Cairo working to improve investor appeal of its industrial sector

06 April 2010

Egypt is well-placed to emerge as the region’s industrial powerhouse as market reforms increase export levels and investment flows into the sector

Cairo has spent much of the past 10 years projecting its image as the region’s burgeoning knowledge economy, persuading large numbers of information, communication and technology sector blue-chip companies to set up shop in investor-friendly free zones, while developing expertise in call centres, outsourcing and content provision.

In numbers:

  • 17per cent: Contribution of the industrial sector to Egypt’s gross domestic product
  • $7.8bn: Private investments in the industrial sector between 2007 and 2008
  • $9.3bn: Value of Egypt’s exports to the US in 2007-08

Source: Trade & Industry Ministry

Growth driver

Yet the country’s traditional manufacturing sector, dominated by textiles and pharmaceuticals, still generates a larger proportion of the country’s wealth than the high-tech segment of the economy. Of the new companies formed in Egypt in 2008-09, the industrial sector’s 18.5 per cent share was more than double the information and communications technology sector’s share of 7.5 per cent.

The government sees industry as the main engine of economic growth, as it aims  to become the leading regional powerhouse by 2050. Industry – excluding informal businesses – accounts for about 17 per cent of Egypt’s gross domestic product (GDP).

More than 26,000 formally registered industrial establishments employ nearly 2.4 million workers and about 1.5 million work in informal industrial enterprises, representing one-fifth of the Egyptian labour force.

Since the 1990s, the state has implemented wide-ranging reforms in the formerly state-dominated industrial sector, weeding out some of the inefficient state-owned enterprises, and encouraging private investment into the strongest business areas.

It has had a measure of success in this regard. In 2007-08, investments in the sector reached £E43bn ($7.8bn), a seven-fold increase on the 2003-04 period.

Cairo has been working hard to improve the investor appeal of its industrial sector.

In 2005, the Industrial Development Authority (IDA) was formed, under the Trade & Industry Ministry, to oversee industrial infrastructure, approvals, land allocation and to attract investments, while managing 120 industrial zones.

Industrial growth rates were impressive; in 2007-08, when the sector recorded a rise in investment of 8 per cent. However, the global economic downturn brought about a sharp deceleration in growth, which halved to 4.2 per cent in 2008-09.

Real GDP growth by sector

Construction-related sectors were particularly hard hit. Local steel manufacturers lost 38 per cent of their market share in 2009, amid a worldwide collapse in steel prices.

But other arms of Egypt’s industrial sector fared better and there is now a tentative sense of optimism in Cairo that the worst is behind it. The industrial sector recorded 5 per cent growth during the first quarter of the 2009-10 financial year, compared to 4.4 per cent during the same period of the previous year. 

“The overall growth of all Egyptian industrial sectors was very satisfactory, given the financial crisis and its global impact,” says Adham Nadim, executive director of the Industrial Modernisation Centre, a Cairo-based industrial development agency.

“The major industrial sectors that witnessed a remarkable boom in terms of exports were the chemicals sector, with a total growth rate of 151 per cent, the furniture sector, with 239 per cent, and the processed food sector, with a 118 per cent growth rate.”

Egypt’s exposure to the recessionary European markets has had a marked impact on industrial exports.

“Conditions have become more problematic, because even though Egypt’s growth in relative terms is better than many countries, it is still tied to what is happening in Europe where economic growth is limited,” says Angus Blair, head of research at Cairo-based investment bank Beltone Financial.

Crisis measures

The government has undertaken counter-cyclical measures to boost private sector investment in manufacturing sectors, for example cancelling taxes on cement, iron, and steel exports, and freezing the energy subsidy phase-out for energy intensive industrial users. But these have delivered only marginal increases in investment. The £E5.2bn ploughed into the industrial sector in the first quarter of 2009-10 was down on the 2007-08 average of £E10.75bn.

The government is looking to more ambitious medium-term targets for its industrial sector as it plots a way out of recovery. The Trade & Industry Ministry aims to boost industrial growth to 10 per cent by 2013 and double exports from E£92bn to E£200bn over the same period. It has targeted six priority areas where Egypt has a major competitive advantage: engineering machinery and equipment; labour-intensive consumer electronics; automotive components; life sciences; biotechnology and handicrafts.

According to the national industrial development strategy, drawn up by Trade & Industry Minister, Rachid Mohammed Rachid, the short-term focus will be to continue leveraging the existing resource-based and low-tech industries, and labour-intensive exports, before effecting gradual shift in the industrial structure towards medium and high-tech industries.

Job creation

Egypt has already made prominent strides in exploiting its hydrocarbons resources with the development of a petrochemicals sector, one of the country’s main value-added economic drivers. The country unveiled a 20-year petrochemicals masterplan in 2002, which aims for $206m to be invested in the sector,

Investing in such labour-intensive downstream energy industries also fulfil another of Cairo’s key strategic ambitions: creating jobs. Under Rachid’s strategy, the industrial sector is to generate nearly 1.5 million new jobs between 2005 and 2011, with an average of 1 million jobs to be created annually from 2012 to 2025.

Many of these jobs will be located in the country’s qualifying industrial zones (QIZs), defined geographic areas that permit duty-free access to the US market for industrial products originating in Egypt and manufactured jointly with Israel (with a minimum 11.7 per cent of Israeli content), in compliance with international rules of origin.

The QIZs’ export focus is fundamental to Egypt’s industrial development prospects. “Exporting is not only a contribution to the development process by generating sales, employment and economic surplus, in today’s world, exporting is a must. You must export to compete, and if you can not compete in foreign markets, you will not be able to compete domestically,” says Ahmad Anter, director of the QIZ unit at the Trade & Industry Ministry.

Manufactured exports account for barely 3 per cent of GDP, and 11 per cent of total current account receipts, but the aim is to increase this as Egypt continues with its diversification strategy.

This is where the QIZs come in. Since their inception in 2005, with seven designated industrial locations and an initial 397 qualified companies, the programme has rapidly expanded to encompass 15 designated industrial zones, with some 700 qualified companies that generate in excess of $1bn in annual revenues. Egypt’s exports to the US have risen exponentially, tripling in value between 2003-04 and 2007-08 to $9.3bn.

The QIZs’ importance stems not only from the export sales volume, and the employment and growth generated, but in their contributions to developing industry standards. The payoff is much greater than a boost to the trade balance, says Anter, who highlights the productivity boost that comes from growing exports through the QIZs.

“Expansion of exports to the US adds to the experience of Egyptian entrepreneurs in working internationally with tightly regulated and highly competitive markets such as the US market, especially with its high health standards and high competition, which refines the manufacturers capacities, and creates spill-over effects that will improve competitiveness to other exports markets,” says Anter. “It also raises standards for production destined to the local market.” 

The government wants to extend the QIZs with three more areas in the poorer southern governorates focusing on products that could benefit from free trade with the US, including food, leather products and electronic goods, in the process shifting the zones’ emphasis away from the declining textiles sector.

“So far, the ready-made garments (RMGs) sector is the main but not the sole contributor to QIZ exports, partly due to our historical experience in this industry, and also because of the benefits from alleviating the relatively high custom duties on RMG products imported into the US by producing it in a QIZ,” says Anter.

The food industry is a promising sector for the QIZs, but Awni says more focus from manufacturers is needed in order to cater to the large size of the US market, consumer tastes and health regulations.

Export tariffs

Future expansion depends on the level of tariffs applied to products, rather than the inherent potential of Egyptian industries. “Expansion in other sectors is directly linked to whether the level of tariff on a certain product is lucratively enough to produce it in a
QIZ, taking into account that some already high tariffs are expected to be reduced in the US,” says Anter.

“What makes it more difficult to expand into other sectors that Egypt is already an eligible country for the US generalised system of preferences, thus enjoying duty-free treatment on many of Egyptian exports. If we add this to low most-favoured nation tariff products, the selection of other potential sectors is very narrowed.”

Some commentators highlight flaws in the politically-motivated QIZ model. “A free trade agreement with the US would have been much better for Egypt, but short of that, the QIZs help  – it’s been the saving grace of the textiles sector,” says Ahmed Galal, head of the Cairo-based Economic Research Forum.

The government is also planning industrial zones separate from the QIZs, with seven new zones to concentrate on engineering industries, food and clothing. These zones will cover 10 million square metres and will house factories in the 10th of Ramadan and October 6th industrial cities, with estimated investments of £E13bn and create  40,000 jobs.

With an abundance of natural resources, large pool of cheap labour and a highly investor-friendly business climate, Egypt has all the raw ingredients in place for an industrial leap forwards. The challenge is to capture the benefit of exposure to the US market gained via the QIZ programme, and gradually upskill the local economy so that it stands at a realistic chance of emerging as the region’s industrial powerhouse.

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