Will Egypt's 'luxury tax' hurt everyday citizens?

Egyptian President Abdel Fattah al-Sisi issued a decree raising customs tariffs on so-called luxury products, a new development that some say threatens the country with a potential wave of inflation.

al-monitor Customers shop for appliances at B-TECH electronics store in Cairo, Oct. 15, 2015.  Photo by FACEBOOK/BTECH.Egypt.
Ismael El-Kholy

Ismael El-Kholy

@ismaelelkholy

Topics covered

market, luxury, inflation, imports, commerce, abdel fattah al-sisi

фев 17, 2016

CAIRO — On Jan. 31, Egyptian President Abdel Fattah al-Sisi issued a decree raising tariffs on hundreds of imports. The increases, which went into effect the very next day, stirred quite a bit of controversy.

Sisi said the increases affect mainly luxury items, and price controls will help prevent businesses from taking advantage of the increased duties to raise consumer prices.

Although the tariffs are being levied on some commodities that are not widely consumed by Egyptians — such as pet food, plums and cashews — they also affect other important products such as refrigerators and other household appliances, LCD televisions and satellite receivers. Many of the increases run as high as 40%.

“The 40% rise on customs tariffs is expected to raise the final prices for consumers by 25%," said Ashraf Hilal, head of the household appliances division at the Federation of Egyptian Chambers of Commerce (FECC).

Ahmad Shiha, head of the FECC importers’ division, said, “There’s a new direction being led by the FEI [Federation of Egyptian Industries] aiming to lobby the government into reducing imports to achieve personal gains. Furthermore, the decree raising customs tariffs and before that, the restriction imposed on the importation of 23 product categories, is only intended to serve the interests of monopolists who want lone control over the Egyptian market."

Sisi’s decision was well-received, however, by FEI chairman Mohammed al-Suwaidi. “The decree raising customs tariffs on imported commodities will boost the national economy and reduce the demand on the US dollar,” Suwaidi said.

The decree came two months after the Central Bank of Egypt adopted new measures that Shiha described as “a bid to end unnecessary imports and boost local production.” These measures include requiring banks to obtain a cash deposit of 100% instead of 50% on import transactions conducted by businesses and governmental bodies.

In an interview with Al-Monitor, economics professor Medhat Nafei at Cairo University said he believes the new tariffs and import controls will lead to higher consumer prices — especially since the decree raising customs duties contradicts international agreements Egypt signed such as the General Agreement on Tariffs and Trade and the Euro-Mediterranean Partnership.

“Egypt will soon face a new wave of inflation, especially with the government’s plan to lift subsidies on electricity and oil, while salaries will not see any increase. The inflation will devour the Egyptians’ money,” Nafei added.

However, Cairo University finance and investment professor Hesham Ibrahim disagreed, saying, “The new tariffs only affect commodities that are not consumed by the majority of Egyptians.” As for household appliances, Ibrahim told Al-Monitor that Egypt has long had its own high-quality appliance industry. He added, “I do not foresee any [lasting] increase in prices."

According to Ibrahim, “The new measures are positive and right, and should have been adopted two years ago.”

As for whether the new measures will help protect local industry, Ibrahim said packaging goods rather than manufacturing them has become Egypt's focus, and the tariffs should be seen as an opportunity to expand into new areas. "The government should address producers and impose tighter controls because a great number of them import foreign products and package them in Egypt under the guise of [being] local products,” he said.

Bassant Fahmy, a member of parliament's economic committee, said, "I support the new decree 100%.”

Fahmy told Al-Monitor, “Thousands of new factories in Egyptian cities manufacture high-quality products — [something] customs tariffs have increased. This is why our duty is to protect Egyptian products."

She added, “Egypt suffers from a shortage of US dollars. This means that Egypt must limit [luxury] imports for a while in order to counterbalance the deficit and preserve monetary reserves." Fahmy concluded, “Products affected by the new tariffs have already been taxed. Egypt does not have any source of income, which further justifies the latest decree.”

Nafei argued against Fahmy’s claims, saying, “The new measures will be protecting the poor-quality Egyptian products that will invade the market. This will only lead to more contraband.”

He added, “The more protected producers feel, the more they will take advantage of the consumers. And there will actually be no competition.”

Nafei said the decree was issued hastily. “These measures should be canceled or we should at least set a time frame to do so. The newly imposed controls will be counterproductive.”

The Egyptian market has yet to see any increase in prices since the decree. However, the nation may witness inflation — especially with the gradual lifting of subsidies on energy. This is why the government has to come up with innovative measures to counter the social effects resulting from a potential price increase.

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