strengthen social protection and protect social groups most affected by the economic reform programme,” he added.
Two days after the decision was announced, Maait said at a press conference that the reason the customs dollar exchange rate on luxury goods had been changed was that in November 2016, when the Egyptian pound was floated, the local currency had depreciated.
A “customs dollar” rate was adopted at that time, fixed at LE16 to the US dollar for 13 months. However, as a result of subsequent changes in prices that had reflected negatively on the Egyptian economy, it had been necessary to float the customs dollar exchange rate on finished goods, he said.
The decision was taken after consultation with various economic groups with the aim of providing job opportunities and protecting Egyptian factories from closure and giving Egyptian products an edge over imported items, Maait added.
Beltone Financial, a local investment bank, earlier released a study reporting that floating the customs dollar exchange rate would increase revenues from taxes even in the absence of new ones.
However, increases in tax revenues from higher customs fees would not be large, it said, since these represent only six per cent of tax revenues targeted at LE770 billion in the 2018-19 fiscal year.
The decision would have a limited effect on inflation, the Beltone report said, mostly on cigarettes and alcohol which represent 2.2 per cent of the goods used to calculate the consumer price index.
Beltone expects Egypt’s monthly inflation to increase by 0.3 to 0.5 per cent in December, resulting in an inflation rate of 18.7 to 18.9 per cent and putting the average inflation rate at 18 per cent for the fourth quarter of 2018 and more than the CBE’s target of 16 per cent.
The bank predicted in its study that interest rates would remain fixed in December.
Hani Farahat, a senior economist at CI Capital, concurred with the findings of the report, saying that floating the customs dollar exchange rate would have a limited effect on inflation because it affected non-essential goods.
The ministry’s decision obliges a number of items to be traded according to the CBE’s dollar rate, exempting them from customs taxes.
These include mobile phones, computers, and imports that have a local match, such as shoe and furniture brands, imported vehicles, motorcycles and tok-toks.
Other items listed include fans, refrigerators, ovens, CD players, blankets, cooking appliances, soaps, fireworks, matches and school bags, in addition to suits, shirts, winter coats, perfumes, tissues and shawls.
In the fruit section, the list includes bananas, melons, papayas, apricots, cherries, guavas, mangoes, coconuts, pineapples and grapes.
Sally Mikhail, a senior equity analyst at Arabiya Online, an online trading company, said the decision would increase inflation, increasing the prices of commodities. Inflation would not cross the 20 per cent mark, but it might record a one per cent increase in December, she added.
Radwa Al-Sweifi, head of research at Pharos Holdings, also believes that inflation will rise along with an increase in most commodity prices, including on local goods. However, the budget would enjoy a LE6 billion increase in customs revenues, she added.
The treasury would also benefit from larger revenues from VAT, which will increase with the rise in the cost of goods, Al-Sweifi said, anticipating a rise of LE2 to LE2.5 billion in VAT revenue.
Besides strategic commodities such as food items, the prices of spare parts, raw materials, and production essentials should remain the same. The tobacco used in the local production of cigarettes is not subject to price increases.
The statement stressed that the decision was meant to provide a fair chance for local products to compete with their imported counterparts, while maintaining the rights of the state to customs taxes that ought to be paid according to the floating rate of the dollar, as is the case elsewhere in the world.
Traders in the vehicles market agreed the decision would lead to an increase in the prices of cars, except for those manufactured in Egypt.
An increase of three per cent in the prices of cars imported from Europe and five per cent for Korean cars was expected, said Alaa Al-Sabaa, a member of the Automotives Division at the Federation of Chambers of Commerce.
GB Auto, a leading player in the automotive industry, said on Monday that the decision would increase the prices of vehicles fully manufactured abroad by one or two per cent
* A version of this article appears in print in the 6 December, 2018 edition of Al-Ahram Weekly under the headline: Customs chain reaction