A new study argues that last week's customs tariff cuts may indeed translate into more government revenues. Niveen Wahish reports Slashing customsrates must have been a difficult decision for the government to make. Customs duties are a main source of government revenues, representing 18 per cent of government tax revenue and 4.4 per cent of the country's GDP in 2001/2002. These are some of the figures cited by Omnia Helmy, principal economist at the Egyptian Center for Economic Studies (ECES), in her study on "The effect of trade liberalisation on government revenues in Egypt." The findings of the study, the release of which coincided with last week's announcement of the customs reductions, show that government revenues will suffer minimal, if any, effects. Fear of losing out on a major source of revenue was one reason that had been keeping the government away from more rapid trade liberalisation. In fact, according to the government, the expected cost of the new customs cuts will be a loss of some LE3 billion in revenue. But according to the scenario drawn out by Helmy, in which she assumed that tariffs would be lowered to an average of 10 per cent, government revenues do not drop. Instead, they increase by no less than LE90 million. According to Helmy, the increased economic growth, triggered by the customs reform, will mean greater demand for imports, which will accordingly signify more customs collected. Before last week's customs reforms, the average tariff rate in Egypt was 21 per cent, compared -- as shown by Helmy's study -- to an average of 15 per cent in developing countries. Helmy's study not only suggested a cut in customs tariffs, but also a reduction in tariff bands, another change mandated by last week's decree. For Helmy, going down to one band would have been ideal, but since that would be too drastic, she said, gradually going down to six (the average in other developing countries) then three and later to one would be effective as well. According to Helmy, the reduced number of bands will help simplify procedures and encourage importers not to evade. Prominent lawyer Taher Helmy, an ECES board member and President of the American Chamber of Commerce in Egypt, said, "the more complicated the law, the harder it is for the customs employee to take a decision." Furthermore, according to Helmy, simplification is important to limit the frequency by which employees take discretionary decisions. Before the recent modifications, he said, the customs tariff law was like a "phonebook". To Omnia Helmy, a number of benefits accrue from trade and customs liberalisation. First of all, being exposed to competition leads to better allocation of resources, which means cheaper prices for consumers and limits on the profitability of producing for the local market -- all of which will encourage exports. As ECES executive director Ahmed Galal stressed, no country can grow its exports without trade liberalisation. "It is not the customs reform in itself, but the effect of that reform on other areas." Not everyone, however, is convinced that the effects will be rosy. While increased imports will make up for any possible loss in revenue, some -- like Shafiq Boghdady, secretary general of the Federation of Egyptian Industries -- questioned the ramifications of increased importation on the foreign exchange market.
