Exports to grow the economy

Akrum Bastawi, Thursday 29 Feb 2024

Greater exports are the key to Egypt’s economic resurgence.

Exports to grow the economy

 

As Al-Ahram Weekly goes to press this week, the World Trade Organisation (WTO) is wrapping up its 13th Ministerial Meeting in Abu Dhabi, mostly with limited ambitions aimed at preventing the increasingly sustained momentum of rising protectionism and anti-globalisation from doing further damage to global trade and the WTO itself as the guardian of the rules-based framework that governs the system of international trade for goods and services.  

For Egypt, the trade policy topics, the timing, and the host country’s own recent investment plans in Egypt offer a rare opportunity to jump-start Egypt’s export economy and enhance its national economic security, despite the backdrop of geopolitical strife worldwide with both ongoing re-polarisation and ensuing economic realignment.

The complex and serious challenges that have faced Egypt’s economy over the past few years have been most tangible through the symptoms of the suffering they have given rise to in rapidly rising prices and the cost of living, dramatic declines in the Egyptian pound’s foreign-exchange purchasing power, and the obvious difficulties for both domestic and foreign investors to evaluate returns for proposed capital-intensive manufacturing projects.

It is easy to point to the wars between Russia and Ukraine (in Europe) and Israel and Palestine (on Egypt’s eastern borders), the lingering effects of the global Covid-19 pandemic and accompanying inflation, and domestic structural and legacy challenges as key culprits affecting Egypt’s economy.

There is certainly merit to this view. There are no magic solutions or quick fixes, and the government should be applauded for having been both courageously bold and level-headed in taking seemingly unpopular steps to address these challenges: in successive waves over the past few years, various subsidies have been scaled back and the currency has been significantly devalued several times. Even with various supportive interventions to alleviate the burden on everyday lives, these were not easy reforms to do.

It is an open secret that more economic policy and exchange-rate reforms are imminent, and they could bode well for what comes next for the wider economy and national economic security, if they are leveraged properly in a renewed focus on a single word: exports.

Just 20 years ago, Egypt implemented a set of reasonably well-integrated reforms that triggered a rapid export growth explosion, where Egypt’s exports by dollar value nearly tripled in less than five years and remained strong even seven years after the reforms had kicked in.

Using data from the World Bank and the Organisation for Economic Cooperation and Development (OECD) as a reference, this export-driven surge did more than just triple Egypt’s exports from nearly $18 billion a year to just over $54 billion a year (at its peak), but it also served as a core engine that drove a tripling of national per capita income over seven years from a GDP per capita in the $1,000 a year range to over $3,000 a year.

Peeling away the numbers, Egypt’s exports skyrocketed as a percentage of GDP by 65 per cent, eventually representing over one third of national GDP before gradually declining again in the wake of the global financial crisis and, later on, the regional effects of the Arab Spring.

Many of Egypt’s rapid export gains described above that happened between 2004 and 2011 were possible due to the benefits of its membership in the WTO. The outcomes of negotiations this week in the UAE on topics like potential taxes and duties on digital trade (e-commerce) and the future of the WTO’s governance and dispute-settlement systems were not known at the time of writing and will be clearer in the days to come. They will affect Egypt and all of the WTO’s members in different ways, some more than others.

For Egypt, there are key benefits if WTO members can maintain a global moratorium on taxing cross-border digital trade. This is one area that Egypt can make great strides in and quickly. But closer to home there are also lessons for Egypt to draw from its export experience between 2004 and 2011.

First, at the core of the reform package was a substantial foreign-exchange policy reform that involved the management of the currency between 2003 and 2005 with a relatively sustainable exchange rate, one with just enough credibility in simulating a semi-floating rate that parallel markets practically disappeared. There was currency predictability.

Second, a robust package of multiple reforms to the bureaucratic machinery of key institutions and accompanying paperwork associated with investment, importing, and exporting was put in place. On the trade side, the centrepiece was an overhaul of the import-tariff structure and tariff rates, essentially leading to a sharp enough drop in overall tariffs to give legitimacy to the argument that Egypt was serious about doing business with the world.

Third, and of critical importance, the day-to-day execution of these reforms was mostly led by technocrats, many with international and private-sector experience and broadcasting a fresh vibrancy about Egypt’s commitment to economic growth that was crucial for international investors and trade partners seeking predictability.

Why are these lessons important at this moment in time?

Let us start with the imminent likelihood of a further reform to the exchange-rate system. If implemented correctly, this ought to result in an immediate competitive advantage for certain types of goods that Egypt exports.

Next, Egypt will need to re-examine the red tape and other systemic legacy obstructions that continue to hamper the import and export space between it and its trade partners, both actual and potential. Even more importantly, it will need to look at the details of those secondary and tertiary hurdles that insufficiently incentivise both domestic businesses and international investors from investing in export-oriented manufacturing.

Egypt needs to flesh out the specifics of enhancing its manufacturing base as part of its recently announced National Economic Strategy 2024-2030 by putting in place measures that are narrow and surgical enough to sequence and target the right types of new export-oriented manufacturing-sector investments yet are also incentivising enough to attract long-term investments into Egypt.

Digital trade (or e-commerce) remains an untapped area for considerable export potential and cannot be overlooked.

The government’s capstone investment success so far in 2024, the $35 billion Egypt-UAE Ras Al-Hekma real-estate project, is no small feat and is a calculated investment for Abu Dhabi. The announcement arrived not a moment too soon for Egypt’s economy.

The project will no doubt have a positive impact on the economy, and leveraging part of it in a way that integrates with the export goal (at least incentivised for e-commerce in terms of a business hub) is just one idea of how this can be assured.

Ultimately, however, Egypt’s long-term national economic security and short to medium-term export potential hinge upon finding ways to motivate its private sector to move beyond contentment with its home market’s baseline consumption and be incentivised to tap into global consumption.

In parallel, there must be a concerted effort by both the public and the private sectors to avoid Egypt becoming too distracted, as it has been all too often, by real estate and construction, without paying at least equal attention to exporting.

 

The writer is a trade and investment specialist advising the public and private sectors on geoeconomic strategy.


* A version of this article appears in print in the 29 February, 2024 edition of Al-Ahram Weekly

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