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Bracing for a row

A row is bubbling under the surface as businesses brace for new regulations, which are expected to limit government export subsidies, reports Ahmed Kotb
A debate is emerging in business circles, in response to government announcements that it is preparing new standards that will limit the amount of export subsidies that each company is allowed to receive.

The new standards, which are still being studied, are set to be announced next week. They are expected to set a LE1 million ceiling for subsidies for each company, regardless of the volume of exports.

According to Minister of Industry and Foreign Trade Mahmoud Eissa, the idea behind the new standards is to enable as many export companies to benefit from subsidies as possible. The idea is focussed especially on small and medium sized companies.

The government currently subsidises exporters of non-oil Egyptian goods with eight per cent of their total cost. The amount of subsidies allocated for Egyptian exports during this fiscal year is LE2.5 billion, down from LE4 billion last year.

The prospect of subsidy reductions has got exporters up in arms. "How can those who export in large quantities be equal to others with limited goods to export?" wonders Ali Eissa, head of the exporters division at the Federation of Egyptian Chambers of Commerce.

Any unified ceiling to subsidising exports, he added, will be harmful and will encourage businesses to resort to manipulation. "Some exporters might establish several companies with limited operations in order to receive subsidies for each company."

"Export companies will be discouraged to grow or even sustain their businesses," Eissa said. "They will have to factor lost subsidies into the prices of their products, and this will make it impossible for our products to compete. We will lose many markets."

Magdi Tolba, member of the Egyptian Garments Export Council, believes that if the government applies the ceiling, "the national economy will suffer a more severe downturn."

Egyptian exports are among the main pillars of national revenues, Tolba said. Hindering exports would be "the worst economic mistake experienced in decades."

The total volume of Egyptian exports in 2011 was estimated at LE130 billion.

"One way to save the Egyptian economy in the coming period is to make exports grow," Tolba added. He also said that export subsidies are considered a contribution from the government to ease burdens -- such as customs taxes -- imposed on exporters before their products reach foreign markets.

"In fact, we expected more support," said Walid Helal, head of the Egyptian Chemical Industries Export Council. The government should be allocating more money to subsidise exporters, he added. "That's the only way to survive competition."

For Sherif Kassem, professor of economics at Al-Sadat Academy, the government should only subsidise exports for a limited period of time, and when it's worth it. "It is not logical to subsidise exporters who try to compete in a European market, for example," said Kassem. "That costs much more than targeting markets that are closer to home. There has to be regulations as to which exporters can benefit from subsidies."

Kassem also suggested that some of the funds allocated to export subsidies could be directed to producers, such as farmers. This would encourage them to produce good quality goods, while increasing the quantity of strategic products like wheat.

To Eissa, subsidising exports is productive. "Every pound the government gives exporters in subsidies brings in at least six more in return," he said. Besides, increasing exports means more job opportunities and more markets for Egyptian products, Eissa added.

The new measures, according to the minister of industry and foreign trade, will be reviewed by export councils before they are approved. The focus will be on increasing local production and added value and creating job opportunities, while opening new markets.

Fundamentally, Tolba believes that no government official will take a decision, such as subsidy reduction, that would lead to laying off workers and decreasing national income. "No one wants an increase in unemployment," he said.

© Al Ahram Weekly 2012