8 Foreign Trade Policy of Egypt, 1986–91
- Saíd El-Naggar
- Published Date:
- December 1992
Hanaa Kheir El-Din and Ahmed El-Dersh
The main purpose of this study is to examine the most important components of foreign trade policy in Egypt and to assess their impact on production performance and on export incentives. It will focus on distortions resulting from the trade policy adopted by Egypt during the eighties, starting in 1986. Trade distortions resulting from other policies such as price controls and investment incentives in various activities are very serious. However, the analysis is confined only to distortions arising from trade policies, namely, the tariff structure, various nontariff barriers, and the exchange rate system.
The next section provides a historic overview of Egypt’s trade policies since the mid-nineteenth century, followed by a review of the current economic situation in Egypt. Then the main elements of current Egyptian foreign trade policy are examined, and the likely impact of this policy and the resulting distortions are analyzed. The final section summarizes the findings and presents the main conclusions that emerge from the study.
After the collapse of Mohamed Ali’s attempt to develop Egypt into an autarkic industrial economy around 1840 and the abolition of government monopolies in trade and production, and until 1930, Egypt was forced to adopt a regime of almost perfectly free trade. “The country landed on the road leading to an export oriented economy. [It was] integrated as an agricultural unit in the world-wide economic system.”1 During almost a century of free trade, the Egyptian cotton economy was developed to a high level, but practically no industrialization took place. Direct controls were virtually nonexistent, with one important exception from 1916 onward: a ban on imports of cotton.2 However, the Government played a major role in economic development because of its responsibilities in irrigation and in other public works.
A new attempt at industrialization began in the interwar period, stimulated by the interruption of maritime transport during the First World War, the accumulation of savings, and the increased profitability of import substitution. This attempt was led by Bank Misr (founded in 1920), which initiated the development of such nontraditional activities in the Egyptian economy as printing, cotton ginning, paper, navigation, cotton spinning and weaving, insurance, and cinema.
In 1930, Egypt gained fiscal autonomy, and immediately used its newly acquired freedom to establish the first tariff structure to protect its infant industry and raise government revenue. As a result, the few existing industries expanded, and a number of new ones were established during the 1930s: in cement, kerosene, and petroleum products.
The next major stimulus to industrialization was provided during the Second World War when Egypt was cut off from foreign supplies. This protection, coupled with increased expenditures by the allied forces, encouraged the growth of such economic activities as repairs, metal manufacturing, and construction. During the war, controls on foreign trade, supplies of necessities, prices, rents, and foreign exchange were introduced. After the war, and until 1959, the protectionist policies were continued; further industries such as nitrogenous fertilizers were established.3
Until 1961, increased tariff protection, import licensing, and the imposition of other taxes and duties on imports provided additional encouragement to industry. During this period, Egypt also held substantial—though largely blocked—sterling reserves in London. Foreign trade and exchange policies consisted of stabilizing the balance of payments and the domestic economy under the constraints set by the speed at which the British Government would agree to release the blocked sterling reserves.4
By 1962, foreign exchange reserves were exhausted, and Egypt entered a period of permanent and severe foreign exchange shortage. Concurrently, the wave of nationalizations in 1961 and the introduction of Arab Socialism and the National Charter presented in 1962 extended the scope of government controls; what had been emergency measures before 1961 became the normal institutions of the country. The economic infrastructure, the majority of heavy and medium-sized industries and mining, and banks and insurance companies were taken over by the public sector. The entire import trade and three fourths of the export trade were made public. Private ownership and control were restricted to internal trade, land, buildings, construction, and light industry.5 Severe import controls were imposed during the sixties. Egypt sometimes had recourse to subsidies to promote exports of selected manufactured goods such as textiles. However, the industrial strategy was heavily oriented toward encouraging import substitution activities. The performance of industry between 1961 and 1973 was dependent on the administration of the foreign exchange budget and on import quotas and controls, since the foreign trade regime during that period was completely centralized.
Although the early 1970s brought liberalization, the system of foreign exchange budgeting and import administration was not abolished. Nevertheless, import procedures for the private sector have changed several times since 1973. However, Egyptian trade policy still involved a variety of regulatory instruments: import licensing, tariffs, surcharges, guarantee deposits, and the prohibition of imports have all been, and some still are, utilized.
In question is the extent to which Egyptian trade policies affect resource allocation and growth, understating the cost of import substitution and overstating the cost of potential export activities. With extensive price controls, domestic market prices are not affected by foreign trade policies. With a large public sector in which investment decisions are made by the government and with direct intervention in production decisions, the allocation of resources does not reflect domestic market prices. A system of deliberate intervention in resource allocation through direct controls and commands may conceivably attain efficiency in production, investment, and growth—or may create more inefficiency than would result from a given trade policy under a market system. However, in a private enterprise economy, the impact of foreign trade policy can be assessed through the price distortions it causes, assuming that private producers adjust to the distorted prices.
In general, Egyptian economic policies have not been conducive to export expansion. The import substitution orientation, even after the liberalization of the economy started in 1974, is indicated by the fact that merchandise exports (other than petroleum) fluctuated around an average of 5 percent of GDP during 1977–89, compared with an average of about 11 percent for Turkey, 11.5 percent for Spain, 13 percent for Greece, and over 30 percent for the Republic of Korea, as shown in Table 1.
|Egypt||Greece||Korea, Rep. of||Spain||Turkey|
Relates to fiscal years ended June 30.
Relates to fiscal years ended June 30.
Current Economic Situation
The second half of the 1980s was a difficult time for Egypt’s economy, when export prices for oil dropped by over $12 a barrel between December 1985 and March 1986.
- Real economic growth decelerated sharply from an average of 5 percent a year in the mid-1980s to near stagnation.
- Inflation remained in the 20–30 percent range.
- Pressures accumulated in the balance of payments: arrears built up, despite efforts at adjustment and the debt relief provided by Paris Club members and other creditors in 1987.
- Annual budget deficits of close to 20 percent of GDP constrained the economy.
The main elements behind these economic difficulties were, first, the growing external debt service burden and unfavorable external developments, such as the precipitous fall in oil prices and in other related sources of foreign exchange (workers’ remittances and Suez Canal tolls), recession in the world economy in general, and the sharp decline in the flow of aid.
Second, structural weaknesses and expansionary financial policies helped to maintain a high level of domestic demand, which, in turn, exerted strong pressures on prices and the balance of payments. These financial policies included controls on many aspects of production and investment; administered pricing, leading to severe price distortions (such as procurement prices for cotton, energy prices, prices of basic consumer goods, exchange rates, and interest rates); public sector monopolies in the production and distribution of major products and services; a restrictive import regime that provided a high degree of protection and prevented the development of an efficient tradable goods sector; a fragmented exchange system and overvaluation of the exchange rate; and sharply negative interest rates in real terms, thus providing a strong incentive to borrow in domestic currency and encouraging dollarization of the economy.
Low interest rates combined with low domestic energy prices and overvalued exchange rates encouraged inefficient investment, placed pressures on the balance of payments, and led to a shift from domestic currency holdings to foreign currency.
Starting in June 1986, Egypt embarked on a fundamental reform of its economy, aimed at introducing market forces as a major determinant of resource allocation in the economy. However, these reforms were fragmented and did not reflect an overall strategy for increasing efficiency, reducing the debt burden, and promoting growth. The excessive caution of the Government and the alleged concern about the well-being of Egyptians, particularly low-income groups, delayed these reforms.
With mounting economic difficulties,6 the reform gathered momentum, policy measures became bolder, more encompassing, and had a wider impact on economic processes in Egypt. These developments culminated in the program of stabilization and structural reform that gained the support of the International Monetary Fund and the World Bank and was the basis of the stand-by arrangement signed with the IMF in May 1991. The objectives of this program were to achieve, as rapidly as possible, a sustainable macroeconomic equilibrium through a number of stabilization measures; to set the stage for renewed economic growth in the medium and long term through a fundamental restructuring of the economy; and to alleviate the impact of economic reforms on the low-income groups through improvements in social policies.
The key elements of the stabilization program include measures such as unification and depreciation of the exchange rate; increasing domestic energy prices and implementing a general sales tax to reduce the overall budget deficit; and increasing interest rates and adopting a noninflationary credit and monetary policy, opening the banking and financial sector to market forces, and strengthening the Central Bank’s supervisory capacity.
The structural adjustment program includes the macroeconomic framework; public enterprise reform and reordering of public investment priorities; price liberalization in the industrial, agricultural, energy, and transport sectors; liberalization of foreign trade policy by narrowing the range of tariff rates, reducing tariff preferences and exemptions, and by reducing in phases nontariff barriers on both exports and imports; and development of the private sector and regulatory reforms. These policies are expected to work in a mutually reinforcing way to reduce fiscal and external deficits, raise domestic savings, and induce efficiency changes that will restore growth to the economy.
The fundamental dual objective to be achieved by liberalizing foreign trade is to expand exports and to replace imports through pursuing two complementary lines of action: establishing competitive export channels and creating efficient import replacement capabilities. The economy would thus become self-reliant, in the sense of maintaining a high rate of investment and a high rate of growth of real national income in the future, while continuing to service external debt and reduce dependence on external borrowing.
Components of Foreign Trade Policy Since 1986
The elements of trade policy to be considered are the tariff structure, various nontariff barriers, export incentives, and the exchange rate system.
The abolition in 1986 of “import rationalization committees” that implied an import licensing system was a major turning point in Egypt’s attempt to liberalize7 its foreign trade policy. It was accompanied by a major restructuring of tariffs as well as the foreign exchange system. Yet the foreign trade system was still characterized by a considerable number of nontariff barriers and a high degree of protection for domestic output, mainly in the industrial sector.
The tariff structure is one of the main economic policy tools. Its importance lies in the fact that it can achieve a number of economic and social objectives depending on the country’s stage of development. Following the nationalization of almost all export-import enterprises in 1961, a new tariff structure was established in 1962, and it was revised in 1975, in accordance with the new policy of “opening up the economy.” Furthermore, in 1980 a complete reform of the tariff structure was made.
With a few exceptions, the 1980 tariff structure was quite rational, with tariff rates increasing with the stage of production. However, a number of problems have arisen with this structure. One was valuing duties at the official exchange rate, implying an effective reduction of customs duties by 15 percent and 40 percent depending on the rate of exchange applied to imports—commercial bank rate, “own” exchange rate, or otherwise. Another was that investors were frequently misled owing to distortions in the relative price structures resulting from the wide variation in the rates of customs duties within broad commodity groups.
On August 21, 1986, a new tariff plan (Presidential Decree No. 351) was issued that attempted to reform the tariff structure and to create the right incentives for domestic producers. It intended to
- Simplify the tariff categories by reducing them from 43 to 10 categories, increasing from a rate of 5 percent to a rate of 160 percent (except for food imports, subject to a 1 percent tax);
- Eliminate dues and import surcharges associated with the tariff;
- Introduce a rationale into the tariff structure, taxing raw materials and basic foodstuffs very lightly, intermediate and capital goods moderately, and consumer durables and luxury items steeply to encourage production;
- Give tariff discounts that increase with the proportion of domestic components used in the finished product, to encourage local assembly industries (a discount of up to 75 percent);
- Rationalize imports; and
- Adjust the exchange rate used in valuing imports for tariff computation purposes, to reflect its true market value.
Comparing the effect of the 1986 tariff reform on the structure of nominal protection with that of the 1980 tariff structure, the weighted average rate of nominal protection on productive activities decreased from 48.1 percent to 47.5 percent, coupled with a reduction of its standard deviation from 52.1 percent to 47.0 percent. However, if the effect of the accompanying devaluation of the Egyptian pound for tariff computation purposes from $1,414 per LE 1 to $0,735 per LE 1 (that is, from 70.7 piasters per $1 to 136 piasters per $1) was taken into consideration, the weighted average nominal tariff rate on the dollar value of imports would increase from 34.0 percent to 64.6 percent. Thus, it appears that the 1986 tariff revisions were primarily intended to substitute price restrictions on imports for the quantitative restrictions abolished in August 1986. This signified a step toward alleviating administrative restrictions and allowing effective play of the price mechanism.8
In spite of wide variations in the commercial banks’ rate of exchange, the exchange rate for tariff valuation purposes was kept fairly constant until 1989, when an across-the-board reduction in tariff rates of 30 percent was enacted. Meanwhile the exchange rate used for valuation of imports for tariff purposes became the free market rate, which at that time was LE 2.6 per $1 ($0,385 per LE 1). These changes were made to avoid increasing the tariff burden resulting from the devaluation of the Egyptian pound.
For tariff exemptions and preferences, the 1986 tariff law had skimmed down the number of such exemptions and confined them to certain agencies and certain purposes clearly specified in the law. Since 1987, tariff exemptions have been scrutinized, streamlined, and restructured. The vast majority of exemptions were eliminated. Exemptions that represented about 49 percent of potential tariff revenue in 1986 fell to about 17 percent in 1990. A study of tariff incidence (calculated as the ratio of tariff collection to imports), using 1988 import figures, notes that the tariff range was narrowed, in 1989, to 0.7–120 percent; with 80 percent of the tariff lines having rates not exceeding 35 percent and only 1.2 percent exceeding 80 percent. Furthermore, the study suggests that legal tariff rates of up to 30 percent are almost equal to observed tariff incidences, while at higher rates, the tariff incidence is much lower than the corresponding legal tariff rates. This raises the question of why tariff exonerations are more common at higher than at lower tariffs.9 Tariff preferences, which imply reductions in tariff rates when imports are made by certain agencies, covered about 90 tariff lines.
Finally, as part of the structural adjustment program, the tariff structure was further streamlined and restructured in 1991 (Presidential Decree No. 178 for 1991, issued on May 21, 1991). The range of tariffs was narrowed from 0.7–120 percent to 1–100 percent. Some exceptions were made from the lower limit that include a few basic foodstuffs, and some from the upper limit that include luxury cars, vans, cosmetics, tobacco, and alcoholic beverages. Thirty of 90 tariff lines with tariff preferences were eliminated—usually referred to as “footnotes” to the tariff schedules.
Nontariff Barriers (NTBs)
After the implementation of the new import control regime in 1986 and the abolition of the “import rationalization committees,” which had previously licensed private sector imports, the quotas and quantitative restrictions on imports were dismantled and replaced by an explicit “banned list” of imports. All commodities not listed could be imported without prior permission. The abolition of the import licensing system was an important step toward economic liberalization. However, Egypt still manages a complex system of nontariff barriers representing quantitative, qualitative, and administrative restrictions on imports and/or exports of a considerable number of products.
Nontariff Barriers on Imports
NTBs on imports cover, in addition to import bans, the suspension of letters of credit, prior governmental approval, special conditions, availability of servicing facilities, quality control, and foreign exchange budgeting and allocation.
Import bans. When first introduced, on August 21, 1986, they included about 210 tariff lines of the Brussels trade nomenclature, comprising 548 commodities half of which were consumer nondurable goods. In 1987 and 1989 more items were added to the list of import bans. In early 1990, the number of banned tariff lines reached 225 and covered approximately 571 commodities. These bans were not absolute. Imports of banned goods were allowed for specific purposes in recognition of the importance of some activities in the economy or to satisfy some real needs that could not otherwise be met, such as the needs of the tourism sector, local assembly industries, temporary admission system, and turnkey projects. The system was flexible enough to accommodate such needs and was less restrictive than it appeared. The purpose of these permanent import bans was basically to protect the domestic output of industries that could satisfy local demand. Starting in May 1990 a number of commodities and/or commodity groups were taken off the list of bans until it was restricted to 105 commodity groups in May 1991.
Letters of credit suspensions (LCSs). This restriction was first applied in 1988 in the form of directives from the Ministry of Economy and Foreign Trade to banks via the Central Bank to stop opening letters of credit for some commodities. In March 1989, and in the following months, as a result of the acute shortage of foreign exchange, more items were added to the list of LCSs to reach 77 commodity and commodity groups by the end of 1989.
In some cases, commodities included in the list of bans were also included in the LCS list, making the design of import policies appear uncoordinated. This can be explained by the fact that considerable amounts of banned commodities were allowed into the country for the reasons given earlier, but, under the pressure of mounting shortages of foreign exchange, instructions were given to banks to suspend temporarily opening letters of credit for some commodities. This kind of restriction was announced as temporary and was not considered by policymakers a permanent feature of Egypt’s foreign trade system. In fact, starting in May 1990, a series of directives to the Central Bank gradually reduced the list of LCSs, until it was eliminated, except for a very few items that were transferred to the list of permanent bans.
Prior approval by specified authorities. Tariff lines also exist whose imports are conditional on the approval of different ministries and government agencies as to quality, quantity, and price. Most of these conditional imports are subject to health, standard, defense, and quality considerations. However, approvals granted on the basis of quantity may be for protectionist purposes.
The list of tariff lines with conditional imports once comprised about 80 entries. In 1987, the list was restricted to 47 tariff lines, to which further items were added to reach 56 by the end of 1989. However, the process of dismantling this NTB was implemented in May 1991, when the new Executive Regulations for the Administration of Imports and Exports (ERAIE) removed 41 of the total 56 entries.
Furthermore, enterprises established under Investment Law 43 for 1974 (amended by Law 230 for 1989) are required to obtain annual approvals from the Investment Authority to import their required inputs. These approvals are granted according to their productive capacities.
Finally, projects established under the Tourism Law—mainly hotels and other tourist establishments—are required to obtain Ministry of Tourism approval to import their needs for different inputs. Commodities imported under this system are supposed to be used solely by these establishments, that is, they are not permitted to trade in such commodities.
Special conditions. The single most important product in this category was cement; the special condition was that imported cement had to be subjected to a laboratory test to check that it conformed with international specifications. Specifications have also to be met for used motor vehicles and equipment. These conditions vary between products and are applied mainly to motor vehicles and capital goods. However, some imports of consumer goods as well as intermediate goods have to satisfy specified conditions. By May 1991, when the new ERAIE went into effect, this list was reduced.
Servicing facilities requirements. To import a number of commodities, the foreign exporter should have an Egyptian commercial agent, an appropriate service center approved by the Ministry of Industry in Egypt, and a guarantee to provide spare parts. The list covered mainly household appliances, tractors, and transport equipment.
The declared objective of this NTB is to protect local consumers or users of such products. However, since the adequacy of these servicing facilities is determined by the Government, this restriction could become a protectionist measure to domestic producers by restricting the brands that these facilities would be allowed to operate in Egypt. This NTB was eliminated by the new ERAIE in May 1991.
Public import monopolies. Imports from bilateral agreement countries were confined to public sector foreign trade companies (general and specialized trading companies). Furthermore, imports of a list of commodities were confined to the above-mentioned companies, and the list covered wheat, flour, unpacked tea, edible oils, animal fats, tobacco, coal, petroleum and its products, military production inputs, and weapons. The ERAIE has recently permitted private sector companies, Law 43 companies, and cooperatives to import from bilateral agreement countries all products agreed upon without exception,10 and the import of commodities such as sugar and petroleum products (previously restricted to the public sector) was also opened to the private sector.
Quality control. The list of commodities subject to quality control covered about 65 tariff lines, most of which are foodstuffs. Some wood and basic metal products are also affected by this NTB. This restriction on imported foodstuffs is quite justified. In 1989, imported automobile parts and durable consumer goods were added to the list. The ERAIE maintained this NTB on transport equipment. The likely explanation for this NTB is to limit imports of these products by adding bureaucratic ties to the process in addition to consumer protection.
Prior import deposits. Importers are required to deposit an amount equivalent to the value of imports: 35 percent is deposited when the importer applies for a letter of credit, and the remaining 65 percent when the letter of credit is actually open. (These percentages apply to trading entities, but when imports are made by production entities, they become 15 percent and 85 percent respectively.) On average these deposits are frozen for about three months, and they pay no interest. Therefore, assuming that the real interest rate is zero and that the actual inflation rate is about 25 percent, the system of prior import deposits is approximately equivalent to a 6 percent tariff surcharge. This obviously adds to the protectionist bias of the trade regime. Another liberalization measure introduced by the ERAIE was to reduce such deposits from 35 percent to 20 percent for imports by trading entities, and from 15 percent to 10 percent for production entities. In addition, interest can be paid on these deposits.
Foreign exchange budgeting and allocation. An annual foreign exchange budget allocates expected foreign exchange receipts from the Central Bank pool and the free banking pool to various uses. If the foreign exchange earnings available to the Central Bank are in excess supply, the balance is used to repay debt. Foreign exchange at the free banking pool is allocated—at the free banking rate—to different government bodies. The past needs of these government bodies represent a major criterion for this allocation. When excess demand appears, rationing is enforced by additional measures: tighter foreign exchange allocated to the public sector, suspension of letters of credit, and attempts to adjust the exchange rate. The private sector was allowed under this system to retain its export earnings for a maximum period of one year. Unused balances, after this time, were to be sold to commercial banks at the free banking rate. Private sector units needing foreign exchange had to resort to the parallel market where exchange rates command a premium. This system of foreign exchange allocation, therefore, discriminated against the private sector.
The new ERAIE did not include a foreign exchange budget or a reference to the allocation of foreign exchange to public sector enterprises. The new foreign exchange regime, together with reform of the public sector law, is supposed to eliminate such discrimination.
Nontariff Barriers on Exports
Exports in Egypt were subject to taxes, some explicit and other implicit in nature, in addition to a number of NTBs such as export bans, export quotas, prior approvals, and quality control.
Cotton growers in Egypt are subject to an implicit tax, whose amount is the difference between cotton farmgate prices and prices at which cottons are exported. Farmgate prices had barely reached, until recently, 40–50 percent of export prices. This has been the main reason behind the deterioration in the production and export of cotton. Meanwhile, the local spinning industry receives an implicit subsidy as its cotton buying prices are only fractions of world market prices.
On the other hand, some exports are subject to an explicit export tax, such as that imposed on raw hides and skins. The objective is to protect the shoe and leather industry.
Quantitative and qualitative restrictions on exports are also represented:
Export prohibitions. The list of export prohibitions covered 20 commodities, most of which were foodstuffs and fodder, raw hides and skins, waste paper and paperboard, low-grade cotton (scarto and sekkina), and scrap metals (iron, copper, aluminum, and lead). Egypt imports food products and fodder in addition to selling them at subsidized prices. These prohibitions are thus imposed to prevent smugglers from exporting these subsidized products. In general, these export prohibitions are not enforced to protect domestic industries, except those on raw hides and on scrap metals. Export bans of hides and skins provide significant protection to downstream leather tanning and other processing activities. The list of export prohibitions has been reduced, under the ERAIE, to 6 items, which still include raw hides, waste paper, and scrap metal.
Export quotas. The list of goods subject to export quotas included 17 items, most of which were foodstuffs, as well as cotton waste and various yarn waste. The rationale behind this restriction on foodstuffs is their relatively short local supply. On the other hand, the export quota on cotton waste and yarn waste appears to be imposed for protectionist purposes. Annual quotas were usually decided by consultation between the Ministry of Economy and Foreign Trade and other ministries concerned—mainly the Ministry of Supply and Internal Trade and the Ministries of Agriculture and Industry—taking into account the local conditions of supply and demand for such commodities.
The ERAIE scaled down export products subject to annual quantitative quotas to only 4 items: raw and waste wool, tanned skins, cotton and cotton yarn waste, and newspaper waste.
Export prior approvals. Prior export approvals granted by different agencies, including the Ministries of Supply, Industry, Health, Agriculture, and Defense, were required for 37 export items. Most of these approvals were not imposed for protectionist purposes except for tanned leather. The new ERAIE reduced this list to only 1 item: yarn and gauze made of cotton or manmade fibers.
Prior approval by General Authority for Supervision of Exports and Imports and quality control. The exportation of a list of commodity groups required prior approval by the General Authority for Supervision of Exports and Imports to verify the quality and specifications of items that included fresh, frozen, and canned vegetables and fruits, citrus fruits, juices, eggs, honey, biscuits, and roasted peanuts. Another list including exports of flowers, medical herbs, fresh fruits and vegetables, dried vegetables, aromatic oils, and dried beans imposed obligatory quality control for public sector companies while this was left optional for the private sector. The ERAIE canceled this discrimination and maintained quality control requirements only for foodstuffs.
Public export monopoly for selected products to agreement countries. Whereas exports of fresh oranges and onions remained the monopoly of some public sector foreign trade companies until May 1991, the new ERAIE eliminated this discrimination, and allowed the private sector to export these commodities to agreement countries.
These incentives cover the drawback and temporary admissions systems and the removal of discrimination between public and private sectors in foreign trade.
Drawback and temporary admissions systems. A commonly practiced form of assistance for exporters is to remove the burden of tariffs and possibly the domestic indirect taxes on materials used in manufacturing export products that add to their cost. Relief from paying such duties takes two basic forms: refunding taxes and duties previously paid on materials used in manufacturing a product when it is exported (drawback); and allowing duty-free imported materials intended for use in manufacturing products for export (temporary admission).
It is certainly more advantageous for the exporter to be exempt from paying duties than to pay them initially and then to get a refund, or drawback, later, because he does not have to lock up his funds, for however short a time, in any refundable tariffs. However, schemes of temporary admissions also have their limitations. As part of the Government’s attempt to liberalize trade and promote exports, both schemes were expanded and improved. Procedures for refunding drawbacks have been considerably simplified. Refunds can now be made within a week.
Alleviating restrictions on private sector trading activities. Removing discrimination between the public and private sectors in effecting foreign trade transactions is undertaken gradually. Upon the approval of the Minister of Economy and Foreign Trade, private sector companies, Law 43 companies, and cooperatives are permitted to conclude offset trade deals with companies and entities in countries with which Egypt has trade and payments agreements, provided that these transactions include commodities appearing in the commodity lists annexed to these agreements. Thus past reliance on public trading companies is being reduced through increased participation by the private sector in foreign trade.
Foreign Exchange System
Although the Egyptian exchange system has been highly liberalized since 1976, it was still complex and a multiple rate system until October 1991. In the early 1980s there were at least six exchange rates. The number was narrowed to four in 1986, then in 1987 was officially brought down to two rates: the Central Bank pool rate and the free banking pool rate. Both these rates were overvalued and the quantity of foreign exchange demanded exceeded the quantity supplied at these overvalued rates. This legal excess demand, together with the considerable demand for illegal transaction purposes, has traditionally supported a third “parallel” market for foreign exchange.
The Central Bank pool dealt with exports of petroleum, raw cotton, and rice, the Sumed pipeline revenues, and Suez Canal dues. It also financed imports of basic foodstuffs (wheat, flour, edible oils, tea, and sugar), insecticides and fertilizers, a large number of public sector capital transactions, and transactions through bilateral payments agreements. Since January 1, 1979, the exchange rate of most transactions has not been altered, and the buying rate was set at LE 0.7 per $1. However, some transactions under bilateral trade agreements were effected at special exchange rates. In August 1989, the Egyptian pound was devalued at the Central Bank to LE 1.1 per $1 and further, to LE 2.00 per $1 in July 1990. This rate remained highly overvalued, however, and had the effect of understating the pound cost of imports of subsidized foodstuffs in the government budget.
The free banking rate used to be fixed daily by a government-appointed committee of private and public sector bankers. This rate was determined according to a combination of market conditions and other nonmarket factors. In opening this market, in May 1987, the rate was initially set at LE 2.165 per $1, which represented a 37 percent devaluation of the Egyptian pound. Banks could purchase foreign exchange, at that rate, from all sources other than those confined to the Central Bank pool. Major sources for this pool were tourist expenditures in Egypt, remittances from Egyptians working abroad, and revenues from exports of commodities other than those earmarked to the Central Bank pool. Banks were authorized to sell foreign exchange from the pool to finance imports, repatriation of foreign companies’ profits, and, to a lesser extent, private foreign debt servicing. The exchange rate in this pool was not a perfect substitute for a freely determined market rate and hence failed to reflect market forces realistically. This must have affected the competitive position of Egyptian exports detrimentally in international markets and aggravated the problem of foreign exchange shortage.
In addition to these pools, there was the parallel market (or black market) for foreign exchange, where some transactions were considered legal: trading through private foreign currency accounts in banks, whereas trading outside bank accounts was deemed illegal. This market was the direct result of certain types of demand for foreign exchange that could not be satisfied through the commercial bank pool. Rates in that market did respond generally to forces of supply and demand. It had as a floor the free banking rate but had been distorted by occasional police intervention in the market.
As mentioned earlier, the exchange rate for customs valuation purposes had been devalued in 1986 to the level of the commercial bank rate (LE 1.36 per $1); however, it was not allowed to be devalued at the same pace and was still LE 1.89 per $1 in July 1989 when it was abolished. The free banking rate was to be applied for customs valuation and that rate was reviewed monthly. An across-the-board reduction of 30 percent in the tariff rate and a 35 percent cut in the consumption tax on imports were then announced to offset the inflationary impact of applying the depreciated customs valuation rate.
To simplify the exchange system and ensure a competitive exchange rate, the prevailing system was replaced in February 1991 by a dual exchange system consisting of a primary market and a secondary (or free) market for a transitional period, at the end of which the two markets would be unified. Transactions in the primary market were restricted to the Central Bank and its authorized branches. Receipts in this market were foreign currency proceeds of public and private sector exports of goods. Payments formerly included in the Central Bank pool continued to be settled through this market.
The exchange rate for the entire system was determined in the secondary (or free) market. The exchange rate in the primary market was maintained, on a daily basis, within 5 percent of the most recent seven working days of the average rate in the free market, which has been fluctuating around LE 3.3 per $1.
An essential feature of this system was the permission granted to nonbank foreign exchange dealers to operate in competition with banks in the free market, provided they satisfied certain conditions. A number of supporting steps in this system have also been implemented, including abolition of import accounts and of the requirements that letters of credit be opened for imports.
Finally, in October 1991, unification of the two markets was announced, thus ending a long history of multiple foreign exchange rates and fragmentation of the exchange market.
Impact of Trade Policy on Resource Allocation and Export Performance
Analysis of the elements of trade policy in Egypt has shown their complexity and diversity. The Government’s constant interference in regulation of trade has favored the production of substitutes for imports protected by tariffs, bans, and other NTBs. Furthermore, trade policy has implied an anti-export bias enhanced by the overvaluation of the Egyptian pound vis-à-vis foreign currencies. The next section assesses the coverage of NTBs as an indicator of their importance as potential instruments for protection. It further discusses effective protection resulting from the tariff structure and the exchange rate. The extent of anti-export bias implied by some of these policy instruments is also examined.
Coverage of Nontariff Barriers
NTBs have been widely used in Egypt during the period under study as balance of payments instruments to bring imports into line with foreign exchange availability and as protective instruments to shield domestic production from foreign competition. Their protective effect on output of both imports and exports was investigated by studying the production coverage of various NTBs.
This coverage was calculated twice: using NTBs as described in Ministerial Decrees 1036/78 and 333/86 and their amendments until March 1990 and then using NTBs as amended by the new ERAIE of May 1991. The methodology requires knowledge of NTBs applied on various imports and exports and the domestic value of production of comparable products. Ideally, the production statistics should be as disaggregated as the information on NTBs. In our case, the values of production were generally more disaggregated than the information on NTBs. The source of these values was “Industrial Production by Commodity, 1987/88.”11 The production coverage of individual NTBs by sector and for total industrial production was assessed. However, 3 out of the 17 activities covered in the CAPMAS publication were disregarded: mining and quarrying, petroleum products and coal, and miscellaneous manufactures. Whether the output of the first two activities is protected is somewhat irrelevant for studying Egyptian foreign trade policy, since the activities are highly regulated and dependent on political decisions on the rate of extraction, expected domestic consumption, and foreign exchange requirements. In addition, the degree of protection of miscellaneous manufactures is not meaningful owing to the great heterogeneity of this activity.
Production Coverage of NTBs on Imports
It is clear from Table 2 that various NTBs have different degrees of restrictiveness and different coverage. Import bans in 1990 covered a large proportion of the industrial activities considered (52.1 percent); this figure was reduced to 40.7 percent after May 1991, but it is still very restrictive. Although their impact on private sector activities was greater than on the public sector before 1991, the ERAIE has lifted the impact of these bans on the private sector considerably (from 64 percent to around 33 percent). Their effect on the public sector was only slightly changed (from 47.5 percent to 43.7 percent). The coverage of letters of credit suspensions (8.8 percent) was much lower than that of permanent bans. Furthermore, its impact on the public sector was stronger than on private activities. This NTB was eventually abolished by the new ERAIE. Other NTBs were much less important than permanent bans. The public sector enterprises seem to have benefited more from these NTBs than the private sector. The ERAIE has practically lifted all these barriers except that requiring submission to quality control tests, the coverage of which increased from 15.8 percent to 20.6 percent, with a heavier incidence in the private sector, leading to the question whether the partial lifting of permanent bans (the most criticized of NTBs) has not been partly compensated by increasing the coverage of quality control requirements.
|Incidence (in percent)|
|Before ERAIE||After ERAIE|
|Letters of credit suspensions||9.16||7.92||8.82||—||—||—|
The total incidence of NTBs on imports has decreased as a result of the ERAIE from 72.8 percent to 54.5 percent of production in the industrial activities under consideration, and has tended to give equal treatment to both public and private sectors. Overall, eliminating double counting12 and adding the incidence of other NTBs to import bans, the production coverage of import restrictions rises from 52.1 percent to 72.8 percent before the ERAIE and from 40.7 percent to 54.5 percent thereafter. NTBs serve different purposes: whereas import bans are primarily protectionist, many of the other NTBs could be justified by health, defense, standard, and quality regulations, and others (LCSs) could be explained by foreign exchange shortages. More detailed analysis may be required to disentangle the protectionist elements in NTBs other than import bans.
Finally, Table 3 provides a summary of the production coverage, by activity, of NTBs considered here. There is a wide disparity between activities. Before the new ERAIE, total production coverage of NTBs on imports exceeded 90 percent in seven activities: food products; beverages and tobacco; clothing and ready-made fabrics; wood, furniture, and fixtures; footwear; leather, leather goods, and furs; and transport. The incidence of NTBs on food products was considerably reduced after the ERAIE; it was also somewhat reduced for transport, but remained higher than 90 percent for the other five activities. The coverage of NTBs varied between about 40 percent and 90 percent for six of the activities considered: spinning and weaving; paper and paper products; printing; chemicals and chemical products; nonmetallic products; and basic metallic industries. Only rubber products were, before the ERAIE, completely free from NTBs.
|Incidence (in percent)|
|Before ERAIE||After ERAIE|
|Beverages and tobacco||100.00||100.00||100.00||96.12||66.85||93.66|
|Spinning and weaving||34.95||56.65||39.83||30.58||45.28||34.16|
|Clothing and ready-made fabrics||100.00||100.00||100.00||100.00||98.97||99.47|
|Wood, furniture, and fixtures||91.82||99.88||97.74||91.23||99.83||97.55|
|Paper and paper products||49.62||59.46||53.05||16.08||32.78||21.89|
|Leather, leather goods, and furs||89.78||98.90||94.82||89.78||98.80||94.82|
|Chemicals and chemical products||61.70||88.25||68.53||30.76||35.19||31.90|
|Nonmetallic products (except coal and petroleum)||87.94||72.39||82.48||77.52||69.17||74.59|
|Basic metallic industries||56.70||51.61||55.68||44.27||42.64||43.94|
|Means of transport||97.43||99.62||97.47||84.12||37.67||83.16|
After the ERAIE, NTBs on printing were also completely removed, with the coverage for the remaining activities being reduced to the range of 30–85 percent, except for the five activities previously mentioned, which remained highly protected. In general, even though the coverage of NTBs in Egypt has been reduced, it still remains high, thus artificially increasing the relative attractiveness of production in activities highly shielded by NTBs on imports.
Production Coverage of NTBs on Exports
Table 4 presents estimates of the production coverage of individual NTBs on exports before and after the ERAIE. The sources of data and the methodology used are the same as those used to calculate the incidence of NTBs on imports.
|Incidence (in percent)|
|Before ERAIE||After ERAIE|
|Quality and other controls||3.24||1.89||2.87||2.97||1.46||2.55|
It appears that NTBs weighed more heavily on the public sector than on the private sector—their incidence covered 21.95 percent and 8.27 percent, respectively, of their production. The ERAIE reduced the total impact of these restrictions considerably, from 18.15 percent to 2.90 percent. The most important of these NTBs—in terms of production coverage—were export prohibitions and the requirement of obtaining prior approvals to export. However, after the ERAIE, quality control restrictions became relatively more important as other NTBs on exports were lifted.
Examining the distribution of NTBs by activity in Table 5 indicates that food products and leather and leather products were the most heavily constrained by NTBs on exports. For food products, these restrictions were not intended to protect domestic industry, as Egypt imports many foodstuffs. Rather, they were dictated by the need to avoid exporting or re-exporting food products, and thus increasing the domestic shortages.
|Incidence (in percent)|
|Before ERAIE||After ERAIE|
|Spinning and weaving||1.30||0.89||1.20||0.40||0.74||0.49|
|Leather, leather products, and furs||81.98||50.44||64.56||81.98||50.44||64.56|
|Chemicals and chemical products||24.20||9.89||20.67||—||—||—|
|Basic metallic industries||14.29||6.95||12.81||0.0005||0.013||0.003|
Export restrictions on leather and leather products (particularly on tanned leather)13 significantly protect downstream leather processing activities and the shoe industry, which is additionally protected from foreign competition by import bans. Restrictions on the exports of basic metallic industries (scrap metals) and of spinning and weaving (cotton waste) are also for protectionist purposes, but were considerably reduced under the ERAIE.
To identify the overall effects of the policy on the structure of the relative incentives provided to various activities, the effect of such policies on the prices of both final products and intermediate inputs should be taken into account. Import tariffs, NTBs, and multiple and overvalued exchange rates affect considerably the structure of incentives offered to producers. While a tariff or an NTB imposed on an imported product would raise its domestic price (thus protecting the domestic substitute), any tariffs or NTBs on the inputs used to produce this substitute would reduce the extent of protection, as the production cost would rise. Conversely, while overvaluation of the exchange rate applied to an import would reduce its domestic price (thus discouraging production of its domestic substitute), overvaluing the exchange rates applied to imported inputs increases the protection to this domestic substitute by reducing its production cost. Accordingly, analysis of the degree of protection to a certain activity should not be confined to the nominal rate of protection (NRP), that is, to the difference between the domestic and international price of its output, but should be extended to the value added obtained under the prevailing trade policy compared with what could have been achieved without such a system.
The effective rate of protection (ERP) of an economic activity sums up the overall impact of the policies applied on the incentive structure. It may be defined as the percentage excess of domestic value added obtained under a set of policies over the value added that would have been realized without these existing policies or international market value added.14
In Egypt, estimating the effective rate of protection with relative accuracy is extremely difficult. The main methodological problems are with the treatment of import bans and other NTBs, with the extensive system of price controls, subsidies, and indirect taxes, and with marked quality differences between domestic and imported products. With these difficulties in mind, we discuss the effective protection on various commodity-producing activities and implied in the 1986 tariff structure that prevailed until 1991.15 A comparison with former tariff structures is also undertaken, along with an attempt to assess the additional impact of both NTBs and the prevailing exchange rate system. The analysis draws upon the results of a study on the evaluation of the protection system in Egypt.16
Table 6 reports the results of the estimates of effective rates of protection, along with the nominal protection accorded to various activities. Effective rates of protection do not seem to be highly correlated with the nominal rates as reflected by the estimated rank correlation coefficient of 0.51, in the sense that a relatively high nominal rate of protection is not necessarily associated with a relatively high effective rate of protection.
|Spinning and weaving||34||788||NIVA1||92|
|Leather and products (excluding footwear)||16||35||68||80|
|Wood and wood products (excluding furniture)||42||40||(6)||32|
|Wooden and metallic furniture||110||296||607||22|
|Paper and printing||16||36||29||33|
|Rubber, plastic, and products||28||563||1221||59|
|Porcelain, china, and ceramics||75||214||336|
|Other nonmetallic products||6||1||14|
|Steel, iron, and metallic products||17||120||192||432|
|Tools and machinery||28||39||58||23|
NIVA: Negative international value added. This indicates an infinitely large protection.
The estimates given in Mabro and Radwan were 43 for iron and steel and 41 for basic metals.
NIVA: Negative international value added. This indicates an infinitely large protection.
The estimates given in Mabro and Radwan were 43 for iron and steel and 41 for basic metals.
Calculations showed that in almost all cases the effective protection granted to the activities considered is higher than the nominal, except for two activities—tobacco processing and cotton ginning. For ginning, discrimination against this activity should be even higher than the estimates, which did not reflect the effect of keeping the domestic price of cotton lower than its export price, nor recognize the effect of the overvalued exchange rate for the pound at which cotton exports (and thus cotton production at world prices) were estimated. If these effects had been taken into consideration, the effective rate of protection would have fallen even lower and would have indicated that competitive producers were actually discouraged from engaging in cotton growing and ginning activities.
Ten activities have very high rates of effective protection. The effective protection granted to the remaining nine activities is not extremely high, ranging from 1 percent to 75 percent. In particular, it appears that customs tariffs provide little effective protection to agricultural crops.
Thus, Table 6 indicates that the effective protection extended by the tariff structure alone tended to favor highly consumer goods, whether durable or nondurable, in addition to steel and iron and transport. It moderately protected intermediate goods and tools and machinery, while it actually discriminated against the more traditional manufacturing activity of cotton ginning.
The effect of the 1986 tariff revisions was to reduce the extent of effective protection in the economy. The economy-wide average rate of effective protection declined from 215 percent in 1980 to 176 percent in 1986. Thus it appears that the 1986 tariff revisions were intended to reduce the extent of protection granted to production activities. Bearing in mind that these revisions were coupled with the removal of all additional taxes on imports (which ranged between 15 percent and 20 percent) and with the devaluation of the pound for tariff computations from 70.7 piastres to 136 piastres per $1—from $1.414 to $0.735 per LE 1, a 48 percent devaluation—this tariff reform implied a step toward liberalization and substitution of market mechanisms for direct administrative interventions more than a genuine reduction of effective protection to domestic activities.
However, comparing the effective rate of protection implied by the tariff structure prevailing until 1991 with that granted to various activities in 1959—prior to the central planning era when most production activities were controlled by the Government and the public sector and when the economy was inward oriented toward import substitution—it appears that domestic production activities are still highly protected by the tariff structure. Out of 16 activities for which the effective rate of protection estimates for 1959 could be found and matched with the more recent ones, only 1 activity seems to have obtained significantly less protection than in 1959—the tobacco processing industry—where high tariffs in the present tariff structure on imported tobacco inputs drastically reduce the domestic value added generated in this industry. Three other activities (food processing, leather and leather products excluding footwear, and other nonmetallic products) also appear to enjoy less protection currently than in 1959; however, the difference does not seem to be large. The remaining 12 activities have been sheltered by a higher degree of effective protection, with some of them enjoying effective rates of protection ranging from threefold to 13-fold their level before central planning.
Currency overvaluation can lead to significant discrimination against domestic production. However, except for cotton spinning, which received cotton inputs at the highly overvalued rate of exchange prevailing at the Central Bank, adjustment for overvaluation did not greatly alter the structure of effective protection in various industrial activities. It tended to emphasize discrimination against some activities and to lessen the degree of protection given to others, but did not alter the relative position of most activities,17 because the exchange rate adjustment applied to the same degree to both outputs and inputs—except for spinning.
Overvaluation of the currency has been a major source of discrimination against export crops—cotton and rice18—which financed the Central Bank pool and later the primary market—until unification of the foreign exchange system in October 1991.
Finally, adjustment for overvaluation least affects the private sector, as their foreign exchange requirements were mostly obtained from the parallel market and thus did not benefit as much as public sector activities from the protectionist impact of importing their inputs at the relatively overvalued exchange rate prevailing in the free banking pool.
Table 7 sums up the estimated nominal rate of protection and the effective rate of protection for a number of industrial activities along with the respective production coverage of NTBs and of import bans before and after the new ERAIE. Nominal rates of protection implied in the tariff structure were not highly correlated with the incidence of both NTBs and of import prohibitions, as reflected by the estimated rank correlation coefficients of 0.30 and 0.60 for the period prior to the new ERAIE and of 0.45 and 0.60 thereafter. Furthermore, all these coefficients were not significant or had a low significance, which did not exceed the 90 percent confidence level. However, the rank correlation coefficients between the effective rate of protection and the incidence of both NTBs and import bans revealed a significant correlation between the effective rate of protection and import prohibitions before the new ERAIE. The estimated rank correlation coefficient reached 0.84 and was significant at the 99 percent confidence level. The rank correlation coefficients between the effective rate of protection and the impact of NTBs before the ERAIE (-0.29) and between the effective rate of protection and the incidence of both NTBs (-0.15) and import bans (0.07) after the ERAIE were all small and insignificant. These observations point to the fact that—except for import prohibitions before the new ERAIE—NTBs on imports did not generally affect various production activities in the same way as did the tariff structure. Activities that received a high degree of effective protection from the tariff structure were not necessarily the most sheltered by NTBs on imports or by import prohibitions.
|Incidence (In percent)1|
|Before ERAIE||After ERAIE|
|Spinning and weaving||34||788||39.83||37.95||34.16||34.16|
|Leather and products||16||35||94.82||94.82||94.82||94.82|
Finally, the effect of reducing the dispersion of tariff rates in the revised 1991 tariff on the structure of effective protection has not yet been thoroughly investigated. However, if we remember that the tariff rates in the Egyptian tariff structure have generally increased with the stage of production—with raw materials taxed at lower rates than intermediate goods, and these two categories less protected than final consumer goods—the degree of effective protection granted to various activities would be expected in general to decline if the dispersion of tariff rates is reduced. The protectionist impact of the tariff structure would be reduced and the domestic production would be opened to increased foreign competition.
Anti-Export Bias in Trade Policy
A domestic producer has the choice of selling the output in the domestic or the export market. This decision largely depends on the relative profitability of the domestic versus the export market, which, in turn, depends upon the prices. Domestic prices are affected by foreign trade policies. If the policies pursued render production for the domestic market more profitable than production for export markets, they are said to discriminate against exports and to entail an anti-export bias.
Egypt, like all industrial and developing countries, has protected its manufacturing industries that produce for the domestic market. It has traditionally protected import-substituting industries over exports, and industry over agriculture, principally by imposing high protective tariffs on imported commodities. Some essential foods and raw materials are exempted from tariffs, but most imported inputs and final products are subject to import taxes that are usually high. These taxes increase costs of production and hinder export expansion. They further raise domestic prices, thus raising the financial profitability of domestic sales compared with export sales.
Since the liberalization policy was adopted in 1974, Egypt has encouraged economic activity through a complex system of incentives. Domestic investments have been encouraged through tax deductions, low-cost credits for specific sectors, and tariff reductions and exemptions on imported machinery and material inputs. Until 1986, domestic production was further assisted through import licensing, quantitative restrictions on imports, and an overvalued exchange rate. However, these measures discouraged exports by raising the profitability of production for domestic markets over foreign markets.
In August 1986, Egypt made a move toward a more liberal trade regime. Successive policy reforms consisted of dismantling quotas and quantitative restrictions on imports, comprehensive tariff revision and unification, and successive devaluations and reductions of the multiple exchange rates until unification was accomplished.
These steps toward liberalization were significant. However, the acute foreign exchange shortages resulted in increasing recourse to various nontariff barriers such as import prohibitions and suspensions of letters of credit to reduce demands for foreign exchange. Some of these NTBs had explicit protectionist intentions, others were used for “rationalizing” foreign exchange use, for health, defense, or other considerations. They all resulted in increasing domestic prices and the profitability of production for the domestic market and in further discouraging exports. Some incentives were provided to exports, including allowing industrial exporters to retain 100 percent of their export earnings. Thus, they eliminated the bias against exports caused by converting export proceeds at a lower exchange rate (the official bank rate) than that applied to financing imports of intermediate inputs and debt service (the parallel market rate). Also, institutional changes involving simplification of export and import procedures were initiated, the duty drawback and the temporary admissions systems were revised, and discrimination against the private sector in foreign trade was removed, allowing it to engage in various export activities.
These expanded incentives, coupled with the devaluation and the subsequent adjustments were intended to increase the competitiveness of exports. These reforms altered the structure of economic incentives, but still failed to eliminate the bias against exports.19 The extent of the economy-wide average bias against exports decreased from 36.6 percent before the August 1986 tariff reform to 34.3 percent thereafter. However, it did not decrease uniformly across all activities. A few activities actually experienced an increased bias against their potential exports (animal production, food processing, tobacco processing, footwear, wood and wooden products (excluding furniture), paper and printing, and chemical products (excluding petroleum refineries)). The anti-export bias declined in all other activities. Sectors enjoying the largest decrease in this bias were sectors with high export potential: spinning and weaving, final wear, furniture, ceramics, china and porcelain, and glass and products.20
The latest tariff reform in 1991 further tended to reduce the margin between domestic and export selling prices, helping to reduce the bias against exports. This tendency was further enhanced by the new ERAIE—which considerably simplified export procedures as well as eliminating a large portion of NTBs on imports—and by the successive devaluations and the unification of the exchange rate. Whether these measures will significantly stimulate exports remains to be seen.
Examination of Egypt’s trade policy since the mid-eighties has shown that, first, NTBs on imports have been used widely for various purposes. Import bans were primarily directed toward protecting domestic industries. However, while many of the other NTBs could be justified by health, defense, standard, and quality regulations, others were used as balance of payments instruments to counter acute shortages of foreign exchange. In spite of serious attempts at phasing out NTBs on imports, their production coverage remained very high (exceeding 80 percent) in several activities, which were mainly import-substituting activities. The new ERAIE significantly reduced NTBs on imports. There is evidence, however, that an acceptable NTB (quality control) has been substituted for another more restrictive and criticized one (import prohibitions).
NTBs on exports have also been used, but to a lesser extent. Most were not intended to have protectionist effects, with a few exceptions that provided considerable protection to downstream activities.
Although the incidence of NTBs on imports was higher for the private sector, the new ERAIE tended to give equal treatment to both public and private sectors in terms of import restrictions, whereas export regulations remained more constraining on the public sector, even after the new ERAIE.
The effective protection given by the tariff structure has in general been higher than implied by nominal tariffs on outputs, indicating that tariffs on outputs were generally higher than on inputs. Effective protection has tended to favor consumer goods activities—whether durable or nondurable—in addition to the steel and iron industry and the transport industry. The intermediate goods industry and tools and machinery were moderately protected, while the more traditional manufacturing activities were actually discriminated against.
The tariff reform of 1986 coupled with the devaluation of the pound for tariff valuation and the ensuing modifications implied a step toward liberalization and the substitution of market mechanisms for direct administrative interventions more than a genuine reduction of effective protection to domestic activities. However, decreasing the range of tariff rates in the 1991 customs tariff revision is likely to reduce somewhat the effective rate of protection granted to various activities.
There is evidence of significant correlation between the production coverage of import bans and the effective rate of protection in some industrial activities, showing that the latter has been reinforced by import prohibitions.
In spite of successive measures to increase export incentives, the tariff structure continued to show a significant bias against exports (estimated at 34.3 percent in the tariff structure prevailing until 1991). This bias has been considerably eased on some export sectors with high export potentials. The latest 1991 tariff revision has further tended to reduce the spread between domestic and export selling prices, thus helping to reduce the bias against exports.
Successive devaluations of the exchange rate and the reduction of multiple rates until unification in October 1991 had little impact on the structure of protection, as it applied similarly to both outputs and inputs. However, the impact on the spinning industry and on major export crops (cotton and rice) was highly significant. These devaluations—an attempt to unify the banking rate with the parallel rate—had a greater impact on the public than on the private sector, as the latter was less protected by the overvaluation of the exchange rate and imported its production requirements predominantly at the parallel market rate.
The series of corrective measures that Egypt implemented aimed at reducing high customs tariffs, phasing out most nontariff barriers to imports, dismantling restrictions on exports, simplifying the exchange rate system and ensuring a competitive exchange rate, and treating public and private trading activities equally have had a positive impact on external trade performance. Encouraging signs can be recognized:
- Exchange rates have stabilized, and the difference between the free banking rate and the parallel rate had become marginal even before the recent unification.
- Nontraditional exports—especially engineering products and cotton manufactures—have positively responded to the exchange rate devaluation since 1987.
- A declining trend in the rate of expansion of commodity imports has been noted in spite of alleviation of NTBs.
The balance of payments outlook has improved somewhat. However, in spite of these signs of improvement, the trade performance and the pattern of resource allocation have not altered fundamentally, which may be partly explained by the following:
- NTBs, although pervasive, did not effectively constrain imports, and large quantities of banned imports continued to flow into the economy.
- The tariff structure played a secondary role in determining the domestic price level and in affecting the structure of relative incentives, which were mainly determined by government controls and direct intervention. Tariffs in Egypt have primarily been a source of government revenue.
- The effect of overvaluation of the Egyptian pound on the structure of incentives in the economy has been relatively limited, except for cotton spinning, cotton weaving, and other manufactures.
Furthermore, successive attempts at liberalizing the trade regime and the ensuing corrective measures were undertaken timidly and in piecemeal fashion. In addition, trade policy in Egypt is not the major determinant of trade performance or of the pattern of resource allocation, both of which are still controlled by various government regulations and interventions and by institutional, legislative, political, and social considerations. It is still too early to judge whether the recently enacted trade policy reform, started in 1991, will effectively and fundamentally alter trade performance and help establish competitive export channels and efficient import-substituting capacities. But awareness of the need to reform on various economic and noneconomic fronts at the same time is an encouraging indicator of potential improvement.
Abadalla Al-Kuwaiz and Nasser Al-Kaoud
The authors of the paper, Hanaa Kheir El-Din and Ahmed El-Dersh, deserve to be commended for their effort in preparing it, and for its content, which is a valuable contribution to our seminar. It provides a comprehensive survey and analysis of Egypt’s foreign trade policies.
Our comment provides a brief summary of the paper, and then a number of general remarks.
The paper deals with the foreign trade policy of Egypt, providing a historic overview of its foreign trade policies since the mid-1800s, referring to the various stages and the basic features of each stage (1840–1930, between World War I and World War II, during World War II, from the end of World War II through the 1950s, between the 1960s and the early 1970s, then up to the early 1980s).
The paper then presents the current economic situation in Egypt beginning with the second half of the 1980s, the difficulties encountered by the Egyptian economy and the factors behind them during that period, and the reforms adopted by Egypt since June 1986 aimed at introducing market forces to determine resource allocation, which led to Egypt’s agreement with the International Monetary Fund in 1991 on a structural reform program and a stabilization program. The paper presents the key elements of the two programs.
The components of Egypt’s trade policy since 1986 are presented in detail, including a description of the tariff structure, the nontariff barriers, the foreign exchange system, and the changes introduced in those components up to October 1991.
In the section entitled “The Impact of Trade Policy on Resource Allocation and Export Performance,” comparisons are provided for production coverage of various customs tariff and tariff barriers before and after 1991 (the date of the new Executive Regulations for the Administration of Imports and Exports (ERAIE)). The levels of effective protection rates provided by tariff for 1959, 1980, and 1986 are shown.
This section also discusses the aspects of anti-export bias in trade policy and the measures taken since 1974 to remedy the situation, giving incentives to exports.
While the paper presents a detailed description of the tariff structure and nontariff barriers in Egypt, it is made at the expense of the analytical side, which is characterized by generalizations in its findings.
As an example, one section deals with the analysis of trade policy, resource allocation, and export performance. But it does not discuss these areas directly by linking them to a theoretical framework. It presents only the production coverage of tariff and nontariff barriers, the proportion of production subject to these barriers, the effective rates of protection, and aspects of anti-export bias in trade policy. The paper does not provide any qualitative analysis or quantitative assessment of the impact of changes in tariff and nontariff barriers and in the exchange rate on the composition and volume of exports and resource allocation.
In a number of instances, the paper mentions that economic decision makers use the tariff (or export duties) or the exchange rate, among other instruments, to influence production rates or government revenue, without providing an appraisal of these two instruments or indicating a preference for one over the other. Even if we confine our discussion to customs duties, we find no reference in the paper to the impact different tariff levels had during the period under review on industrial growth in particular, or on the growth of government revenue or of national income in general. Furthermore, if we consider only the governmental objective of increasing government revenue, we find that such an objective can be reached through increasing the rates of customs duties (or export duties), or as a result of increased tax revenues based on increased production resulting from a reduction of customs duties on production inputs or a reduction of export duties (the so-called Laffer Curve), or what we can call the theory of Ibn-Khaldun (named after Arab thinker Ibn-Khaldun) on the impact of taxes. No such analysis is evident in the paper.
It is well known that Egypt often resorts to swap arrangements in its trade relations as an instrument of its foreign trade policy. It would have been useful if the authors had elaborated on the position of this instrument in Egypt’s trade policy.
In a seminar like this, the paper is expected to include an analysis of the composition and volume of Egypt’s foreign and intra-Arab trade, and the impact on these two areas of the changes in tariff and nontariff barriers. The outcome of the general conclusions—on the positive response of nontraditional exports to a reduction in the exchange rate, or the deceleration of increases in imports of commodities resulting from adjustment measures—is not adequate.
The list of nontariff barriers to imports includes import prohibitions, the suspension of letters of credit, prior approval by specified authorities, special conditions for imports, servicing facilities requirements, and quality controls. These barriers are presented in the paper as if they were of equal impact or justification. The paper refers to replacing one barrier by another, for example, an import ban for quality controls. Quality controls or the requirement of servicing facilities should have been justified in a different way.
The issues contained in the paper are numerous, scattered, and lack cohesion, which reflects on the unity of the paper.
It seems that many of the nontariff barriers resulted from the limited role given to the private sector and the nonadoption of market economics. It is therefore important for the economy to be oriented more toward market forces, the allocation of resources, and privatization because of the major role they play in the liberalization of Egypt’s trade policy.
The paper repeatedly states that Egypt’s trade policy has targeted import substitution and shown a bias against exports, leading thereby to a diminishing share of imports in GDP. But Table 1 shows that the ratio of Egyptian imports to GDP in 1977 is the same as for 1989. I wish the paper could give an explanation for this.
The paper presents the structural reform program and the stabilization program without adequate evaluation or assessment of their applicability.
Comparisons between the production coverage of tariff and nontariff barriers can be more meaningful if they include data from other countries.
In calculating effective and nominal rates of protection, the paper draws upon the results of another study by one of the authors (Hanaa Kheir El-Din), making the method adopted for calculating the rates or arriving at those results ambiguous for the readers of the paper presented at this seminar. For example, there is no reference in the paper to any evidence supporting the concluding remark on the existence of a significant correlation between the production coverage of import prohibitions and the effective rate of protection. The analyses contained in the paper also do not support the concluding remark that successive exchange rate devaluations had little impact on the structure of protection. The overall bias against exports in the economy is assessed to have fallen from 36.6 percent before August 1986 to 34.3 percent thereafter. It is unclear how this assessment was calculated.
The study provides no explanation of a number of the concluding remarks, which are included as a supplement or marginal notes and not as conclusions drawn from the text of the paper.
The authors deserve to be commended for having written an informative, competent, and very timely assessment of Egypt’s trade policies and the reform recently initiated by the Government.
Underlying the paper, especially in the early part, there is the argument that only with protection of the industrial sector will manufacturing develop in a country. For example, it is contended that the country’s first industrialization in the 1930s only took place because a tariff was imposed that had protective effects. This may well be true in the case of Egypt during the last hundred years, but the general proposition that industrialization only occurs with protection is demonstrably untrue. Fortunately, this erroneous contention does not affect the remainder of the paper.
One significant contribution that the paper makes is in the measurement of the production coverage of nontariff barriers (NTBs) in Egypt. The estimated coverage, including only manufacturing, is strikingly large. Earlier analysis, initiated along somewhat similar lines by Hanaa Kheir El-Din, shows a more modest coverage of NTBs. Without getting into a detailed comparison of the two different data sets and estimates, one nevertheless must question whether the more recent estimates presented in the paper overestimate NTB protection. The current estimates are undertaken at a highly aggregated, two-digit, level, while the earlier estimates were undertaken at a more disaggregated four-digit level. Aggregation introduces an upward bias in the coverage estimates; if there is evidence of an NTB for a given product group, all of the production in that product group is considered to be protected by that NTB. Nevertheless, the point made by the authors is well taken and correct: Egyptian manufacturing has in the past enjoyed considerable NTB protection and continues to do so, even after the rather courageous steps toward trade policy reform taken in 1991.
The use of the concept of effective protection to analyze the effects of the Egyptian incentive system is appropriate and potentially quite useful. The problem stems from the way in which rates of effective protection are calculated. The authors have relied on work that makes the estimates on the basis of tariff protection. In an economy in which there are significant policy-induced price distortions reflecting the overall incentive system, one cannot attribute much importance to effective tariff protection. Effective tariff protection is not the same as effective protection. For Egypt, the price distortions have been considerable, including, as the authors document, extensive NTBs. Tariffs cannot explain, or measure, the differences between international and domestic prices. Yet the extent to which those differences are allowed to exist reflects the system of incentives. Accordingly, one must be very careful in not reading too much into the authors’ estimates of effective tariff protection. One hopes that with the reforms initiated so far by the Government some initiative will be exercised to undertake a comprehensive and policy-oriented study of the incentive system, including the measurement of effective protection based upon direct domestic and international price comparisons.
In analyzing the trade policy liberalization, and particularly the reduction of NTBs, taking place during 1991, the authors conclude that there has been some substitution between more acceptable NTBs (such as quality control) for more restrictive NTBs (such as bans). In the strict sense this cannot be true, since both were reduced significantly during 1991, although proportionally bans were reduced less dramatically. One must conclude that this was so because the Government has found it politically more difficult to reduce the bans. In addition, looking at the reduction in bans that has taken place so far, it is evident that the greatest cuts were not in manufacturing but in agriculture, and for the private sector, rather than for the public sector. Again, the Government seems to have found it difficult to reduce protection for manufacturing and for the public sector itself. This of course raises questions as to the future success and direction of the reform effort.
While the paper very ably describes the policy reforms that have taken place during 1991, there is little said about where they are likely to go in the future. The reader is left with the question of whether these reforms have been a one-step operation or whether they are part of a larger program of trade reform to unfold sometime in the future. If the latter is true, what is the nature of the future reforms? What can be expected and when? Moreover, if there is a blueprint for a reform program that the Egyptian Government has in mind, why is such a direction not forcefully announced and indicated by the Government?
Charles Issawi, Egypt in Revolution: An Economic Analysis (London; New York: Oxford University Press, 1963), p. 24.
Bert Hansen and Karim A. Nashashibi, Foreign Trade Regimes and Economic Development: Egypt (New York: National Bureau of Economic Research, 1975), pp. 3–4.
Khalid Ikram, Egypt: Economic Management in a Period of Transition (Baltimore, Maryland: Johns Hopkins University Press, 1980) pp. 13—15.
Hansen and Nashashibi (cited in fn. 2), pp. 4—8.
Ikram (cited in fn. 3), pp. 20–23.
Experience of other developing countries suggests that “an atmosphere of crisis has sometimes been the policital stimulus for reform.” See World Bank, World Development Report, 1987, p. 96.
Liberalization means “any policy action that reduces the restrictiveness of controls—it may be their complete removal, or the replacement of a restrictive set of controls with a less restrictive one.” (Ann O. Krueger, Perspectives on Trade and Development (Chicago: University of Chicago Press, 1989), p. 184.)
H. Kheir El-Din and others, Evaluation of the Protection System in Egypt (Center for Economic and Financial Research and Studies, Cairo University, 1989), pp. 24–26.
Julio Nogues, “On the Design of a Trade Liberalization Program for Egypt” (unpublished; World Bank, January 1990), p. 9.
Previously, private sector entities could not import from bilateral agreement countries wood, paper, paper pulp, and cardboard, which remained the monopoly of public sector foreign trade companies.
A Central Agency for Public Mobilization and Statistics (CAPMAS) publication, Document No. 71-12611/90, June 1990.
The sum of incidences of individual NTBs in Table 2 (100.45 percent and 61.77 percent) is much higher than total incidences given. This clearly shows that some commodities are subject to more than one NTB.
Exports of raw hides are also prohibited, but their impact is not represented here as they are not included in the activities considered. This prohibition, in turn, provides substantial protection to the tanning activity.
Bela Balassa and Associates, The Structure of Protection in Developing Countries (Baltimore, Maryland: Johns Hopkins University Press, 1971).
As previously mentioned, a 30 percent across-the-board reduction in tariff rates was undertaken in 1989, along with a devaluation of the exchange rate used to value customs tariffs, leaving the tariff burden on various activities unchanged until the 1991 reforms.
See Kheir El-Din and others (cited in fn. 8), pp. 114–20.
Ibid., p. 113.
For the measurement of the extent of tariff-induced bias against exports, see Balassa and Associates (cited in fn. 14), pp. 331—32.
See Kheir El-Din and others (cited in fn. 8), pp. 124–26.