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Second generation reforms needed for Egypt’s economy

Second-generation reforms tackling structural problems in Egypt’s economy are needed to encourage greater private-sector participation and the creation of jobs, according to one World Bank economist

Niveen Wahish , Saturday 14 Dec 2019
Second generation reforms needed
Pushing exports is a key driver of growth

“The road to reform is still long, arduous, and in need of continuity.”

This is how Hoda Youssef, a senior economist at the World Bank, concluded her paper entitled “What after Stability? The Challenges of the Next Phase of Economic Reform” looking at the future of Egypt’s economy.

While acknowledging the successes of the International Monetary Fund (IMF)-backed reform programme initiated by the government in 2016 to stabilise and build confidence in the economy, Youssef argued that structural reforms were what the government now needed to focus on.

Youssef stressed that the measures taken to stabilise the economy had had some harsh social and economic effects, as a spike in inflation accompanying the depreciation of the currency had led to a sharp increase in the cost of living.

Despite measures taken by the government to mitigate these negative effects, the measures had “remained limited in nature and coverage,” Youssef said, and did not cover damage to the real incomes of the middle classes.

Given this “high price” of the reforms, Youssef stressed the importance of maintaining their momentum. There was a need to move to the “second generation of reforms”, Youssef said, in order to translate the improvement in macroeconomic indicators into better living conditions for all citizens.

She called for consolidating what had been achieved and making it more meaningful to different social classes, age groups, and professional groups, as well as different geographical regions.

In order to do this, she said the government should focus on resolving structural problems, address the fundamentals of the economy, and allow for greater private-sector participation.

“This must play a key role in driving the economy and creating the decent jobs needed by the hundreds of thousands of graduates who enter the labour market every year,” she said.

Youssef specified three main areas that were crucial to such reforms, including pushing exports as a key driver of growth, enhancing competition, and investing in human capital. The lack of reforms in these three areas over long periods had limited Egypt’s ability to fully exploit its economic potential, she said.

Youssef pointed out that though the depreciation of the Egyptian pound had been expected to reflect positively on the volume of exports, increases in non-oil exports had been modest. She attributed this to Egypt’s exports being concentrated in traditional sectors, rather than in goods for which there was growing global demand.

Egypt’s competitiveness has increased in products that are experiencing a decline in global demand, such as cotton, fertilisers, tobacco and oilseeds, while its production is limited in goods for which global demand is increasing. The latter include electrical machinery, essential oils, fruit, and vegetables. Boosting export competitiveness could only be achieved by expanding into products for which there is high global demand, Youssef said.

Another constraint on exports are Egypt’s numerous non-tariff barriers and procedures. These include administrative and technical procedures, as well as sanitary and phytosanitary measures.

Many exporting companies, especially smaller ones, cannot export successfully because of the costs involved in these procedures, Youssef said. She suggested that the requirements be simplified, their impacts on exports assessed, and future trade negotiations geared towards greater coordination with them.

She also noted that the measures also affect Egyptian imports, meaning that they adversely affect exports given the high dependence of domestic production on imports of raw materials and intermediate inputs.

The administrative and financial burdens on companies as a result of these constraints were high due to the complexity and length of time it takes to obtain required documents, the high cost of customs clearance, an absence of information, and the lack of clarity on technical regulations concerning goods, she noted.

The lack of electronic processing in customs clearance also contributes to delays, and procedures can give way to discretionary decisions and open the door to corruption. Moreover, the multiplicity of bodies involved, such as the Customs Authority, the port authorities, the General Organisation for Export and Import Control, the Security Services, and others, further complicates procedures.

Infrastructure constraints present additional challenges, including those related to limited or inappropriate storage, refrigeration, and testing facilities. The impact of such factors has meant that Egypt lags behind in the World Bank’s Cross-Border Trade Index, ranking 171 out of 189 countries in 2018 and showing a clear deterioration over time.

The third group of export constraints is the lack of spatial connectivity to international markets and the weakness of local transport facilities, which prevent Egypt from making the best use of its unique geographical location and its proximity to regional and international markets.

Besides working on boosting exports, work was also needed to establish fair and transparent rules for competition that are effectively applied across the economy, Youssef said. She called for leveling the playing field between companies regardless of public or private-sector ownership.

Another priority is investing in human capital as the most important objective without which other reforms cannot function, Youssef said. There should be increases in public spending on health, education, scientific research and vocational training, she said, particularly since education and healthcare spending is low compared to needs and in other countries.

Part of the financial savings from cutting energy subsidies and increasing tax revenues could be used to increase spending on these two sectors, she said. However, while it is important to increase spending on education and healthcare, this alone would not be sufficient to achieve an improvement in outputs.

Youssef said that the two sectors suffered from an inefficient allocation of resources. She said that Egypt’s reform strategy for education must ensure that resources are allocated in a way that aims to improve teaching and learning outcomes. If this did not happen, she said, there would continue to be a skills gap in the job market.

*A version of this article appears in print in the 12 December, 2019 edition of Al-Ahram Weekly.

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