Government raises import tariff rate

Government raises import tariff rate

On May 6th the government mandated, via executive decree, an increase in the tariff on merchandise imports to 2.5%, up from 0.5% previously. The policy seeks to provide a temporary boost to public revenue, and will expire atyear-end.

Analysis

The decision to lift the import tariff, which had not been altered since 1998, reflects the government's concerns about the recent decline in tax revenue(in real terms), along with concerns over the fiscal impact of a recent pause in the removal of utilities subsidies. An increase in revenue from higher tariffs (of a projected 0.2% of GDP) will help the government meet its ambitious fiscal targets, and could also provide an additional source of dollar inflows into the economy.

The government has taken some precautions to minimise economic distortions that might result from the new policy. It has instituted caps—on a sliding scale—on the tariff payments made by importers, depending on the volume of operations. For instance, for operations under US$10,000 the maximum tariff that can be levied is US$150, which implies an effective tariff rate of 1.5%. Presumably, this is to protect small-and medium-sized enterprises (SMEs), which rely heavily on imports.

Nonetheless, there are concerns about the economic impact of the tariffs. Some critics claim that the tariffs will add to price pressures. However, in our view, inflationary concerns are overdone, especially given that consumer goods, which have the most direct impact on prices, make up only around 13% of total imports.

That said, the policy move could have a detrimental impact on investor sentiment, particularly for import-reliant sectors. The tariff increase could hurt the automotive industry, given its close integration into the Brazilian market; eight out of the top ten best-selling cars in Argentina are imported from Brazil. The measure could also indirectly affect the competitiveness of Argentina's exports. For example, Argentina imports soybeans from Brazil and Paraguay each year to supplement domestic soy output for use in the manufacturing of soy derivatives, which are then exported. These soybean imports, which were previously exempt from the tariff regime, will now contribute to higher costs for agro-industrial exporters.

Impact on the forecast

Import tariffs will support our view of continued progress on fiscal adjustment. We do not expect a substantial impact on consumer prices; the impact on the external balance and growth is, for now, unclear, as tariffs could also have the impact of reducing import volumes by more than we currently expect.