Will the Egyptian sugar tariff be lowered?
A presidential decree was issued on 31 October 1999 that effectively doubled tariffs on imported sugar to Egypt. Because of a serious oversupply that caused losses for local traders and producers, the decree was deemed necessary. Tariffs on white sugar jumped to 26 percent from 10 percent and tariffs on raw sugar rose to 24 percent from 5 percent.
This measure was taken to protect the sugar industry, which is one of the pillars of Southern Egyptian economy, but it is questionable how effective the industry is in a global marketplace. Egyptian sugar is more expensive than imported sugar and not of high enough quality for the pharmaceutical sector, a significant consumer of high-quality imported sugar.
Aside from the obvious problem of how the sugar industry in Egypt might become competitive in a global sense, the government is facing an added difficulty. Being Africa's largest sugar importer, Egypt has a gap between local production and consumption of 400,000 to 600,000 tons annually. The difficulty arose when in 1998, imports rose to 1.2 million tons, causing a tremendous oversupply, which has caused a great deal of tension in many segments of the Egyptian economy.
In January, Business Monthly magazine reported the reaction of the business community in Egypt most affected by the tariffs. Pepsi-Cola said the tariffs "had a very negative effect. This will cost us several millions." Vitrac, a food processor that relies completely on imported sugar, was understandably dismayed at the dramatic rise in tariffs. Vitrac Chairman, Munir Fakhry, reportedly commented, "If this policy continues in the long term, I'll have to put the prices of our products up."
In a real bind are pharmaceutical companies like Pfizer who must use high-quality sugar to meet exacting international standards, and for their needs local production doesn't meet the standards Pfizer must adhere to. A spokesman for Pfizer told Business Monthly, "we're not happy about the decision. We're not producing biscuits or sweets. We're making medicine, and we need the best sugar we can get."
In November 1999, Pfizer was paying 1,800 Egyptian liras (LE) per ton, whereas before the decree, Pfizer paid LE1,200 per ton for imported sugar. Pfizer spokesman continued with, "we have enough stored sugar to last until March, 2000. After that, we're going to try and use local production in the future, but there is the problem of purity."
Recently, Minister of Supply and Internal Trade was asked to comment on the government's position on tariffs and the sugar industry in Egypt. Business Monthly reports that the minister, Hassan Khedr, felt "that Egypt's current stored sugar supply will cover consumption until January 2001."
The minister declined comment about speculation regarding Egypt's possible entry into the market for up to 700,000 tons, but said a government sugar committee will convene shortly to examine the possibility of increasing sugar imports and lowering the high tariffs.
Mokhtar Khattab, the minister in charge of the state's main sugar purchasers and refiners, the Food Industries Holding Company and the Sugar and Integrated Industries Co. offered his views to Business Monthly. He felt that with a supply estimated at 1 million tons, combined with a forecasted local production of 1.4 million tons would cover Egypt's consumption requirements for a further 14 months.
Rumor and speculation are filling the sugar market in Egypt. As local prices of sugar rise from LE1.3 per kilo from the beginning of the year to a current price of LE1.8 per kilo, traders think that the situation will soon be changing. This is combined with a reported buy tender from the FIHC of 80,000 tons of white and raw sugar this September.
If Egypt relaxes the tariffs on sugar importation, the results could be dire for local producers. The resultant unemployment is something that the government doesn't want to face, yet how long can it hold out with local prices rising. Also, other sectors, which rely on imported sugar, are starting to suffer as production costs are much higher than before the tariffs, which make these sectors less competitive globally.
So far, the government has been closed mouth regarding its future plans for the importation of sugar. A trader at an international trading firm in Alexandria observed: "Sugar is a very sensitive issue at the moment. Ever since the oversupply crisis a couple of years back, the government has taken a guarded approach to sugar buying."
With Ramadan approaching, and its ensuing rise in local sugar consumption, traders are optimistic that there may be an easing of Egypt's high import duties. They estimate that Egypt may have to purchase as much as 700,000 tons of sugar in the second half of this year, but this would only be feasible if the government lowers the prohibitively high tariffs.
Should this become necessary, Egypt's main refiners would contract local private trading companies to acquire sugar through international trading firms like Cargill, Louis Dreyfus and Oriac. The Economy and Foreign Trade Ministry said "private buyers and the FIHC would also seek to import sugar from the COMESA (Common Market of Eastern and Southern Africa) countries under more favorable tariffs.
Perhaps after Ramadan, this situation will rectify itself, and if it does so, one hopes that the import industry will learn from it's irresponsible over purchasing of two years ago and impose regulations to insure that the situation isn't repeated. If this is done, it may give the government the room it needs to develop the local sugar industry to globally competitive levels with a minimum of turmoil.
If the government refuses to address the issue of competitiveness in the sugar industry, it could have more negative effects on foreign investment in Egypt. When Egypt first applied the tariff decree, the European Union strongly complained seeing as it exported 150,000 tons of high-quality sugar annually to Egypt.
Ahmed Kamel, a researcher at Commercial International Brokerage Co. summed up the tariff decree with "It contradicts the cause of free trade and sends mixed messages to the international business community."
So, sugar traders and foreign investors now sit back with their tea and wait to see how the government will respond to the pressures of the market with the hopes of a favorable change in the near future. — (Albawaba-MEBG)
© 2000 Mena Report (www.menareport.com)