Beltone said that they expect a limited impact on headline inflation from this hike in customs foreign exchange (FX) rate, which will be mainly driven by the tobacco and alcohol segment, and accounts for 2.2% of the Consumer Price Index (CPI) basket.
Furthermore, Beltone added that they foresee an addition of 0.3-0.5% to their December monthly headline reading expectation of 0.5%. This will result in an inflation reading of 18.7-18.9% in December 2018, marking an average inflation reading of 18% in the fourth quarter of 2018―above the Central Bank of Egypt (CBE) upper boundary target of 16%. “Thus, we reiterate our view of maintained interest rates in 2018.”
The ministry of finance decided to implement a new system for setting the FX rate for custom duty starting from December 2018. The rate for strategic and essential goods will remain fixed at EGP 16 per USD, while the rate for non-essential goods will be set as the average exchange rate listed by the CBE during the preceding month. It is set at EGP 17.87 per USD in December, where these non-essential goods will include tobacco products, alcohol, pet food, imported fish and shrimp, cosmetics, cars, 2 and 3 wheelers and other goods that are categorised as luxury, as well as goods that have a local substitute.
Beltone noted that the FX rate for custom duty has been fixed at EGP 16 per USD for all goods since September 2017, which marks an about 10% discount to the current market exchange rate, amid efforts to contain inflationary pressures. The rate was significantly reduced from EGP 18.5 per USD in mid-February 2017, as the EGP showed more stability.
“The move aims to increase tax revenues, barring any new tax measures. We believe the addition will not be significant as custom duties account for 6% of tax revenues targeted at EGP 770bn in the fiscal year (FY) 2018/19, a growth of 21% year-over-year (y-o-y), compared to a rise of 38% in FY 2017/18, that saw the spill over of the July 2017 1% increase in the value added tax (VAT) rate and the annual increase in sales taxes on tobacco. We note that tax revenues increased 40% in the first quarter of 2018/19, supporting a revenues growth of 35.3% y-o-y,” Beltone concluded.