Egypt began a slow process of moving from a state-dominated closed economy with high tariffs on imports and foreign exchange controls to a more open and market-friendly one in the 1990s. This process gained momentum in mid-2004 when the government of former Prime Minister Ahmed Nazif launched a number of ambitious and far-reaching economic reforms. The basic goal of the reform program was to ease the constraints on private investment and growth by reducing the size and role of the public sector in the economy, modernizing the financial system, streamlining business regulations, privatizing state-owned enterprises, and advancing trade liberalization.

These reforms led to a significant improvement in the business and investment climate, so much so that the World Bank’s 2010 Doing Business Report listed Egypt among the top reformers in the world. Consequently, Egypt’s economic growth, which had been running at around an annual average rate of about 4 percent, increased to over 7 percent in 2007-2008. The country also managed to withstand the impact of the global financial crisis and recession by continuing to grow at a very respectable rate of an average of 5 percent in 2009-2010.

Reducing protectionism and opening up Egypt to the world economy was a central element in the reform program. As such, the government moved aggressively to reduce tariffs on imports. In 2002, the average tariff on all imported products was 48 percent and in 2004 the government reduced it sharply to 20 percent. By 2010, the average tariff on all imports had been brought down to less than 10 percent, and to 8 percent for manufactured goods. The purpose of the tariff reduction was to increase imports and in that, the policy was very successful as imports nearly tripled from $23 billion in 2004 to close to $60 billion in 2009-2010. As a result of the trade liberalization, Egypt’s exports increased from $23 billion in 2004 to about $50 billion in 2009-2010.

Egypt was following the example of many emerging market economies in East Asia and Latin America and the outcomes confirmed the well-established view that reducing protectionism makes the economy more efficient since it has to face foreign competition, and this in turn increases investment and growth. But the overall reform process, including trade liberalization, stalled in 2011 at the start of the Arab Spring. The political turmoil over the following four years was not conducive to advancing or deepening economic reforms. The four successive governments between 2011 and 2015 focused mainly on political and security issues, and the economy and economic policies took a backseat. While these governments did not go any further in liberalizing trade, it is worth noting that despite foreign exchange pressures, none of them actually reversed what had been achieved in the last few years of the Hosni Mubarak regime. As a result, imports continued to grow and reached over $72 billion in 2015.

In January of this year, protectionism came back into the picture. Following the appointment of Tarek Amer as Governor of the Central Bank of Egypt at the end of 2015, a presidential decree was issued (No. 25 of 2016) increasing tariffs on “luxury” goods by an average of 10 percent. These new higher tariffs were imposed on a variety of items including household appliances, consumer electronics, garments, cosmetics, pens, lighters, and watches. The average tariff on 500-600 imported commodities would now be in the range of 20-40 percent, up from 10-30 percent. Furthermore, regulations were imposed on “low-quality” consumer products, most of which come from China, involving registration with Egyptian authorities, providing documentation of licenses, and proof of inspection.

So why this change of heart on the part of the government in bringing back protectionism by increasing import tariffs and introducing new regulations? The Central Bank of Egypt has advanced several reasons, such as the wish to protect local industries from low-quality cheaper imports and to increase customs revenues to improve the public finances. These reasons are very secondary. The main reason, stated clearly by Amer, is to ease pressure on the Central Bank of Egypt’s foreign exchange reserves by reducing the import bill by 25 percent (or about $20 billion) in 2016.

There’s no question that Egypt has serious balance of payments problems and needs to take steps to correct the situation. In the past few years, political turmoil and security incidents have led to a significant fall in tourism revenues and foreign direct investment, along with an outflow of private capital. In such circumstances, is imposing restrictions on imports through regulations and higher tariffs the optimal policy? From the experience around the world, and Egypt’s own experience prior to the start of the Arab Spring, it is clear that the answer is no.

The more appropriate policy to protect the country’s foreign exchange reserves would be to allow the exchange rate to depreciate. But successive governments, including the current one, put great stock in the stability of the Egyptian pound. Over the past five years, the pound has depreciated from EGP 5.8 to the US dollar to its current level of EGP 7.8 to the US dollar – a fall of some 35 percent, or an average of 7 percent per year. Over the same period, the country lost some $20 billion in foreign exchange reserves in keeping the value of the pound from falling faster and further. The picture looks even worse if one adds the inflows of official grants, mainly from the Gulf countries, amounting to $16 billion, and foreign loans and borrowing of some $23 billion during 2011-2015. All this money went to finance imports and private capital outflows and virtually none of it was added to the Central Bank of Egypt’s foreign exchange reserves. There is no doubt that if the Egyptian pound had been allowed to depreciate more, one would be looking at a much healthier foreign exchange position.

The Egyptian government has apparently decided that maintaining stability of the exchange rate is a higher priority than having a more open trade regime. While raising import tariffs may be a “quick-fix” to improve the balance of payment, it is nonetheless a move in the wrong direction and is unlikely to be very effective. It is hard to see any gains from a return to protectionism, and in some ways it is a pity that the government is reversing reforms that were contentious and difficult to implement. Backtracking on trade reforms is a bad signal to send to foreign and domestic investors. The higher tariffs will buy the country a little time, but eventually, and possibly soon, the Egyptian pound will be devalued. So very little would have been gained by increasing protectionism.

Mohsin Khan is a Nonresident Senior Fellow in the Rafik Hariri Center for the Middle East focusing on the economic dimensions of transition in the Middle East and North Africa. Elissa Miller is a Program Assistant in the Rafik Hariri Center for the Middle East.