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Monday, 3 December 2018

Digesting the change in how customs are calculated on non-essential goods: Car prices are up, interest rate cuts could be postponed

Car prices are up and analysts suggest interest rate cuts could be postponed as nation digests the change in how customs on non-essential goods are calculated: The exchange rate used to calculate customs on non-essential imports has been currently set at EGP 17.90 to the greenback and will be reviewed monthly to gauge the impact of inflation, said Finance Minister Mohamed Maait in a statement (pdf). It is unlikely that amending the customs FX rate will have an adverse impact on inflation, said Maait, noting that if inflation were to rise, the ministry may reverse the decision and bring the rate back down to EGP 16. Maait reiterated that the purpose of the decision was to encourage local production over imports. The statement came a day after the ministry scrapped its discount rate of EGP 16 per USD for “luxury” imports including pet foot, computers and mobile phones.

Analysts split on inflation impact: Shuaa Capital disputes Maait’s claim that the decision would have a minimal impact on inflation, saying the rate hike will hit goods that make up around 19% of the basket used to calculate the consumer price index (CPI). Beltone Financial predicts the impact will be minimal, arguing those hardest-hit are true non-essentials such as tobacco and alcohol, which only make up 2.2% of the CPI.

Does this mean a delay to interest rate cuts? We’ve already seen inflation rates jump in recent months, and the downside risk here is that it ticks up to a rate that prompts the central bank to either hike interest rates or delay its long-awaited rate cut. The central bank will next meet to review interest rates on 27 December — too early for the inflationary impact of this decision to be clear.

The House is worried: The House of Representatives, which plans to summon the head of the Customs Authority next week,is concerned about the decision, local news outlets report. House Economic Committee member Amr El Gohary predicts the move could see prices rise as much as 10%, arguing that the market is in no position to absorb further hikes, even if they are on non-essential goods. El Gohary fears retailers will use the change in customs FX rate as cover to justify across-the-board price hikes.

Car prices are already going up, as expected: Privately held Mansour Group (Chevrolet) and EGX-listed GB Auto (Hyundai, Geely), the country’s largest automotive distributors, were reportedly the first to raise prices in lock step with the new customs rate, according to reports in the domestic press (here and here) that suggest:

  • Chevrolet’s Optra and Aveo passenger cars are now going for EGP 2-5k more per unit;
  • Hyundai vehicles including the Creta, Accent and Elantra are running EGP 3-6k more expensive.

Expect the price of imported cars to rise 2-5% by the time the dust settles, industry association AMIC has suggested.

Rejoice if you’re a smoker though: Eastern Company has said the decision does not apply to its products as they are locally produced, local news reported. It explained that the decision also doesn’t apply to the tobacco it uses in production because it doesn’t fall under the “finished goods” category.

Complain all you want, but ask yourselves: How is it in the nation’s best interest to subsidize the import of non-essential commodities? Quick answer: It ain’t. The discount rate on customs was a temporary distortion necessary at the time, and it has run its course.

Enterprise is a daily publication of Enterprise Ventures LLC, an Egyptian limited liability company (commercial register 83594), and a subsidiary of Inktank Communications. Summaries are intended for guidance only and are provided on an as-is basis; kindly refer to the source article in its original language prior to undertaking any action. Neither Enterprise Ventures nor its staff assume any responsibility or liability for the accuracy of the information contained in this publication, whether in the form of summaries or analysis. © 2018 Enterprise Ventures LLC.