For years the government has been targeting achieving a major boost in the country’s exports, but, despite improvements, Egypt’s export performance remains below its potential.
Compared to other middle-income countries that started at the same level or below in the early 2000s, Egypt’s exports-to-GDP ratio remains much lower, says the newly released World Bank Egypt Economic Monitor report.
According to the report, exports of goods fell from 17 to 5.6 per cent of GDP between fiscal years 2006 and 2016, although they picked up again in 2018 to reach 10.3 per cent of GDP. Given the country’s high dependence on imports, the weak exports performance has resulted in an average trade deficit of 12 per cent of GDP during the same period, the report showed.
Entitled “From Floating to Thriving: Taking Egypt’s Exports to New Levels”, the report said that energy subsidies and the exchange-rate overvaluation “have resulted in a weak export performance and a modest regional and global integration” because they worked in favour of energy intensive industries and shifted production resources away from labour-intensive and exports-oriented sectors.
Though there has been an improvement in export performance since the exchange-rate liberalisation, that has not been enough to guarantee improvements in performance. A currency depreciation boosts exports because it makes the price of domestic products more competitive.
“Other countries have seen their exports reacting more sensibly to a more modest currency depreciation, while a significantly larger depreciation in the Egyptian pound was only followed by an export increase of 16 per cent in about a year’s time,” the report said. That being the case, the report suggested that “rapid and sustained exports growth certainly requires more than a price effect.”
The report lamented that Egypt exported a very limited number of sophisticated goods and the majority were peripheral goods like crude and refined petroleum, precious metals, agricultural products, textiles and construction material.
“Only a few products in which Egypt specialises and expands are matching the growth of global demand,” the report said, adding that global demand for some of Egypt’s top exports such as cotton, fertilisers, tobacco and oil seeds had been declining. The country has lost competitiveness in textiles, cement, aluminum, ceramics and chemicals, as its share of world trade in these products has declined between 2012 and 2016.
“There is a limited ability to achieve substantial increases in Egyptian exports if the exports structure remains concentrated in products that are weakly traded in global markets,” the report said. Electrical machinery, essential oils, and edible fruits and vegetables are some of the few Egyptian exports subject to accelerating global demand and that could be considered as winners, it added.
Source: Egypt Economic Monitor
Source: Egypt Economic Monitor
Besides working on exporting more goods that are in global demand, the report recommended varying export markets. It showed that though Egypt’s exports have gradually shifted away from the US, they still remain limited to traditional markets. The EU has been the most important trading partner and first recipient of Egyptian products for the past decade, while exports to African markets remain under-developed, averaging 2.2 per cent of total exports between 2008 and 2017, the report said.
“Egypt is under-trading with 63 per cent of destinations, with African countries representing half of these destinations,” the report showed. Egypt is also under-trading and not exploiting its full trade potential in 53 per cent of products, some of which have a comparative advantage such as textiles, garments, fertilisers, chemicals and wooden products.
The report suggested that “increasing exports in established sectors and markets seems like a low-hanging fruit, but as global demand shifts to new sectors and products, developing new export sectors and expanding the country’s access to new markets is equally important.”
It stressed the need to focus on higher value-added and technology-intensive products. To enable this to happen, the report recommended giving firms incentives to upgrade their technological capabilities as well as their production processes and products.
It also said research and development and innovation were important to enable firms to integrate with the global industry chain and to move up to a high added-value production structure.
The report stressed the need to simplify the business environment to attract potential investors in non-oil sectors.
“Industrial and investment policies should encourage business activities that allow for a technological catching-up to be complemented and orchestrated with innovation and education policies to avail the skills needed for the catching-up process,” it said.
Meanwhile, to make the most of Egypt’s multiple preferential trade agreements, which the report said were mostly limited to tariff-waiving, the report recommended deeper and more comprehensive trade agreements that addressed non-tariff measures, the harmonisation of standards, and the inclusion of services and investment provisions. This would help Egypt to develop regional and global value chains that in turn would boost trade and help small and medium enterprises to export, the report said.
Removing trade barriers was another important recommendation of the report. Despite significant reforms and liberalisation efforts, significant trade barriers prevent the country from fully exploiting its trade potential and maximising its gains from trade, it said.
“There is an urgent need to ease the regulatory environment around trade activities, notably customs and trade regulations,” it added. It praised existing efforts like the single-window system that allows international traders to submit all documents at one location instead of making separate document submissions to each agency; however, it said that a thorough review and harmonisation of the legal regulatory framework and of the existing procedures was needed to streamline and improve the cross-border movement of goods.
Connectivity was another area the report focused on. It said that despite its strategic location, Egypt suffered limited connectivity, which was an obstacle to the efficient and reliable movement of goods and services.
“Access to markets, including the cost of transporting goods and inputs, is a function of distance, road quality, and other geo-physical barriers,” the report said, adding that enhanced infrastructure and logistics were important for domestic trade and exports and reduced losses for perishable goods.
In Egypt, internal distances from borders can add substantial amounts to times and costs, the report said.
Egypt’s performance on trade logistics put it at 67th position globally out of 160 countries included in the Logistics Performance Index, the report said. The index tracks performance on cost and reliability of import and export supply chains, infrastructure, the quality performance of core services, and the friendliness of trade-clearance procedures.
This being the case, the report recommended a focus on improving connectivity across Egypt between port locations and consumption and production areas by expanding capacity for rail freight transport and highways and developing the potential of Nile river-transport facilities. It recommended enhancing international connectivity through improved maritime services and taking advantage of free zones to provide additional value.
To make this happen, the report said the government should focus on the legal and regulatory framework to facilitate trade, while enabling private participation and commercial financing in multi-modal freight transport and logistics.
*A version of this article appears in print in the 18 July, 2019 edition of Al-Ahram Weekly under the headline: The exports dilemma