New Egyptian trade deal could boost regional economies

After seven years of negotiation, the signing of the Tripartite Free Trade Agreement (TFTA) in June 2015 at Sharm El Sheikh is being heralded as a turning point in regional integration, and a significant boost for Egypt’s efforts to increase its exports to the fast-growing markets of sub-Saharan Africa. According to news reports following the signature of the TFTA, the ministry of trade and industry estimated that Egypt’s trade to Africa will nearly double over the next three years, to $5bn.

While there is substantial potential for the TFTA – nicknamed the Cape to Cairo trade agreement – to significantly deepen economic ties across the continent and further boost intra-regional trade – which currently stands at roughly one-tenth of overall trade volumes – the scope and complexity of the undertaking are likely to delay the most meaningful benefits of the TFTA for Egypt and the rest of Africa.

While all 26 member states have signed an agreement, implementation will be the next step. The regulatory regimes governing the three participating regional economic communities (RECs) and the different member states will need to be harmonised, which could push the effective start date of the TFTA beyond the anticipated deadline of 2017.

Trade Specifications

The TFTA is an economic integration initiative pursued by three of the continent’s RECs – the East African Community (EAC), the Common Market for Eastern and Southern Africa and the Southern African Development Community .

Once implemented, the agreement will create a 26-member integrated economic entity spanning Egypt to South Africa, covering some 17.3m sq km and creating a market of around 632m people, equivalent to more than half the population of Africa. With a combined GDP of $1.2trn, the new trade bloc would account for around 60% of the continent’s economic activity, making it a powerful force for commerce. The agreement seems set to evolve over time as well.

Notably, the agreement establishes a framework to incorporate other Central and West African nations that were excluded from the initial agreement at a later date, paving the way for an even larger trading zone. While the signing of the agreement in Sharm El Sheikh – which hosted another symbolic milestone for the country’s economy in February with the Egypt Economic Development Conference, resulting in more than $30bn worth of investment commitments – marks a key waypoint for continental integration, the agreement still has several hurdles to overcome.  All countries have yet to sign the final agreement, and the TFTA will still need to be ratified by the legislatures of each state. National laws and tariff structures will also need to be adjusted to reflect the terms of the deal, as negotiations continue over rules of origin, trade remedies and dispute settlements.

Deeping Ties

The TFTA, which is based on the pillars of market integration, infrastructure expansion and industrial development, is an important step towards the broader goal of economic integration across the continent, as envisaged in the 1994 Abuja Treaty on the Establishment of an African Economic Community, signed under the auspices of the Organisation of African Unity.

Africa remains the least economically integrated continent in the world in terms of intra-regional trade flows. While intra-continental trade accounts for around 40% and 60% of total trade in the Americas and Europe, respectively, that figure stands at just 12% for Africa. The EAC has seen greater progress in this regard than other regions on the continent. While intra-regional trade in both ECOWAS and the Arab Maghreb Union in West and North Africa accounts for one-tenth of overall trade volumes, the EAC averages around 30%.

Procedural Constraints

The low volumes are in part a result of the wide range of obstacles that exporters face in Africa. According to the World Bank’s “Doing Business Index”, Africa’s distance to the frontier ranking – which measures the ease of trading across borders on a scale from 100 for the best performers to zero for the worst – averages around 50. That rises to 70 for North Africa, but remains well behind the OECD average of 86. The number of documents required to export in Africa is twice the OECD average, and in some countries, like Cameroon, it is three times the OECD average. At 30 days, it also takes three times as long to export a container as OECD countries – although again, North Africa offers better results, at 19 days – and costs roughly twice as much (although for North Africa economies, the World Bank notes that the difference with OECD countries is minimal).

Egypt tends to perform far better than the vast majority of sub-Saharan Africa countries in this regard, with well-developed infrastructural links and easy access to key trading routes (see Transport chapter), as well as less of a procedural burden and cost. On average the cost to export a container in Egypt is roughly half that of the regional average, and only modestly higher than that of OECD high income countries – although there is scope for improvement on the import side.

Ultimately, these procedural constraints and bottlenecks limit the ability of exporters and importers in the market to access foreign clients and foreign suppliers, driving up the cost of business and – when looking to trade with neighbours – significantly limiting integration. Indeed, for many producers in sub-Saharan Africa, it is easier, cheaper and faster to trade with an OECD country than with a client in a neighbouring economy.

Egypt’s Pivot

As a result, the free trade agreement and all that it entails offers significant opportunities for most of the member states, but perhaps none more so than Egypt, who in recent months has sought to accelerate the strengthening of trade and investment links with its neighbours to the south. Egypt is a major exporter in a number of key segments where demand in Africa is particularly high, although the country’s overall trade balance with external partners has remained in negative territory since 2004, as imports demanded by a rapidly expanding economy have outpaced export growth. In the 2014/15 financial year the trade deficit stood at LE284.4bn ($38.8bn).

The nation has, however, established itself as a sizeable exporter of oil and other mineral products – crucial as inputs not only for import-dependent energy-consuming industries such as cement factories in Ethiopia or manufacturers in Kenya – but also chemicals, agricultural products, livestock and food products. Its most significant imports, many of which are primary imports that are later exported as manufactured goods, are mineral and chemical products, agricultural products, livestock and foodstuff, machinery and electrical equipment and base metals.

Current Partners

Currently – as is the case with most emerging markets in Africa, and the majority of the other member states in the TFTA – the nation’s largest single trading partner is the EU, which accounted for 33.8% of total exports in the period from July to December 2014, according to Ministry of Finance (MoF) data. Trade with the EU has been greatly facilitated by the 2004 EU-Egypt Association Agreement, which established a 12-year trade liberalisation programme.

This has not prevented the country from looking to diversify and Egypt has several other well-established trading relationships. This has been most visible in recent years through the expansion of its trading activity with Arab countries. Trade with Arab states has inched up from 19.9% of the total in 2009/10 to 20.9% in 2013/14, but investment has increased even more dramatically, and the country’s partners in the GCC have played a key role in supporting Egypt’s growth by providing favourable terms for imports of key commodities, including oil, for the Egyptian government. These links are important to Egypt’s efforts to boost export growth, which has levelled off in recent years. The $26.1bn of total exports recorded for 2013/14 represented a modest decrease on the previous year’s $27bn.

Africa’s Potential

However, Egypt has been paying ever-greater attention to its neighbours to the south, with the TFTA only one component of a broader attempt to re-engage with sub-Saharan economies. The country has a long history of trading with African nations, but in recent years, those economic links have fallen by the wayside. Currently, less than 3% of Egypt’s overall trade volumes are with Africa, and no sub-Saharan economy is among the continent’s largest export destinations. Even Nigeria, which with 170m people and a GDP of more than $500bn, is the continent’s biggest economy and largest market, only receives a fraction of a percent Egypt’s exports. To reverse the historical slide, Egypt has over the past 18 months aggressively courted African partners.

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The Report: Egypt 2016

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