Gov’t looks to address tax + cost gap caused by FX crunch for industry players: Industrial and retail players have been lobbying the government to issue new regulations to protect companies with FX expenses from incurring significant financial losses or an additional tax burden. Companies are concerned that the losses they incur from sourcing FX will be exacerbated by how their tax base is calculated without accounting for these FX costs, according to industry sources Enterprise spoke with.

The currency crisis is making it difficult for businesses to calculate their FX costs: The gap between the official USD-EGP exchange rate and the parallel market rate has been widening for the past several months, surpassing the EGP 60.0 / USD 1 mark over the weekend, according to market sources. That’s almost double the official exchange rate of EGP 30.96.

Industrial players are heavily reliant on FX for business + operations: Several companies need to import raw materials, manufacturing components, machinery, equipment, and other goods required for production, with the industrial sector importing c. 60-90% of the raw materials they need, our sources say.

The problem: The real cost of sourcing each USD ranges between EGP 68-70, which is significantly higher than the official rate and the rate at which banks issue letters of guarantee, Chairman of the Federation of Egyptian Industries’ (FEI) tax and customs committee Mohamed El Bahey told Enterprise. This delta creates significant pressure for businesses, and requires government attention to address and therefore help determine companies’ tax base, El Bahey said.

Companies have been trying to figure out how to handle these variable costs:Representatives from all of the Federation of Egyptian Industries’ divisions and the Federation of Chambers of Commerce have been discussing with accounting offices and auditors how to best approach the issue and determine an appropriate figure for the impact of the parallel market on their balance sheets, according to El Bahey. The two sides have also been trying to calculate a fair tax base as part of that process, he said.

Government is working on putting something together: Government officials met with industrial and retail players to discuss the impact of the parallel market on their businesses and how they account for these costs, as well as how they impact their bottom lines, according to our sources. Cabinet is currently working on a proposal to address these issues and provide businesses with a guiding framework for how to calculate foreign currency differences for 2023, our sources said. Companies that have significant foreign currency expenses are expected to account for a 26% price differential when calculating these FX costs to determine their tax base, according to our sources. Industry had requested that the government set that price differential at 30%, which still falls short of fully accounting for the additional costs incurred but would take some financial pressure off of these companies to allow for business continuity, according to sources from the FEI.

But there are going to be controls in place: The government is working on putting limits and controls to ensure that this accounting framework is not abused, our sources stressed. Companies will be required to submit paperwork to show their USD sourcing requirements and link these expenses to their sales revenues. Companies will only be allowed to implement the accounting measures if they can prove that FX expenses are necessary for their operations, meaning it will be limited to companies with importing and exporting activity, and those that need to import raw materials, according to our sources.

Some sectors think they deserve special treatment, including the pharma sector, whose dependence on raw materials hovers at around 90%, according to head of the Federation of Egyptian Industries’ pharma division Ali Ouf. “We’re facing a crisis due to the inability to compensate for jumps in the cost differences of USD sourcing by pricing it into the products because the sector is regulated by mandatory pricing that can’t be changed without the approval of the Egyptian Drug Authority,” Ouf told Enterprise. This formula puts the sector under the pressure of facing “huge” cost differences, he said.

Companies in import and export are also buckling under the pressure, since they are entirely reliant on FX and are forced to resort to the parallel market for their financing needs, said head of the Internal Trade Committee of the Importers Division of the Federation of Chambers of Commerce Matta Bishay. The government should push the price differential for foreign currency to at least 50% for these companies, particularly those that specialize in importing production inputs and partially finished goods, Bishay told us.

Your top industrial development stories for the week:

  • Vietnam’s EuP sets up plastic filler plant in Sadat City:European PlasticsCorporation (EuP Group), a Vietnamese manufacturer of filler masterbatch— a plastic filler used in the production of plastics — inaugurated last week a factory in Sadat City, with the first phase costing USD 30 mn, according to a statement by the General Authority for Investments (GAFI). The factory has an annual production capacity of 300k tons.
  • Egyptian-British JV to set up animal feed factories worth USD 30 mn: Supreme Holding has formed a joint venture with an undisclosed British company — dubbed Continental Investments — that will invest the equivalent of a combined USD 30 mn into setting up four animal feed factories in Sharqia governorate’s 10th Ramadan City, Supreme Holding Chairman Moharam Helal told Al Arabiya.
  • ACWA Power’s Kom Ombo solar plant is nearing completion:The 200-MW solar plant being built in Upper Egypt is now 82% complete, and is expected to be completed by April 2024 at an investment cost of USD 168 mn, according to a cabinet statement yesterday.
  • China’s Guangdong Vanward New Electric breaks ground on a USD 12 mn factory for home appliances and heat exchangers in the TEDA industrial zone in Ain Sokhna on Thursday, according to an SCZone statement.
Tags: