Al-Monitor Pro

Egypt’s industrial sector to record modest growth despite government push

To:

Al-Monitor Pro Members

From:

Marc Español 

Journalist covering Egypt and Sudan

Date:

Sep. 18, 2023

Bottom Line:

The Egyptian government announced on Aug. 30 that it had granted electronics giant Samsung a golden license to build a mobile phone factory in Beni Suef, south of Cairo, scheduled to be up and running in the second half of 2024. The decision to award the South Korean multinational a gold license, which allows companies to secure in one go all the permits required to work in the country, comes as Egypt seeks to streamline and accelerate the development of local manufacturing to ultimately narrow its negative trade balance. Several firms have already benefited from various government reforms over the past couple of years, yet fundamental obstacles and the current economic headwinds make the bid a challenging undertaking.

Background Facts:
  • Manufacturing industries, including petroleum refining, accounted for 16.8% of Egypt’s GDP in FY2021/2022 (which runs from July 1 to June 30), the latest for which the Ministry of Planning and Economic Development has released data. It was its single largest contributor.
  • The sector experienced a tough 2022 mainly due to a severe dollar shortage in the country, rising commodity prices, import restrictions, high inflation rates and further disruptions to global supply lines triggered by the 2022 Russian invasion of Ukraine.
  • Some of these pressures have continued into 2023, including inflation that reached a new all-time high of 37.4% in August, a persistent dollar shortage and ambiguity about the local currency’s future amid rumors of another looming devaluation.
  • Following the invasion of Ukraine which triggered a sharp increase in the country’s import bill, Egypt accelerated plans to localize its industrial sector in order to bolster its economy, curb reliance on imports, boost exports and narrow the trade balance deficit.
  • In FY2021/2022, Egypt recorded a negative trade balance of $43.4 billion and a current account (CA) deficit of $16.5 billion, according to data from the Central Bank of Egypt (CBE). During the first three quarters of FY2022/2023, the negative trade balance stood at $23.5 billion and the overall CA deficit at $5.2 billion.
  • One of the main measures adopted by the government to boost the development of the local industrial sector in the last year was to end, in December 2022, the requirement for businesses to obtain letters of credit to finance imports.
  • The letter of credit system was imposed shortly after the economic meltdown caused by the war in Ukraine so as to limit imports amid a severe shortage of foreign currency, but it disrupted much of the local industry and led to a fall in production.
  • By the end of 2022, the government also chose nine industrial sectors, responsible for about a quarter of the country’s import bill in 2019, or about $17 billion, to be part of a four-year import substitution program dubbed Ebda. The pharmaceutical, chemical and engineering industries are among those selected.
  • The Ebda program provides financial and technical support to companies that are in difficulty or about to default, offers incentives to invest in industrial projects, and helps to lure foreign investments and fast-track bureaucratic procedures.
  • In December 2022, President Abdel Fattah al-Sisi approved the State Ownership Policy Document, which sets out the economic sectors from which the state plans to withdraw in the coming years and those in which it intends to increase or reduce its involvement, as a way to create a clearer and more attractive business environment.
  • In mid-January 2023, the government announced the approval of a program of 150 billion Egyptian pounds (almost $5 billion at current exchange rates) to provide 11% subsidized loans to companies in the industrial and agricultural sectors.
  • On Aug, 27, Sisi also ordered the government to grant a five-year exemption from all taxes, except VAT, to industrial projects in yet-to-be-defined strategic sectors, provided they are completed and operational in a maximum of three years.
  • On Sept. 5, Bloomberg Asharq quoted a government official as saying that seven industries have so far been chosen to receive these exemptions, including textiles, electronics, petrochemicals, green hydrogen, solar energy, electric cars and mining.
  • The Egyptian president ordered on the same day to expand the types of projects that can obtain golden licenses. He instructed that these single approval licenses — which do not waive requirements but rather streamline bureaucratic procedures — be granted to all projects that boost local industrialization.
  • Among the foreign companies that have been granted a golden license this summer are electronics giant Samsung and its new mobile phone factory in Beni Suef; Chinese multinational home appliance maker Midea Group, which will invest $25 million to expand its production lines in the country; and a $100 million, 500 MW wind farm in the Gulf of Suez led by a consortium comprising France’s Engie, Japan’s Toyota and Eurus Energy, and Egypt’s Orascom.
  • In the state budget for the current FY2023/2024, the government has set aside an unprecedented allocation of EGP28 billion ($1 billion) for export subsidies, representing an increase of over 350% compared to last year according to the independent Egyptian outlet Mada Masr.
  • Egyptian authorities have stepped up efforts to capitalize on its special economic zones, especially the one along the Suez Canal, to attract foreign investment in export-oriented industrial projects.
  • In FY2021/2022, the latest year for which complete data is available from the CBE, Egypt’s exports reached $43.9 billion, a 70% increase since FY2017/2018. The government’s target is to reach $60 billion by 2025.
  • Of total exports in FY2021/2022, fuel and mineral oils made up 41.4% (compared to 34.7% in FY2017/2018), while finished goods accounted for 37% (compared to 40% four years earlier), according to CBE figures. These percentages remained largely stable during the first half of FY2022/2023.
  • Despite government measures aimed at boosting local industry, the IMF expects its expansion to be moderate and anticipates that the services sector will contribute almost three times as much to Egypt’s economic growth over the next four to five years.
Alternative Scenarios:

Scenario 1: Persistent economic headwinds, limited structural reforms stall the industry 

Inflationary pressures, rising production costs, problems with the supply and import of commodities, lack of clarity on the exchange rate, a continued shortage of dollars and high interest rates lead to stagnation or even a decline in industrial activity and production. The need to increase wages for workers in the context of a sharp drop in their purchasing power and greater labor unrest adds further tension. Under this scenario, the government’s plans to boost industrialization prove overly ambitious and yield minimal direct results.

Scenario 2: Renewed, serious push for reform injects optimism in the industrial sector

Egyptian authorities resume and accelerate their ambitious economic reform program, including the liberalization of the exchange rate, the privatization of state-owned and military-owned firms, and the gradual withdrawal of the state from certain economic sectors. These moves inject greater optimism and some confidence in the recovery of the market, which has already been noted since July — albeit modestly — by S&P’s Purchasing Managers’ Index (PM). The non-oil industry subsequently comes out of contractionary territory and expands, supported by targeted government stimulus measures.

Conclusion - Most Likely Scenario:

The most likely scenario is that the Egyptian authorities’ push to develop local industry will yield limited results in the medium term, and only in specific sectors. So far, most of the measures adopted by the government have been in the form of stimulus packages aimed at attracting and facilitating foreign investment and the establishment of industrial projects. But less attention has been devoted to ambitious structural reforms, including clarity around the exchange rate, reducing the influence of the state — and particularly the military — in many attractive sectors of the local economy, and leveling the playing field for the private sector. Deep-rooted shortfalls such as access to finance, the promotion of sectors with higher added value, poor labor conditions and low industrial productivity have also received limited attention. Without addressing many of these issues, only those industrial sectors that are particularly well positioned to offer a product already in demand abroad, such as fertilizers and petrochemical products, are likely to expand substantially in the short to medium term.

Contributor Background:

Marc Español has been reporting on Egypt since 2017, with a focus on the economy and the human rights situation in the country. He has been a contributor to Al-Monitor since 2018 and his work has appeared in other publications such as El País and the think tanks Fundación Alternativas and the European Institute of the Mediterranean (IEMed).

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