Al-Wahsh: “Evaluating the Decision to Adjust the Customs Dollar and Align It with the Official Exchange Rate”

Written by economic expert “Saber Al-Wahsh”.

In light of the current economic conditions, the decision by the Minister of Finance to reduce the customs dollar rate and align it with the official exchange rate raises a number of potential short-term implications, particularly regarding prices and monetary stability. This calls for a careful evaluation that goes beyond the theoretical nature of the measure.

First: Short-term negative effects:
The decision is likely to lead to a temporary wave of inflation, as the impact of increased customs costs is quickly passed on to the prices of goods, in an environment characterized by weak competition and the absence of effective oversight. Additionally, the behavior of the local market is marked by what can be described as price rigidity, where prices respond quickly to increases but are slow to decline when costs decrease.

Moreover, the decision may drive an increase in precautionary demand for foreign currency, amid expectations of rising prices. This could negatively affect exchange rate stability in the parallel market during the transitional period. The slight rise we are currently witnessing in the parallel market exchange rate may be a result of this factor, or simply a correction process as commonly seen in currency markets.

Second: Impact on citizens and living standards:
Despite what accounting analysis may suggest in terms of neutrality—meaning the removal of a tax on cash and its transfer to the customs dollar, resulting in a net zero effect on citizens—the reality indicates that citizens will be the most affected party.

Cost increases are quickly reflected in prices, while any potential decreases are not translated at the same pace. Furthermore, the dominance of a limited number of major importers (oligopoly) enhances their ability to pass on costs without sufficient competitive pressure. Accordingly, it is likely that citizens will bear a net burden during the initial phase of the decision’s implementation.

Third: Timing issue and time gap:
These negative effects are exacerbated by the time gap between implementing the decision and the emergence of its potential positive results. The economy operates in cycles linked to imports and inventory, typically ranging between 3 to 6 months, and may extend to a full year. During this period, inflationary pressures may accumulate without any counter-effect to mitigate them.

Fourth: Relationship with the parallel foreign exchange market:
In the short term, the decision may increase pressure on the parallel market due to rising demand for foreign currency, whether for import purposes or precautionary motives.

In the medium term, unifying the rate may help reduce the gap, but this remains dependent on the central bank’s ability to manage liquidity and effectively control demand for foreign currency. It also depends on other factors, such as whether there will be a unified budget within revenue limits, and whether all parties will adhere to it.

Fifth: Consistency of economic policies (the theoretical positive aspect):
Despite these implications, the decision carries a positive aspect in terms of policy consistency, as it contributes to unifying price signals within the economy and reducing distortions resulting from multiple exchange rates. However, this consistency remains conditional on continued exchange rate stability and the success of monetary policy in managing the market without depleting reserves.

Sixth: Impact on public finances:
Unifying the customs dollar rate may lead to a nominal increase in customs revenues. However, this effect is not guaranteed, as it may be offset by a decline in import volumes or an expansion in customs evasion, given monitoring challenges. Therefore, the net impact on public finances depends on the efficiency of customs administration and its ability to control entry points.

Conclusion:
The decision carries a reform-oriented logic in principle, but its short-term cost appears high under current conditions. In the absence of effective accompanying policies, it is likely that citizens will bear the greatest burden during the transitional period, and pressures on the parallel market may intensify. Accordingly, the success of the decision depends not only on its content, but also on its timing, implementation mechanisms, and its integration with a comprehensive package of economic reforms.