Egypt-Economic Growth and Trade Development

MODUL University

MBA in Public Governance & Management

2010 Economics for NPOs

Egypt - The Government's Initiatives towards Economic Growth and Trade Development

Economic Overview

Egypt began its transition to a market-oriented economy in 1991, by launching the Economic Reform and Structural Adjustment Program (ERSAP), which aimed to create sustainable economic growth implemented over a series of predefined phases. The first phase of the ERSAP was focused on improvement in public finance, exchange rate policies and inflation stabilisation. The second phase addressed trade liberalisation, market reforms, private sector participation, export competitiveness and the initiation of fiscal measures to increase credit flow. Importantly, ERSAP initiatives led to significant external debt relief, which helped Egypt to attain macroeconomic stability during the 1990s.

The social, religious, and historical standing that Egypt enjoys with the Arabian Gulf, North Africa and Europe has helped stimulate tourism, labour supply and Foreign Direct Investment (FDI). This has helped the economy grow significantly, particularly, in the past decade. In this time, Egypt has also strengthened its international trade relations by entering into bilateral and multi-lateral trade agreements with the United States and countries in Asia, Africa, the Middle East and Europe. Key agreements are:

  • The US-Egypt Partnership for Economic Growth and Development
  • EU Partnership Agreement
  • The Common Market for Eastern and Southern Africa Agreement (COMESA)
  • The Greater Arab Free Trade Area (GAFTA)

Asia is an increasingly important region for the Egyptian Government. Exports to non-Arab Asian countries accounted for 17.2% of Egypt's total volume of trade in the year 2007-08. The Ministry of Trade and Industry has clear plans to increase exports to these markets and better balance trade deficits. The Ministry is also concerned with obtaining free market access for Egyptian products in foreign markets with significant Arab populations, including Central Asia (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan and Afghanistan) and China, Malaysia and Thailand. Moreover, discussions are underway between Egypt and Singapore regarding a proposed free trade agreement. Ongoing agreements with Asian countries include a preferential trade agreement with India, a free trade agreement with Sri Lanka and also a trade agreement with Kazakhstan.

In terms of economic performance, Egypt has in recent years emerged as one of the fastest developing economic regions in the world and one of Africa's most prosperous economies.

The World Bank's 'Doing Business 2010' report ranks Egypt 106 of 183 countries surveyed. The country was ranked 116 in the 2009 survey. The study again placed Egypt among the world's leading reformers in the world in terms of key business-friendly measures such as the ease of starting a business, addressing bureaucratic delays - especially for construction permits, and the provision of one-stop shop services to traders at ports as well as allowing better access to credit for businesses.

Parameter                         Egypt's Rank out of 183 countries 
Ease of Doing Business            106
Starting a Business                24
Dealing with Licenses             156
Employing Workers                 120
Registering Property               87
Getting Credit                     71
Protecting Investors               73
Paying Taxes                      140
Trading Across Borders             29
Enforcing Contracts               148
Closing a Business                132
			
Economic Indicator                    2003-04       2004-05       2005-06        2006-07       2007-08 
Nominal GDP (US $ Billion)            78.0          93.0          107.2          130.5         162.1
Real GDP Growth (%)                    4.1           4.5            6.8            7.1           7.2
Real GDP per capita (US $)            1,036.0       1,323.0       1,520.0        1,762.0       2,173.0
Unemployment (%)                      11.1          10.5           10.6            8.9           8.4
Average Annual Inflation (%)           9.5          11.7            4.2           10.9          11.7
Overall Budget Deficit(% of GDP)       9.5           9.6            8.2            7.5           7.0
Exports (US $ Billion)                10.5          13.8           18.5           22.0          29.4
Imports (US $ Billion)                18.3          24.2           30.4           37.8          52.8
Net FDI (US $ Billion)                 0.4           3.9            6.1           11.0          13.2
External Debt (% of GDP)              38.1          31.3           29.9           22.4          20.9
Net Intl Reserves(US $ Billion)       14.8          19.2           22.9           28.6          34.6
Exchange Rate (LE/US $)                6.2           5.8            5.8            5.7           5.5
            

GDP Growth

While Egypt's Fifth Five-year plan (2002-2007) set a GDP growth target of 6.2%, the achieved rate was 5.5%. The initial phase of the plan was characterised by slow growth, while the later stage showed accelerated expansion of almost 7.5% - with all key sectors exceeding their individual planned growth rates.

Figure 3 Egypt: Growth Rates of Key Economy Sectors (2002-03 to 2006-07)

Sector                     Planned Growth Rate (%)        Achieved Growth Rate (%)
Tourism                    9.0                            10.8
Natural Gas                4.8                            15.8
Suez Canal                 2.7                            15.4
Communications and IT      6.0                            10.8
Construction and Building  6.7                             8.7 
			

Leading sectors that contribute to economic growth include manufacturing, petroleum and natural gas, social services, trade and finance, agriculture as well as transportation and storage.

Unemployment and Inflation

n the domestic front, unemployment fell from 11.1 percent in 2003-04 to 9.1 percent in 2006-07. According to the Egyptian State Information Service, about 95 percent of the workforce is employed in the small and medium enterprise (SME) sector. The inflation rate declined from its peak level of 12.9 percent in 2003-04 to 4.2 percent in 2005-06 before rising to 10.9 percent in 2006-07. The sharp rise during 2006 is attributable to several factors: the outbreak of the avian flu, which impacted meat and egg prices, higher world commodity prices, and increasing domestic demand. Although Egypt's Central Bank has on several occasions intervened to keep inflation under control, inflationary pressures remain a challenge for the Government as domestic demand grows.

Privatisation

Total receipts from 53 privatisation transactions in 2006-07 were US $2.4 billion. Key deals included the sale of the third mobile phone license to UAE based Etisalat in July 2006 and the privatisation of the Bank of Alexandria in October 2006.

Foreign Reserves and Foreign Direct Investment (FDI)

Egypt has a favourable balance of payments, with a US $5.3 billion payment surplus in 2007-08. Foreign exchange reserves also showed impressive growth and reached a level of US $30 billion. With foreign trade accounting for 37.9% of GDP, Egypt is now showing more signs of increasing integration with the global economy.

In 2007-08, net FDI touched US $13.2 billion compared to US $11.1 billion in 2006-07. This meant Egypt was the leading FDI recipient in North Africa and second among African countries. However, as the global economy slowed, FDI in 2008-09 was down 39.7% to US$8.1 billion, according to the Central Bank of Egypt.

International Trade - Exports and Imports

Commodity exports grew at 33.6% from US $22.0 billion in 2006-07 to US $29.40 billion in 2007-08. This was driven largely by petroleum exports, which increased from US $10.0 billion to US $14.5 billion at a growth rate of 45%. Non-petroleum exports totalled US $14.9 billion. Finished goods as a proportion of overall exports grew from 34.2% in 2006-07 to 45.4% in 2007-08. The share of petroleum and non petroleum exports have varied over the past two years with non-petroleum products driving the export growth in 2006-07 and petroleum exports in 2007-08. Finished product exports have shown higher growth year-on-year for the past four years. This trend indicates a rise towards value-added export categories.

Despite this export growth, Egypt's trade deficit has widened primarily due to the increase in imports of non petroleum products to meet growing domestic demand for industrial production and consumption.

Parameter                    2003-04        2004-05         2005-06           2006-07          2007-08 
Exports (US $ Billion)       10.5           13.8            18.5              22.0             29.4 
Imports (US $ Billion)       18.3           24.2            30.4              37.8             52.8 
Trade balance (US $ Billion) (7.8)         (10.4)           (12)             (15.8)           (23.4) 
FDI (US $ Million)            407           3902            6,111            11,053           13,200
            

Government Policies, Regulations and Key Challenges

Fiscal Policy

In recent years, Egypt's encouraging economic policy performance has been reflected in the country's growing GDP and declining fiscal deficit (as a percentage of GDP) and through greater investments by both foreign and domestic companies. A change in focus is apparent where investments are being encouraged by duty cuts and tax reductions. Subsidies, social benefits and employee wages have received more significant funding, which indicates the Government's intention to balance economic and social growth.

Although the absolute fiscal deficit increased from US $10.0 billion in 2006-07 to US $11.2 billion in 2007-08, its share of GDP declined from 7.5% to 6.8%.

Investment

Inland investment includes projects that are commissioned in any of the 40 industrial parks developed by the Government. These parks have common industry clusters and are located within 19 governorates. Egypt gives high priority to industrial parks for the transfer of technology and innovation. In Upper Egypt (South of Cairo), land is allocated free of charge after production has commenced.

Free Zones

Free zones are part of the national Territory of Egypt, but are considered outside the purview of import, monetary, duty-related issues and customs boundaries of the country. They offer unique advantages to foreign investors in terms of monetary and financial transactions. Free zones are classified as:

a) Private free zones

b) Public free zones

There are 10 state-developed public free zones. These are managed by a board of directors responsible for providing all facilities and services.

Key privileges and guarantees available to free zone investors:

  • Absence of minimum and maximum limits for invested capital
  • Freedom to transfer invested capital and profits of the project abroad
  • Freedom to decide pricing of products and profit margins
  • Protection against confiscation of projects
  • Exemption of all capital assets, production, imports and exports from customs duties or taxes on sales or other kinds of taxes even if these activities exist outside the free zone for temporary periods
  • Exemption of all components produced in free zones projects from customs duties when sold to the local market
  • Exemption of land registration, contracts and loans from the tax stamp registration fees for five years

Regulatory Constraints

While Egypt has made impressive progress on economic reforms, regulatory constraints remain.

Approvals

Some projects still require prior approval from relevant ministries in addition to the General Authority for Investment (GAFI). This includes investments in Sinai, all military products and related industries, as well as tobacco and tobacco products. Law 15 (1963) prohibits foreign ownership of areas designated as agricultural land, except for desert reclamation projects.

Tariffs

There have been far-reaching changes to the import duty regime but inconsistencies remain. In 2006, for example, the tariff rate on poultry was reduced from 32% to nil, but was restored to 32% in 2007.

Customs Procedures

Although Egypt has adopted the World Trade Organisation (WTO) customs valuation system (2001), it is not yet fully implemented. This means importers still encounter conflicts between the old (reference price) and new (invoice based) systems.

Import Restrictions

Passenger vehicles can only be imported within one year of production.

Prohibitions applied to the import of natural products, vitamins and food supplements in finished form

  • Only local factories are allowed to produce these products and to import raw materials for manufacturing.
  • Dietary products require an import license and the approval process takes anywhere between four and 12 months. Moreover, if a similar dietary product is available locally, registration of the imported product will be rejected.

Key Challenges in Managing Economic Growth

In addition to policy issues that need to be addressed to optimise the conditions for doing business, there are specific macroeconomic barriers to Egypt's continued economic growth, including:

  • The Government's ability to sustain public investment in infrastructure if debt increases significantly
  • The current condition of Egypt's infrastructure

Management of Debt

Government debt - domestic and external - climbed to US $152.4 billion in 2007-08, 91.5% of GDP. Domestic public debt constituted 74.3% of GDP, representing a 4.5% increase.

The servicing and managing of debt is critical on two accounts. First is the Government's ability to continue making public investments. Second is the ability to illustrate strong macro-economic fundamentals to attract more private investment in key infrastructure projects.

Freight Infrastructure Restraints

Egypt's freight infrastructure is relatively underdeveloped. Despite a modernisation programme in the 1980s, many roads remain in poor condition or under construction. The 1990s saw the beginning of strong growth in the numbers of licensed automobiles, which means the road system, especially in urban areas, is highly congested and a major safety concern. Moreover, Egypt's state-owned rail network, which has 9,400 kilometres of track, is passenger-focused and in need of upgrading work.

Egypt has 90 airports. Egypt Air, the country's official airline, carries about 25% of international air passenger traffic into the country yet is known to suffer from service and a fair share of cargo quality and reliability issues.

Major ports in Egypt include Alexandria (including Dekheila port), Port Said, Suez, Damietta and Sokhna. While some port facilities are providing services of international standard, problems exist at other ports such as inefficient operations and inconsistent customs duties and administration.

Egypt has around 3,500 kilometres of inland waterways, which encompass the Nile and various canal systems. However, these waterways are underutilised and lack the infrastructure and capabilities to handle large-scale cargo transportation.

In addition to Egypt's infrastructure challenges, a key concern area is the lack of a comprehensive blueprint to synchronise the development initiatives across transportation modes and to integrate the transportation network. Failure to do so will hamper the country's long-term economic growth.

Challenges for the Development of Infrastructure

Egypt's transportation and logistics infrastructure requires major improvements to serve the long-term needs of Egypt's expanding economy. However, the following challenges need to be overcome to aid the development of the infrastructure:

  • Complicated laws for sanctioning infrastructure projects
  • Long timeframe from start to completion of projects
  • Too few development agencies and private sector investors for infrastructure projects
  • Quality and productivity issues in infrastructure because latest engineering know-how and global best practice are not widely available
  • Lack of openness to private investment to both develop and operate infrastructure

Legal Issues and Robustness of Legal Framework

Legislation regarding investments in Egypt has changed significantly in recent years. The current pro-business outlook has simplified and streamlined the process of investing in Egypt, empowering organisations such as the GAFI to be a one-stop-shop for investors who wish to register and operate their business in Egypt. Corporate tax has been reduced from 40% to 20%, which has in turn increased overall revenue collection levels. The current legal system in Egypt is considered one of the most attractive in the region. The Government allows up to 100% FDI in most industry sectors.

However, certain logistics and transportation operations are still not open to private investment. For example, the Government has initiated Public Private Partnership (PPP) programs only in the passenger sector. Significant steps are needed to put Egypt's freight environment on par with developed and developing economies such as China and India. Traffic laws need to be made more stringent with increasing emphasis on safety and pollution reduction. The legal system should also aid faster implementation of key infrastructure projects.

Another major concern is the lack of a unified code of law relating to the freight sector and infrastructure development. There are a number of old laws, which have been subject to change through various presidential and ministerial decrees. A consolidated Companies Law, which combines all the various changes, would enhance the ease of doing business in the country.

Some apparent inconsistency in the Government's outlook on certain key policy and legal issues is another area of concern. For example, in mid-2008, the Government abolished free zone status for certain energy-intensive industries. Overnight this changed the business scenario for those sectors. Companies had to forgo key benefits such as a five-year tax exemption. Although the Government revised the list of industries that would lose free zone status, this resulted in major projects being delayed or cancelled.

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