With the Egyptian pound losing more than 55 percent of its value in the past eight months, economists and industrial experts debate the hidden opportunities that can come out of this seemingly economic predicament and how businesses, especially manufacturers and exporters, can benefit from such devaluation.
At the Business Forward annual event, held on December 4, a panel discussion titled, “What does the devaluation mean for business, industry, and exports?” featuring prominent panelists was a platform for a conversation about the topic. Moderated by Hany Genena, economist and adjunct professor of management at the AUC School of Business, the panel included renowned banker Hisham Ezz El Arab, non-executive chairman of the Commercial International Bank (CIB) and managing partner of HE Advisory, and Maha Saleh, foreign trade and public affairs expert.
Is there a benefit from the flexible exchange rate, and how does the system operate?
“In the past, we used to focus on interest rates, exchange rates, and the size of reserves as objectives while they are tools, not objectives, and those tools are used to reach price stability. In order to achieve that, the government needs a very tight monetary policy and fiscal discipline. Without both, you will remain in a vicious cycle. Over the past 50 years, we were not practicing what we preach. We did everything other than trying to reach price stability thinking that the exchange rate is part of our dignity,” Ezz El Arab explained.
Ezz El Arab also explained the role of currency indexation as two main things. First, to guide the domestic policies of the central bank to get the currency to its fair value. Second, to understand a country’s competitive edge compared to its trade partners.
Egypt’s main challenges to increasing exports and attracting more FDI
With a bit of pessimism, Saleh explained that one main impediment to increasing exports is that Egypt needs to find its competitive advantage and added value. With regards to FDI, she forecasts that there won’t be a lot of FDI next year as businesses need to adjust to the changes in the economy and the business environment, and this adjustment takes time. Legislative and regulatory frameworks could be either attractive or repelling to investors, and this needs to be addressed. Also, lots of bureaucracy stops the inflow of FDI.
“The private sector needs to feel they are allies to the government. They need to feel they can point out the bottlenecks before the legislation comes out and probably go further and find out solutions with the government and try to avoid these bottlenecks and achieve the same target at the end,” Saleh added.
On the same topic, Ezz El Arab advised Egyptian producers to explore the African export market. “You go to a supermarket, for instance, in Nairobi or Rwanda, and you look at the canned food there. Where does that come from? From the UAE. You go to West Africa, and the biscuits in the room are coming from Turkey. Morocco is exporting cars to all African countries. Where are we in the middle of this? We are not there,” he added.
He explained that the business community in Egypt needed to change its mindset regarding exporting to the EU and the US as the profit margin exporting to these regions is extremely thin, and these markets are incredibly competitive. He added that exporters needed to get out of their comfort zone and invade those markets where Egyptian products have a competitive advantage.
“You don’t expect the government to do everything. The government has signed a free trade agreement with African countries. Every time I see ambassadors in one of the African countries, I find that they are starving for Egyptians to go and open businesses there. They are willing to go out of their way to help the Egyptian business community export its products there,” he added.
What about regional competition from Turkey and Morocco regarding taking Egypt’s share from exports and attracting more FDI?
“When we think about exports, we need to go back to the godfathers of economics Adam Smith and David Ricardo and what they told us regarding this. They told us that a country should focus its efforts on producing what it can produce best in the most economic and efficient way. This is the key,” said Saleh.
Elaborating more, Saleh highlighted the Indian experience during the past decade and explained that their success story could be attributed to two main pillars. First, they developed a strategy with “thrust markets” and “thrust products” where they linked their products with the markets they were targeting. Second, they launched an initiative called ‘Make in India’. This initiative marked a total change in the mindset of the Indian government that enabled it to attract more investors. Its key strategy was “minimum government and maximum governance”. The less interference of the government in the ecosystem, the more the private sector can engage easily and freely in the market. This is the main mindset,” Saleh elaborated.
Capitalizing on the Indian example, she advised that in order to attract investors, government institutions needed to adopt an enabling mindset of facilitating the process for investors to initiate and do business instead of creating obstacles, such as the long timeframes for obtaining licenses.
Is Egypt capable of exporting technology?
The short answer is yes. Saleh believes there is great potential, provided that there is an investment in the right caliber. She explained the main pillars of the digital economy that could provide opportunities for investment expansion. First is the app economy, where Egypt has a few successful individual cases but the whole ecosystem needs to be nurtured in order to make use of this growing economy, especially that 95 percent of the app economy in Egypt is developed by developers outside Egypt like India, China and Turkey. Second is the gaming industry, which Egypt also has a great potential in due to the abundance of young talents. Third is the digital arts-related applications.
“We are talking about a huge market. For instance, the size of the app economy is about two billion users per year,” she added. “Egyptians are talented, and we can use this to brand Egypt, and you have the young, educated pool that you need to empower in order to employ in this area. For instance, in the manufacturing sector, in a medium-sized enterprise you can employ from 2000-4000 employees. While you can train more than 4000 people a week in the digital sector and they can meet all these kinds of demands that are quantified in numbers as opportunities. Egypt could be a hub for that,” Saleh added.
Ezz El Arab emphasized the importance of the digital economy by highlighting the importance of preparing the ecosystem in Egypt for this tech transformation that is inevitable. This could be achieved by increasing the capacity of data centers and data storage to serve businesses. He also mentioned that connectivity and internet stability is still a major issue in the Egyptian ecosystem. “Unless you have a high-speed stable internet you won’t have a growing digital economy,” he explained.
Egypt: Manufacturing hub or a services provider?
Ezz El Arab believes that Egypt is capable of excelling in both sectors. “Definitely, you can do both. You have enough land; you have enough energy to serve the industrial sector, but you don’t have simple rules to encourage manufacturers to do business. Another important thing manufacturers should consider is the local market as a hedge for their businesses, not the target,” he explained.
Saleh emphasized the same idea that Egypt could work on both sectors. She added that the trade balance is what matters when it comes to exports and imports. She mentioned the example of China being the second largest importer in the world, aside from being one of the largest exporters. She mentioned that Egypt had about 11 percent of export contribution to its GDP and that it needed to increase that to at least 35 percent, like Morocco and Turkey. Addressing the enabling environment is the key. Saleh referred to the State Ownership Policy Document as a successful example of how public-private consultation should be done and could be done for other policies and regulations as well.
Approvals requested by businesses from government agencies should have a time limit, believes Ezz El Arab. A declared strategy with Key Performance Indicators that all the stakeholders are accountable for is what Ezz El Arab concludes to be what Egypt needs in the next phase to boost private sector activity and exports.