Viewpoint: Girgis Abd El Shahid
Given the recent adverse global developments – and as a continuation of the national structural reform programme first initiated in 2016 – the government of Egypt has undertaken several key reforms aimed at alleviating the impact of inflation while ensuring the economy remains stable.
On March 21, 2022 the Central Bank of Egypt (CBE) allowed the Egyptian pound to devalue against the US dollar by around 16% as a means to curb the widening net trade deficit. This was reinforced with several procedural, monetary and fiscal measures, with the goal of addressing the structural challenges facing the economy. These reforms aim to increase GDP by supporting local industrialisation, expanding non-oil exports and attracting increased foreign direct investment (FDI).
Since the first phase of reforms began in 2016, the focus has been on reducing the high import bill. These efforts have been fortified by second-phase measures. Some of these reforms, particularly the CBE requirement that importers use letters of credit to finance imports, were unpopular with some observers. Others were praised, such as Law No. 3 of 2022 amending some of the provisions of the value-added tax (VAT) law providing for the possibility of postponing the collection of VAT on purchased machinery and equipment used in industrialisation.
The reasoning behind these second-phase reform measures is clear: the government is encouraging the economy to move from its reliance on importing many essentials to manufacturing them locally.
Even so, it is important to keep in mind that not all imported products can be replaced with locally manufactured goods, and that the required level of industrialisation will only take place through increased FDI. It is widely recognised in economics that not all shifts to industrialisation lead to the required economies of scale. There are cases where it is more practical to continue importing certain essential and even some luxury products, rather than manufacturing them at home.
For example, the government has been attempting to replace imported powdered milk with locally produced options for years. While powdered milk requires limited technological capacity to manufacture, local production would not be economically viable. When industrial economists were approached to give their perspective on this predicament, the answer turned out to be quite simple: in order to manufacture powdered milk, a company needs livestock, and livestock needs to be fed. The combined bill for increasing the amount of livestock raised domestically and importing the grass that would be required to feed the animals means that the locally produced product would most likely be more expensive than imported powdered milk.
With respect to the second point, Egypt can only attract FDI if the country remains a level playing field, with everyone competing on an equal footing. To this end, it is also worth highlighting that Egypt is continuously working to extend its network of bilateral and multilateral investment treaties, with over 100 such treaties signed as of mid-2022. This assures foreign investors that their investment will be protected. While Egypt is ranked first in the Arab world on the list of countries going through arbitration cases, the country has never considered backing down from its international commitments. It has never even threatened to do so, which affirms its continuing policy of promoting FDI and protecting the interests of foreign investors.
Egypt is embracing a thorough and encouraging reform programme that will certainly yield beneficial results for generations to come. Throughout the reform process, however, it will be important for Egypt to keep its eye on developing the most robust economic ecosystem possible, allowing both local and foreign investment to expand and flourish.
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