Despite positive changes in Egypt’s economy in the wake of the economic reform programme initiated by the government in late 2016, one essential sector that contributes to GDP growth continues to face challenges — exports.
According to the World Bank Egypt Economic Monitor report “From Floating to Thriving: Taking Egypt’s Exports to New Levels,” published July 16, the cornerstone of Egypt’s economic reforms was the liberalisation of the exchange rate to address local currency overvaluation.
The World Bank considered floating the currency as necessary but also not sufficient to guarantee a notable improvement in export performance, especially that historical trends show that improvements in export performance have been short-lived, indicating difficulties in sustaining progress.
“The late years of the 2000s witnessed a notable increase in exports volume, which then started to deteriorate even before 2011’s economic turmoil. Furthermore, when compared to other middle-income countries who started at the same level or below in the early 2000s, Egypt’s exports to Gross Domestic Product (GDP) ration remains much lower,” the report states.
This reflects, the World Bank estimates, persistent inability to benefit from globalisation trends, possibly due to the existence of high trade costs, within and at the country’s borders.
Some challenges curb Egypt’s ability to raise exports, in particular non-tariff barriers, which cover a diverse set of factors and take many legal forms. Non-tariff barriers can have economy-wide implications through their effect on the price and quantity of traded products and may impose high fixed costs on companies thereby affecting their ability to export.
The report also highlighted that Egypt is not well integrated into global markets, as Egypt’s exports have historically been dominated by oil products, though their relative weight has gradually decreased from half to just over a third of total exports. In FY 2018, non-oil exports constituted 66 percent of the total. More importantly, exports are chiefly focused on products that are either traditional or have a low-value added.
The report added that the long tradition of subsidising energy prices also favoured energy-intensive industries and biased exports towards them.
Meanwhile, though the destination for Egypt’s exports has gradually shifted away from the US, exports remain limited to traditional markets. Recent shifts have favoured Arab countries in particular, with the United Arab Emirates and Saudi Arabia who receiving 9.7 percent and four percent of exports in FY 2018 respectively.
Together, the EU and Arab countries receive close to 70 percent of Egypt’s exports, while exports to Africa are still underdeveloped and have not seen any major increase over the past decade.
Over the last decade, EU countries have been the most major recipient of Egyptian products.
The research conducted and compiled in the report revealed that the products exported in the largest volume are not necessarily those in which Egypt has the best comparative advantage.
In addition, despite significant reforms and liberalisation efforts, hard trade barriers prevent Egypt from fully exploiting its trade potentials and maximising its gains.
The report noted administrative burdens resulting from the lengthy procedures, heavy documentation requirements and costly clearance processes for imported and exported goods. Technical requirements and sanitary and phytosanitary (SPS) measures applied by partner countries are also important obstacles to Egyptian exports.
Other non-tariff measures (NTMs) or quantitative restrictions imposed by Egyptian authorities, compounded by infrastructural challenges, undermine exports growth.
The report suggested a number of measures to help the export sector reap the benefit of economic reforms. In particular, Egypt should gear the production structure towards higher value-added and technology-intensive products, of which developing countries are increasingly becoming exporters.
The expansion of global value chains also provides an opportunity for companies to integrate with the global industry chain and move up to high added-value products. These require, in turn, more focus on research and development, skills development and technological upgrades, areas in which Egypt’s industrial sector remains weak.
The complex business environment in Egypt also limits the economy’s attractiveness for foreign direct investment, which remains largely concentrated in oil and gas, while potential investors in non-oil sectors could benefit from Egypt’s strategic location in proximity to African, European and Middle Eastern markets.
Hence, industrial and investment policies should encourage business activities and ease the regulatory environment around trade activities.