Will Egyptian move to curb imports stoke inflation?

Egyptian authorities floated the customs foreign exchange rate for non-basic commodities in a move aimed at curbing imports and demand for the US dollar while hopefully boosting local production of substitutes.

al-monitor Cranes are seen near the Suez Canal in Port Said, Egypt, July 29, 2018.  Photo by REUTERS/Amr Abdallah Dalsh.

Dec 12, 2018

In an apparent attempt to curb demand for the greenback, Egyptian authorities freed the customs foreign exchange rate for non-basic and luxury commodities on Dec. 1. Going forward, the customs foreign exchange rate for non-basic commodities will be set according to the market price. On Dec. 5, the Egyptian pound stood at 17.95 to the dollar, CBE data showed. Authorities left the customs foreign exchange rate unchanged for staples, at 16 Egyptian pounds ($0.89) against the dollar.

The foreign exchange rate is a reference point that the Egyptian Customs Authority uses to calculate duties on imported commodities. The rate had been artificially low prior to the government floating the pound in November 2016 and doubled after the currency float, according CBE data.

Finance Minister Mohamed Maait told reporters on Dec. 2 that increasing the customs foreign exchange rate will protect national industrialization and boost the domestic labor market. The idea is that it will lower the imports of goods, which will increase in price, and thereby increase demand for local substitutes.

Analysts argue, however, that the move will increase inflationary pressures in the coming months, citing higher import costs for a wide range of common items. So-called non-basic commodities include bikes, motorbikes, automobiles, electronics, electrical appliances, kitchenware, detergents, jewelry, perfumes, clothes, furniture, liquor, dried nuts, honey, fruits, cosmetics and other goods.

Ahmed Youssef, an economic researcher at Suez Canal University, told Al-Monitor, “The man in the street will not be affected by an increase in the price of ostrich meat or caviar, but consumers will definitely be impacted by higher prices for clothes, which are considered ‘non-basic.’” 

He further stated, “Probably the government is seeking to increase revenues from customs duties and curb imports at the same time. A higher customs foreign exchange rate for household goods will hike prices for the end users, who will take the blow anyway.”

Youssef predicted, “Prices of household goods may rise by roughly 10% to 15% on the back of the decision. The Finance Ministry fixes the customs foreign exchange rate at 90% of the US currency's market price. Urban inflation will pick up as a consequence.”

While the CBE has followed a balanced monetary policy aimed at shoring up the local currency against the dollar and taming high rates of inflation, the current squeeze in emerging markets is casting a shadow over foreign holdings of treasury bills, which declined by $9.8 billion between April and October.

According to CBE data, foreign holdings of Egyptian treasury bills fell to 210.2 billion pounds (around $11.7 billion) at the end of October. At the end of March, they stood at 380.3 billion pounds (about $21.5 billion). In October alone, foreign holdings fell by $1.4 billion.

Moreover, from January to October, the country’s trade deficit increased by $7.13 billion, to $37.123 billion, compared to $29.993 billion for the same period in 2017, revealed data from the General Organization for Export and Import Control. The wider gap in the trade balance and rising capital outflows portend a weaker pound ahead.

“Increasing the customs foreign exchange rate for luxury goods reflects the government’s recognition that the pound will remain weak,” Abdel Nabi Abdel Motaleb, undersecretary of the Trade and Industry Ministry for Economic Research, told the daily Al-Gomhuria on Dec. 1, adding that the US dollar will strengthen versus the pound in 2019. “Such a situation will drive dollar holders to keep their holdings of the greenback as a store of value.”

The Cairo-based investment bank HC Research is predicting that the pound will fall 5-10% against the dollar in 2019.

The Cairo-based investment bank Beltone Financial said on Dec. 2 that the new policy on the customs foreign exchange rate will have a limited impact on Egypt’s inflation rate. It noted that imported cigarettes and liquor account for only 2.2% of Egypt’s consumer price index.

Urban inflation eased to 17.5% in October, down from 31.8% in October the year before, according to data from the state-run Central Agency for Public Mobilization and Statistics. Beltone forecasts that urban inflation will increase to 18.7-18.9% in December.

Despite an easing of the inflation rate this year compared with last year's rate, Egypt's money supply, an indicator of inflationary pressures, rose by 2.7%, to 3.547 trillion pounds in September 2018, year-on-year, CBE data showed.

Traders, however, are taking a different view, expecting commodity prices under the free foreign exchange rate to rise by 10-15%. They foresee an increase in the price of non-basic commodities eventually driving up the cost of living, raising the price of staples as well as the inflation rate. Some of what the government sees as “luxury” goods, traders note, are commodities that are part of people’s everyday lives.

“It is surprising that the decree applies to electronic devices, which are basic for companies and individuals,” Mohamed el-Mohandes, head of the Engineering Industries Chamber of the Federation of Egyptian Industries, told the Masrawy news portal on Dec. 1. “Prices of computers and cell phones will increase by 12-15%.”

Raya Trade, Egypt’s largest mobile distributor, is predicting 18 million cell phone to be sold for all of 2018, a value of 35 billion pounds, compared to 12 million devices last year.

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