CAIRO: While the government passed Thursday legislation to amend customs duties and lift tariffs on several foodstuffs as well as cement and steel – citing inflationary pressure – experts believe it is a quick-fix solution that will only curb soaring prices on a short-term basis.
Egyptians woke up Thursday to news that President Hosni Mubarak issued a presidential decree amending customs duties on 111 items, in what Minister of Finance Youssef Botrous Ghali called an attempt to curb the rise in prices of food products and to support the low-income population.
Under the new decree, “strategic products, namely rice, edible oils, some dairy products and baby milk, as well as food products for patients with chronic diseases, have been totally exempt from customs duties.
Custom duties on cement, steel and some glass products have also been exempted, while duties on coal have been reduced to five percent. Tariffs on products, such as home appliances, medical material and intermediary products have also been cut between 2-30 percent.
“This step should help alleviate some of the pressure on domestic prices, especially of food products. However, we do not expect the impact to be significantly high, considering that import tariffs on some products are already low, and the rise in prices is mainly the result of products’ higher prices across the world, stated Beltone Financial.
The Cairo brokerage Beltone Financial explained that previous import tariffs on rice were as low as 2 percent, and ranged between 2-10 percent on edible oils. Rates on dairy products and baby milk were also within the low range of 5-20 percent.
As for lifting duty on steel and cement, Beltone Financial said the new legislation would make little difference because these products are still more expensive in the surrounding markets and it would not be more feasible to import after removing tariffs, which had only amounted to around 5 percent.
Government officials, however, said that waiving import duties on basic products would reduce cost of food and building material on the Egyptian market, where urban inflation hit 12.1 percent in the year to February.
According to Reuters, Trade and Industry Minister Rachid Mohamed Rachid told the Financial Times of London the Egyptian government had to act against inflation because of the danger it posed to the economic liberalization program.
People are coming and saying we don t have enough food to eat, we don t have enough food to live and that will hijack the whole reform program of Egypt. We cannot afford that, Rachid told the newspaper two days before the new legislation was announced.
Inflation rebounded in the first three months of 2008, after decelerating in the second half of 2007 as the effects of previous supply shocks in 2006 (namely avian flu and gasoline hikes) passed through. Consumer Price Index (CPI) inflation surged 10.5 percent year-on-year in January and 12.1 percent in February, up from 6.9 percent in November and December.
“While we had expected that inflation would rebound in 2008 due to high levels of growth and rising global commodity prices, we have been surprised by the rate of increase in the first two months of this year, stated EFG-Hermes on its latest economic report on Egypt.
The pickup in inflation has prompted the Central Bank of Egypt (CBE) to raise its policy rates twice this year, most recently by 50 basis points on March 23. The bank’s Monetary Policy Committee (MPC) brought the overnight deposit rate to 9.5 percent and the overnight lending rate to 11.5 percent. “Given our pessimistic view on inflation in 2008, we expect further increases in policy rates, bringing the overnight deposit rate above 10 percent and overnight lending rate above 12 percent by the end of 2008, EFG-Hermes noted.
Commenting on recent amendments of custom duties, Simon Kitchen, senior economist at EFG-Hermes, told Daily News Egypt that the decision would make prices of some commodities a little cheaper in the short-term. “But I think that in general what might be required is an appreciation of the Egyptian pound so that all imports become cheaper. This tariff is selective, but appreciating the pound against the dollar would make commodities cheaper. EFG-Hermes expects the Central Bank of Egypt (CBE) to allow more appreciation of the pound/dollar rate from its current level of LE 5.47 in an effort to curb imported inflation. “With a significant share of recent inflation being driven by higher prices of imported food items like wheat, maize and cooking oil, an Egyptian pound appreciation will reduce price growth of these items, and will also – all things being equal – reduce the pound’s costs of subsidizing key commodity imports, the investment bank said, adding that such an appreciation would have a rapid impact on inflation.
As for steel, Kitchen doubts that prices will slow down on domestic markets as a result of lifting off tariffs. “A lot of what is driving the steel price increase is a rise of costs of imported raw material (imported steel iron and imported steel billet). International prices of steel are more or less equal to domestic prices, he said.
Recent reports show that prices of steel have again soared to a range between LE 5,250-5,700 per ton, with some retailers crossing the LE 6,000 per ton mark in Cairo and Alexandria. Cement prices have also been on the rise, climbing to LE 450 per ton from LE 330 in the three months from November. Producers and retailers justify upsurges as a “pass-through of international prices onto building materials prices.
A constant push up in steel prices has caused the Ministry of Trade and Industry to demand local steel producers to define a price cap on sales to their agents, traders, and consumers. The decision, which was passed on Wednesday, stipulates that steel rebar producers identify their maximum consumer price ceiling to ensure that wholesalers as well as retailers do not exceed that price cap.
“I am not sure how this will work because if global steel prices continue to rise, domestic steel producers will have to pass on some of this increase to consumers. But by placing a cap, I am not sure how that will work out, Kitchen pointed out.
