It is a well-established fact that exports can be a key driver of economic growth and recovery, because securing a place in global value chains comes after increasing competitiveness of local products and services, attracting investments, and creating an environment for private sector development in which policies and logistics enable exports. With Egypt’s President Abdelfattah El Sisi ambitiously calling last August for raising Egypt’s industrial investment and its (non-petroleum) exports to $ 100 billion over the next 3-4 years, there is a strong political to place export promotion as a national priority. Minister of Trade and Industry Nevin Gamae stated on several occasions that efforts to achieve this target would include logistical facilitation, addressing obstacles facing exporting businesses, and opening more markets for Egypt with a focus on expanding exports in Africa.
In Business Forward’s new series “What will it take for Egypt to reach $100 billion of exports?”, we discuss this question with industry leaders who share their experience-based visions and recommendations for Egypt’s ambitious endeavor with expanding exports. In the first part of the series, we speak to Maha Saleh ’02, government affairs and public policy director at NGage Consulting. She is also an expert in foreign trade and the former executive director for the Engineering Export Council of Egypt.
Is the $100 billion exports target feasible soon?
Most of our manufacturing industries produce at less than 50 percent of their production capacity, due to several challenges in many areas, such as market opportunities, logistics, quality and product certification, skilled labor, and more. Addressing all these areas needs a collaboration effort from the different stakeholders involved, not only the Ministry of Trade and Industry.
In some sectors, you need to work on attracting investments to fully utilize or expand your production capabilities or for the technology transfer. In other sectors, you need to work very closely with transportation and aviation for logistics solutions. When this collaboration is achieved, the target could be achieved.
Despite the huge currency depreciation in 2016, Egypt is performing less than peers like Tunisia, Turkey and Morocco when it comes to exports. What barriers and challenges do you see as the most pressing?
Egyptian exports did not increase with currency liberalization as the industry depends on imported components and raw materials.
The Ministry of Trade and Industry has been adopting many initiatives to substitute imported components with local manufacturing, trying to link the Small and Medium Enterprises (SMEs) to the big corporates that exist in Egypt.
However, to be able to sustain this process, the private sector should be the main champion of that, to transfer the necessary skills and knowhow and maintain the quality of the suppliers.
Big local manufacturers and multinationals working in Egypt should focus on developing their local suppliers, which will eventually affect their cost structure and competitiveness. Many of the government policies are working on giving incentives the more you have localization. The more we work up the value chain, the more we can benefit from the government incentives as the added value of the product in increased. However, still much more programs are needed to stimulate the private sector.
From your experience, which sub-sectors have a competitive advantage and potential to place Egypt on global value chains? Which are Egypt’s most significant current and potential markets?
The competitive advantage of a sector is very much linked to the market. Different strategies should be formulated for each sector with its specific markets. For example, Africa is not a potential for all sectors.
Each sector has different sub-sectors with their unique characteristics and specifics, but the following are some generic assumptions about export target markets.
These are very generic assumptions. Each sector has different sub-sectors with their unique characteristics and specs. Although Egypt is a country that enjoys a high number of preferential agreements, not much of our exports is capitalizing on that. The MENA region is a dominant market for our exports, followed by Europe. We should be looking more into the African Continental Free Trade Area (AfCFTA) countries.
80 percent of our exports comes from chemicals, building material, engineering products, food, agricultural products and textiles. A leap could be achieved, if we focused our resources on these sectors. And by the word resources, I mean streamlining all efforts (government, international entities, private sector) in the same direction towards the same target. The enabling environment is a key factor, [which means] providing access to market, information, finance, technology, training and certifications.
What policies/developments do you see as the most promising?
Egypt is working on providing many of the mentioned factors. The country worked hard on the transportation side, providing ease of connectivity. This was reflected in the Global Competitiveness Index, in which Egypt jumped up 90 ranks in 2019 in the quality of road infrastructure, leaping to the 28th place up from the 118th in 2014.
On the UN Global Knowledge Index 2020 Egypt jumped 10 places in one year. Egypt ranks 15 out of 36 countries with high human development. Egypt advanced in all indicators, moving up 23 ranks in the Technical, Vocational Education and Training sectoral index, and 11 ranks in Pre-University Education.
Egypt has also worked extensively on special economic zones. The SCZone is a special economic zone that gives many privileges of establishing a business there as the running costs are less. Your imported materials are exempt from duties, and access to ports is facilitated with the aim of facilitating exports worldwide.
What is the role of trade promotion bodies in the process of expanding exports?
Trade promotion bodies such as the export councils and export development agencies support in providing access to all the mentioned pillars. They diagnose what the private sector needs and tailor activities to fit their needs. The councils take a “market driven approach”, where the market needs are first identified, and production is adapted according to global trends. They match businesses with the export opportunity. In order for this to take place, they support in qualifying the company and the product to match the identified potential market opportunity. Market intelligence is the starting point to be able to identify the potential market for each product. They work hand in hand with the company to expand their global markets. The assessment tools used help direct the assistance of the councils to the company’s weak spots.
In your opinion, what role could governments play in directing investments to priority areas and incentivize local firms to compete in global markets, especially towards more complex manufacturing?
The country should take both a bottom-up and top-down approach to involve all stakeholders in formulating an export development strategy with a detailed action plan that identifies roles for each stakeholder. This will help us maximize the usage of our resources, not duplicating efforts and thus we will be able to identify the gaps in the cycle in which international organizations can help with through the development projects directed to Egypt.
Engagement with the private sector is essential for pinpointing the areas to which you need to direct investments to as a priority. In this way, the government helps in developing the whole supply chain of the competitive sectors or products, and can ensure and sustain the country’s market share in the global markets.
In my view, the government needs to make sure to deal with the private sector challenges and tailor the country’s offerings, programs, incentives to deal with their problems. This needs to be done bearing in mind that the challenges of big local and multinational companies to function and expand are different from those of SMEs. Dividing them into two pools is essential to address the problems of each pool. Addressing the problems of the big ones, is a quick-win approach and is necessary for attracting more big names. In many cases, dealing with these challenges one by one is more effective than incentivizing. Supporting the SMEs in many pillars ensures the diversity of your exports. Usually, it is never one challenge but plenty of pillars you need to work on; therefore, we should make sure that SMEs receive the whole package of support: technical, financial, and marketing, rather than only one aspect.
What international experiences could we draw lessons from?
Many of the Business Support Organizations in other countries make it a must to receive support in all the areas. For example, if companies asked for finance, they need to receive the technical support, if they asked for fair participation, they need to obtain necessary quality certifications, and so on. We need to make sure they receive all support they need in all disciplines for them to sustain in global markets and compete. I also liked the Indian experience, as there are technology centers whose main task is to support the manufacturers meet the export opportunities.
I believe we should focus on the ‘Smiling Curve’ concept to be able to increase our added value to any manufacturing product.
This concept was developed in the 1990s by a Taiwanese company depicting two ends of the value chain, where you need to either work on the Research and Development (R & D) on the product to increase its value added at one end, or increase the services and marketing accompanied with the product to increase the value added at the other end.
With the way the ‘Smiling Curve’ is represented, the Y-axis for value-added and an X-axis for value chain (stage of production), the resulting curve appears like a ‘smile’.
Digital services could easily complement and add to any product on one side; and on another side it can add to the means of marketing and selling the product. With the current situation of COVID-19, all industries should start exploring this area.
How has COVID-19 impacted the manufacturing sector in Egypt? (in terms of attracting FDI, in terms of creating new demand and new markets)
COVID-19 showed that the manufacturing industry is agile. We saw big local corporates starting right away to add ventilators to their production lines especially those producing home appliances and auto parts as they have similar production facilities, and others in cosmetics who switched to alcohol sanitizer, those in textiles switched to medical masks and more. Also, the pandemic brought in many SMEs, as the SMEs are more flexible in adapting their business. With every challenge, there is an opportunity, and the SMEs tried to seize the opportunity right away. SMEs who were not agile enough, were lost unfortunately.
At that stage, strong government entities are needed for market surveillance and compliance. International standards must be followed to export and meet the external demands.
At this moment with global trends going towards a partial shift away from China (not putting all eggs in one basket anymore), it is extremely important to showcase Egypt’s potential in attracting investments, and direct them to certain sectors. With Egypt’s proximity and improved logistics, it could be a hub to export to other regions, either the rest of Africa -especially with AfCFTA into act- or the rest of the world.
What would you put in a quick prescription to boost exports?
– Improving trade across borders (time frame for export & import)
– Developing an action plan for boosting exports by identifying thrust products and thrust markets and the role of each stakeholder.
– Streamlining all efforts and resources: government, private sector and international development agencies, to achieve the plan. Through this mapping, gaps could be identified and dealt with.
– Establishing industrial incubators and technology centers that help manufacturers meet the export opportunity, making sure that companies have access to the technical, financial and marketing support pillars.
– Addressing the challenges of the big local companies and multinationals on a case by case basis. Many of the times, it is more effective than incentivizing.
– Capitalizing on the young population, developing their skills and knowhow, linking the large pool of entrepreneurs and start-ups to industry to add to their services and marketing channels, and bring them up the smiling curve.