The private sector is the beating heart of any economy, often making or breaking development and growth efforts. That’s been the case in most countries and also the case in Egypt, where the private sector has a set of unique characteristics but also unique challenges. The International Finance Corporation (IFC) 2020 report, titled Creating Markets in Egypt: Country Private Sector Diagnostic, delves deep in all the different aspects of the sector in Egypt, and we follow suit by highlighting key findings and recommendations of the report.
First things first, how big is the private sector in Egypt? In FY2019, it reached almost 70% of the GDP, up from an average of 64.8% over the past two decades. Traditionally dominant private sector industries, like agriculture and manufacturing, are increasingly taking a backseat to now-booming industries like real estate and construction.
“The public sector, in contrast, represents almost one third of GDP and remains an important player in domestic markets, with a marked presence (measured as share in sectoral GDP) in oil and gas extraction, oil refining, electricity, and water, as well as financial intermediation and insurance,” explains the IFC 2020 report.
An overwhelming majority of Egypt’s private sector firms are microenterprises employing up to only 5 employees, which the report suggests implies a difficulty of growing on part of Egyptian firms. 30 percent of Egypt’s private sector is located in Greater Cairo and Alexandria, which collectively make up 40 percent of the sector’s employment. Upper Egypt, on the other hand, has only a 17 percent share of private enterprises in Egypt. This geographic concentration of private sector activities naturally reinforced the notion of a central economy and internal migration – which potentially lead to more challenges.
“More than half of firms conduct wholesale, retail, trade, and repair activity. Manufacturing industries, despite being the second largest sector, account for only 11.5 percent of total establishments. The distribution of employment by economic sector reflects the same profile. More than 42 percent of employment is concentrated in wholesale, retail, trade, and repair activity; manufacturing industries, the next largest activity, provide 21 percent of private sector employment,” reads the IFC 2020 report.
While it helped cushion Egypt’s economy from global market crises at some points, informality presents a major hurdle for the sector’s growth. In an IFC survey, 61 percent of firms said they had no commercial register, and 71 percent no insurance number. Such businesses often find themselves with no support networks or access to government stimulus package because of their informality status.
Another linked but separate structural issue is the private sector’s low reliance on financial institutions. The number of private enterprises that borrow to “start, operate, or expand a farm or business is far below Egypt’s peers,” explains the report.
What about exports?
Any healthy economy works towards increasing its exports, and Egypt’s is no different. The 2016 devaluation of the Egyptian pound was expected to greatly boost Egyptian exports, but the increases were rather modest. In 2018, goods and services exports reached 19 percent of the GDP, while similar economies like Morocco and Tunisia stood at 40 percent and Turkey at 30 percent. That makes the per capital export of goods and services in Egypt stand at $440, far below other economies of similar size.
“These products have relatively limited employment impact and are often supported by distortionary incentives, such as subsidized energy prices. They are also homogeneous products, so the devaluation impacts are likely to be larger than for more sophisticated products. Services exports are dominated by transportation (primarily fueled by Suez Canal revenues) and travel (tourism services), which together constituted about 87 percent of services exports in FY2019,” reads the IFC report.
That’s not to say there hasn’t been a marked increase in exports since 2015. However, only three products accounted to more than half of that increase; oil; urea; and gold.
While Egypt’s geostrategic location gives it potential advantages and easier access to major markets, its products have a low export value. The IFC report highlights the difference between Egypt and Turkey (due to their similarities) in this regard; where Egypt in 2018 exported 2063 products, with each product going to an average of nine countries; whereas Turkey exported 4210 products, each going to an average of 30 markets.
Due to these factors combined, in addition to Egypt’s exports being mostly ‘primary commodities and less sophisticated products,’ its participation in global value chains is lower than similar economies. More sophisticated products could help Egypt move up the chain; however their production in Egypt is hindered by the cost, unavailability of high-quality critical inputs and technology, as well as efficient transport and logistics services.
“However, Egypt has been diversifying its exports into more complex products, which creates an opportunity to expand further, especially in products for which global demand is rising. Over the years 2003–18, about 7 percent of the total export share came from new products. A number of them are products with higher complexity, specifically in the chemicals and electronics industries,” explains the report, adding that demand for Egypt-made products like motor vehicle parts is expected to grow at 12.5 percent between 2017 and 2022, ‘and various chemical products, such as plastic plates, vulcanized rubber, and pigments, are expected to experience significant growth.’
Other factors also come into play, like the fact that Egypt’s trade protection measures continue to ‘undermine both domestic competition and export competitiveness.’ On that, Egypt imposes high external tariffs, making it the second-most-protected economy in the world after Sudan – particularly protecting processed food and beverage industries and essential consumer goods like soap.
“For such lower-value products that are more important in the consumption bundle of poorer households, particularly amid COVID-19 pandemic, high protection may limit domestic competition, reduce availability of some of these essential health products and medical supplies, and raise prices, and thus reduce the welfare of such groups amid their reduced household income due to economic disruptions.”
The vagueness of decision-making when it comes to tariffs also constitutes another major non-tariff barrier.
All in all, Coivd-19, despite the damage it has inflicted upon world economies, presents Egypt with a chance to “position itself as an attractive location for manufacturing firms as they rethink their investment strategies for the recovery phase.”
“Trade policy reforms, particularly a streamlined and reduced tariff regime, along with speedy customs clearance and trade facilitation measures that use automation and minimize physical interactions, will be critical to reduce the spread of the disease,” reads the paper.
Read the full IFC report here