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Photo Credit: Cover photo: Aerial view container cargo ship, import-export business logistics, and transportation of International by ship in the open sea: © Avigator Fortuner 887/Shutterstock Internal photo: Aerial top view container ship with crane bridge for load container, logistics import export, shipping or transportation concept background. © Studio concept/Shutterstock Cover design: Rana Al Gazzaz PREFACE TABLE OF CONTENTS LIST OF FIGURES LIST OF ABBREVIATIONS OVERVIEW CHAPTER ONE Recent Economic Developments Drivers of growth are shifting from consumption to investment and net exports. Macroeconomic indicators have reacted positively to the reforms undertaken by the government of Egypt (GoE Net exports became the largest contributor to GDP growth, helped by competitiveness gains of the depreciated local currency, but the exports base remains narrow and concentrated in extracted gas. FIGURE 1 With an influx of capital expenditure to the energy, Public consumption and investments contributed extractives and real estate sectors, private modestly to growth due to their relative slowdown. investment is picking up but remains stifled by the difficult business environment and high interest rates. FIGURE 1 FIGURE 2. On the sectoral side, most of the sectors grew at a FIGURE 3. reasonable pace in FY2018, but concerns remain over the limited drivers of recovery beyond gas and tourism (FIGURE 2). FIGURE 4 Labor market indicators are yet to reflect a broad-based growth recovery The unemployment rate declined, but the recent growth recovery does not seem to fully reflect on all labor market outcomes, FIGURE 5 The chronic problem of youth unemployment is particularly challenging, and it is mainly concentrated among those with university education. FIGURE 4 FIGURE 5. Fiscal reforms are paying off, but important challenges remain Egypt is addressing long-standing fiscal imbalances as a cornerstone of its wider economic reform program. Several reasons may explain the chronic youth unemployment Important fiscal reforms on both the expenditure and revenue sides have led to a gradual decline in Gender disparity also plays an important role in the fiscal deficit. unemployment in Egypt. FIGURE 6 FIGURE 7 Public expenditure reforms are a main pillar of the fiscal consolidation plan and essential to address both the level and structure of spending. Expenditures reforms have mostly focused on reducing inefficient and unsustainable expenditure items. The education and health sectors have yet to benefit from the freed-up resources. FIGURE 6. FIGURE 7. The public sector wage bill has been contained in recent years, but declining real wages may result in recurring wage bill pressures over the medium term. Large interest payments—the budget’s single largest component— exert tremendous pressure on the budget and undermine government efforts FIGURE 8 to spend on priority areas. FIGURE 9 FIGURE 8. FIGURE 9. Large public debt ratios weigh on the public budget FIGURE 10 and have led to rising debt servicing costs. On the revenues side, higher levels are needed to create fiscal space for growth-enhancing public spending in areas such as infrastructure, healthcare, and education. FIGURE 11. TABLE 1. Inflation receded but remains elevated, with adverse effects on socioeconomic conditions and investment decisions FIGURE 12 FIGURE 11 While recent episodes of high inflation were induced by transitory cost, fiscal factors contribute to the persistence of relatively high inflation rates, even in the absence of acute shocks. Markets dynamics and prices could benefit from increased competition. Structural factors related to the degree of competition in the economy and the efficiency of goods markets may also explain persistent high inflation in the economy. FIGURE 11 FIGURE 12. FIGURE 13. High inflation disproportionately hurts the poor and those living on fixed income, and complicate investment decisions. FIGURE 14. External position improved markedly; non-oil exports are yet to catch-up The balance of payments (BOP) has improved remarkably, helped by a narrowing current account FIGURE 15. deficit FIGURE 13 FIGURE 14 FIGURE 16. FIGURE 17. Services are largely contributing to the narrowing of current account deficit, with tourism showing FIGURE 16 strong signs of recovery. The trade deficit narrowed, helped by an increase in exports proceeds while import payments remained constrained. The capital and financial account surplus declined in the aftermath of the emerging markets sell-off in 2018. FIGURE 18 FIGURE 19 FIGURE 18 The oil and gas sectors remain the engine of incoming FDI, driven by the expansion in exploration and production agreements with international oil companies. FIGURE 20 The GoE had started a range of reforms on The Egyptian pound has regained flexibility after investment facilitation being steady for around 8 months, which is critical to safeguard competitiveness and help cushion against external shocks. FIGURE 20 Tight monetary conditions and large financing needs have adverse effects on private sector credit The CBE has resumed a monetary easing cycle in February 2019, following several months of tightening policy. Net foreign assets in the overall banking system Domestic credit is primarily and increasingly (CBE and banks) is bouncing back after a steep extended to the public sector. decline started in May 2018. FIGURE 21 FIGURE 22 The banking system is financially sound. . FIGURE 21 FIGURE 22. Risks and challenges originate from debt and extra-budgetary activities Loose fiscal policies have historically contributed to an accumulation of public debt, with increased external debt in recent years. Domestic government debt has a challenging maturity structure, with about half of outstanding debt issued on a short-term basis (less than one year). FIGURE 23 FIGURE 23 Egypt’s debt-to-GDP ratio is declining but remains high and subject to significant risks. Apart from the elevated level and risky structure of Egypt’s government debt, there are challenges pertaining to its management. Economic Outlook Real GDP growth is expected to continue rising gradually to reach 6 percent by FY2021, from 5.3 percent in FY2018. Important risks remain with regards to extra- budgetary government units and public corporations, considering their complex and non- transparent links to the State budget. Total government debt is expected to decline but external debt-to-GDP ratio is expected to have risen in FY2019 due to the relatively heavier Private investment is projected to continue rising, reliance on external financing. assuming an effective implementation of business climate related reforms Overall fiscal deficit target for FY2019 is conceivable, although reaching a 2 percent primary surplus remains a challenge. The external accounts are expected to remain favorable over the forecast trajectory Egypt remains vulnerable to global slowdown and regional shocks, and the associated volatility in capital flows. Annex 1.1 – Main Macroeconomic Indicators FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 Pre- Actual Actual Actual Actual Actual Forecast Forecast Forecast Actual Real Sector and Prices Public Finance (percent of GDP) External Sector (percent of GDP) IN FOCUS From Floating to Thriving: Taking Egypt’s Exports to New Levels Egypt is yet to meet its export potential FIGURE 24. Egypt’s exports potential has been historically hampered by several domestic market distortions and multiple barriers. FIGURE 25 FIGURE 24 The liberalization of the exchange rate in November 2016 was necessary to correct for the exchange rate misalignment but is not sufficient to guarantee a notable improvement in export performance. FIGURE 25 FIGURE 26 Historical trends also show that improvements in FIGURE 27 export performance have been short-lived, indicating difficulties in sustaining progress. This reflects a persistent inability to benefit from higher globalization trends, possibly due to the existence of high trade costs, before and at the country’s borders. The destination for Egypt’s exports has gradually shifted away from the USA, but exports remain limited to traditional markets. The production and export landscapes To understand why Egypt is not well integrated into global markets, one must look first into the production range as the basis of any trade potential. FIGURE 27 FIGURE 26 The product space has also evolved through the years, but the range of exported products remains difficult to expand. , FIGURE 28 FIGURE 29 comparative advantage FIGURE 29 FIGURE 28 The analysis of Egypt’s exports basket reveals that the largest exported products are not necessarily those in which Egypt has the highest revealed FIGURE 30 Only a few products in which Egypt specializes and expands are matching the growth of global demand. Regional integration, a forgotten agenda? While Egypt is a fairly open economy, its regional FIGURE 30 integration has lagged behind, reflecting limited trade ties to North Africa or the wider MENA and Africa regions. Egypt’s geographical location has always been acknowledged as one of its major assets, together with its large and diversified economy. regional trade partners. Empirical evidence shows that Egypt is not meeting its potential as expected from its different characteristics and those of its commercial A more concerted harmonization of standards and partners. customs procedures, services and regulatory environment, could have contributed to a higher level of intraregional trade. Explaining the untapped potential Despite significant reforms and liberalization efforts, significant trade barriers prevent the country from fully exploiting its trade potentials and maximizing its gains from trade. Egypt has signed several preferential trade agreements (PTA), including important ones with FIGURE 31 Tracing Egypt’s tariffs policy over time shows that applied tariffs have dropped significantly over time. FIGURE 31. Non-tariff measures: from legitimate objectives to trade barriers While non-tariff measures (NTMs) are meant to provide legitimate objectives, they are often used as a protection mechanism for domestic production. Significant trade barriers prevent Egypt from meeting its potential, including administrative, technical and sanitary measures. An administrative burden results from the lengthy procedures, heavy documentation requirements and costly clearance process for imported and exported goods. This administrative burden reflects complicated procedures, as well as other non-trade related concerns. TABLE 1 Indicator Egypt MENA Lower Middle OECD Income Time to export Documentary compliance (hours) 88 67.9 64 2.4 Border compliance (hours) 48 58 72 12.5 Cost to export Documentary compliance (US$) 100 244.6 140 35.2 Border compliance (US$) 258 442.4 403 139.1 Time to import Documentary compliance (hours) 265 75.5 71 3.4 Border compliance (hours) 240 105.4 99 8.5 Cost to import Documentary compliance (US$) 1,000 269 209 25 Border compliance (US$) 554 536 503 100.2 Other cumbersome NTMs and quantitative restrictions imposed by Egyptian authorities, compounded by infrastructure challenges, undermine exports growth. Technical requirements and sanitary and phytosanitary (SPS) measures applied by partner countries are also important obstacles to Egyptian exports. Strategic location but limited connectivity Despite its strong location advantage and proximity to potential markets, Egypt has limited physical connectivity to global markets and weak domestic transport facilities. While connectivity on its own cannot not bring about increased trade, both international and domestic connectivity need to be improved to realize the trade opportunities. FIGURE 32 FIGURE 32 Beyond the country’s borders and gateways, logistics processes and institutions may also constrain the free and quick movement of goods. Three policy areas to unleashing exports potential Egypt continues to specialize in traditional areas of comparative advantage and limited value-added, as opposed to goods that are subject to high global demand. FIGURE 33 FIGURE 33. FIGURE 34. FIGURE 34 Significant administrative and technical barriers add layers of cost and complexity to trading firms, hereby undermining their ability to engage in trading across borders. Connectivity, infrastructure and logistics challenges undermine exports growth, as they hinder the movement of goods including across borders and increase product losses from inefficient transportation and storage. References Annex 2.1 The Gravity Model to Assess Trade Performance12 Contigij, Colij, ComLegij, ComLangij and Landlocked Fij = G ∗ Mi ∗ Mj / Dij = − = 0 + 1 / + 2 / + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 + 12 + + + = / Xijkt j k; / and / ; lnDistij