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Unlocking exports A year ago, the president of the republic called export promotion “a matter of life and death.” Since then, the nation’s trade balance has improved markedly By Daliah Merzaban Egypt’s drive to promote exports took a major step forward in the months following January’s historic controlled currency flotation. The lower valuation of the Egyptian pound made locally manufactured goods more competitive on international markets, and local producers recorded massive jumps in foreign currency-denominated export revenues. According to figures from the foreign trade ministry, total exports amounted to $2.071 billion from January to April 2003 – a 31.3-percent jump from first-quarter 2002. What’s more, imports fell in tandem, declining 17.7 percent during the same four-month period to $3.547 billion. International economists have long urged developing countries to adopt strategic measures to boost exports, such as devaluing local currency, providing tax relief to export-oriented firms and simplifying customs procedures. Since the government passed the Export Promotion Law (No. 155) in July 2002, several initiatives have been launched in a bid to help local producers position themselves in the face of increasing global competition – under the shadow of the looming World Trade Organization (WTO) deadline for total compliance, scheduled for 2005. But according to industry analysts, if Egypt is to be ready for the post-2005 global market, negotiating duty free arrangements – especially with the US – will be no less important than efforts aimed at internal reform. Supplementing the big four Most economists see export-led development as the principal means of remedying unfavorable trade balances. Egypt’s trade deficit is particularly dire. In 2002, the country imported $12.52 billion worth of products, while exporting only $4.7 billion worth (mainly textiles and petroleum). The “big four” foreign currency earners – tourism, oil, Suez Canal receipts and workers’ remittances – simply don’t generate enough money to finance the gap, according to Sayed Abou El-Omsan, first undersecretary of the Ministry of Foreign Trade and head of the ministry’s Foreign Trade Sector. Revenue levels for the Suez Canal and oil exports, he explained, have generally remained flat, while hard currency earnings from workers’ remittances have declined drastically in recent years. Tourism, although a formidable breadwinner, is easily shaken by regional and global instabilities – as the outbreak of war in Iraq revealed earlier this year. Promoting a variety of non-oil exports, therefore, is the most reliable means of enhancing Egypt’s foreign currency earning potential. “Exports are the ones that you can change. They’re the ones that you can manipulate to increase foreign currency earnings and promote employment,” said Abou El-Omsan. With this in mind, the ministry’s export promotion strategy – adopted in 2001 – promised tax and customs reforms, export guarantees, free trade agreements and international marketing strategies to boost the competitiveness of Egyptian exports. Within this context, the Export Promotion Law aimed to reduce the red tape associated with exporting by centralizing all export-related activities under the trade ministry’s umbrella. Now, rather than having to get clearance from multifarious ministries and agencies, exporters can take care of all product inspection requirements in one fell swoop, at the General Organization for Import & Export Control. The law further established an export support fund to bolster the quality and general competitiveness of Egyptian-manufactured goods and services. In June, Minister of Foreign Trade Youssef Boutros-Ghali – whose very ministry was created with the express mandate of “fixing” the trade balance – raised the capital of the Export Support Fund from £E 400 million to £E 650 million. Salwa Mansour, senior manager and board member at the majority state-owned Export Development Bank of Egypt (EDBE), said the fund has so far been geared mainly towards agricultural companies, gas and chartered aviation, with “very good” results. EDBE itself, opened in 1983, offers clients banking options specifically tailored to the needs of exporters, including loans at special rates, pre-export financing and tax rebates, and also invests in companies that focus on tourism. “You need a very strong credit guarantee company to make sure that exports are guaranteed,” Mansour said. While the local environment for exports has no doubt become more nurturing, Egypt continues to lag behind its peers in the Middle East and North Africa. Both Jordan and Lebanon consistently outperform Egypt in terms of export revenues, while Tunisia, with its much smaller economy, manages to reel in about $13 billion from exports annually – more than double that earned by Egypt. An uncompetitive home market Uninspired by the lure of foreign markets, many local manufacturers have traditionally avoided the export business. The reason for this, says principal economist at the Egyptian Center for Economic Studies (ECES) Omnea Helmy, has to do with a series of disincentives facing local manufacturers. “The Egyptian producer prefers to sell in the domestic market rather than export because it is more profitable,” Helmy said. The ECES referred to this paradox specifically in a 2001 policy paper aptly titled “The export puzzle.” According to that study, the lack of a competitive exchange rate, high levels of protection, excessive costs of transport and communication, large transaction costs and cumbersome tax and customs procedures have all contributed to a general export aversion among producers. Additionally, Egyptian tariffs, surcharges and taxes on intermediate goods are higher than the developing-market average, while customs procedures are notoriously slow. According to Abou El-Omsan, producers have learned to take advantage of the lack of competition from imported products, which are too expensive for the average consumer due to stiff import tariffs. “There is a monopolistic nature embedded in the minds of producers. Why should they spend money to access other markets when they have a competitive advantage locally?” he said. The result, Abou El-Omsan added, is that Egyptian products have developed a bad reputation for being of low quality by international standards. With the deadline for full WTO compliance drawing nigh, it’s only a matter of time before the market domination enjoyed by complacent producers comes crashing down. As borders become more porous, local manufacturers will be compelled to improve product standards in order to compete with the lower-priced, higher-quality alternatives that will more easily find their way onto the local market. According to Adham Nadim, furniture manufacturer and secretary-general of the Egyptian Exporters Association (ExpoLink), “We are now convincing our fellow manufacturers that if they cannot compete abroad, they will very soon not be able to compete in the local market.” Cutting the Gordian knot The good news, though, is that the longstanding obstacles that had combined to form the “export puzzle” are fast being dismantled, as the government takes steps to reduce biases that have hindered export in the past. When Prime Minister Atef Ebeid took an Economist-sponsored business conference by storm – announcing that the currency would be floated the next day – on January 29, exporters across Egypt were brimming with optimism about the obvious prospects for growth. Among them was Mohamed Kassem, chairman of the World Trading Company, a major local garment exporter. According to Kassem, the exchange rate regime – which had kept the value of the Egyptian pound at unrealistically high levels – discouraged local producers from exploring world markets for the past 40 years. Kassem described January’s flotation as “the first active step by the government to reverse this bias.” The post-float payoff was instantaneous. According to figures provided by the state-owned Holding Company for Spinning & Weaving, textile exports reached £E 2.17 billion from January to May, up from £E 1.35 billion for the same period in 2002 – a jump of 35 percent. Local cloth and textile producer Oriental Weavers, for example, posted a 47-percent rise in first-half net profits, attributing the windfall to a 44-percent sales increase – mostly in exports. Another key hindrance to export growth has been the stiff taxes levied on imported components used for the production of exports. For some industries – like textiles and apparel – imported raw materials account for between 60 and 85 percent of the final product’s content. But according to Kassem, a new tax rebate system provides tax exemption on imported materials intended for the production of exportable goods, calculated as a percentage of the product’s total value at the time of export. Apparel and textiles, for instance, receive a rebate of 8 percent if they are using imported raw materials, and 10 percent if using local yarn and fabrics. “There was a noticeable improvement in the performance of exports due to this and other initiatives,” Kassem noted. In the area of customs reform, meanwhile, Amr Abdel Latif, ExpoLink’s deputy executive director, said that exporters are finding it easier to reclaim previously paid customs on raw materials used in manufacturing products for export. Additionally, new units at points of entry facilitate the smooth
release of the intermediate goods necessary to process finished
products for export. “There was lots of red tape before,”
Abdel Latif said. “Enhancing the customs temporary release
system has been a major contributor to promoting exports.” Devaluation’s exportable winners Currency devaluation also unlocked the export potential of a number of oft-overlooked sub-sectors. Building materials – such as cement, glass and aluminum – represent a potentially lucrative export niche, and have attracted a great deal of international attention on the local stock exchange in recent months (particularly cement). Egypt’s furniture industry has also witnessed monstrous growth levels since the devaluation. Until now, the furniture sector has focused primarily on supplying the domestic market. But according to Nadim, whose company, Nadim Industries, manufactures contemporary furniture, there are new reasons to concentrate on markets abroad. “We have – all of a sudden – become about 20 percent more competitive, due to the new exchange rate,” he said. He went on to note that if exporters were reimbursed for the 21-percent tariffs they paid on intermediate inputs used in furniture for export, “this would give the Egyptian exporter another 20-percent boost.” Currently worth around $150 million to $200 million annually, according to unofficial figures, Nadim predicts that furniture manufacture will grow into a $700 million industry in a matter of years. “We could be very, very competitive in the coming years,” Nadim said. The problem with customs Yet despite the recent progress, exporters continue to tell stories of being tripped up by untrained customs officials at the lowest levels of the bureaucratic machine. Abdel Latif, for example, noted that it “takes ages” for exporters in all industries to bring in the samples – from an article of clothing to a container of cement – that are then used to develop competitive counter products. Even though the prompt receipt of such samples is paramount, customs officers often delay their release, and subject them to steep and unnecessary taxes, he said. According to Abou El-Omsan, one of the trade ministry’s primary goals is to train employees to communicate in the language of international commerce. “You cannot increase exports without upgrading the capacity of people to cope with international markets,” he said. The first undersecretary added that another key challenge is to improve communication between the government ministries involved in export, especially the Ministry of Finance, under the auspices of which the customs regime operates. While the legislative framework of export promotion is “still in a transition period,” according to Abou El-Omsan, he expects the full impact of the export promotion law – which still awaits executive regulations – to be felt throughout the entire gamut of the exporting community within a couple of years. A brave new world The year 2005 will mark the end of the three-decade old GATT system and usher in a new era of free trade, where duty free access will become a critical factor in determining who gets coveted market share. With this in mind, the government has solidified its trade ties within the Arab zone and Africa, and, most recently, with the EU – its largest trading partner – via an association agreement ratified in April. Nevertheless, exporters have been hard hit by ever-increasing competition from the regional contenders that have secured preferential access to the world’s biggest market, the US. Neighboring Jordan, for one, is a tough competitor in many areas, due to its FTA with the US and its exploitation of the US-backed Qualified Industrial Zone scheme, which provides designated manufacturing areas with duty free access to the US when products include a specified percentage of Israeli input. Sub-Saharan African countries have duty free access to the US market under the African Growth & Opportunity Act, while Washington has – much to Cairo’s chagrin – launched FTA talks with both Bahrain and Morocco. According to Abdel Latif, Jordan’s textile industry has, in a matter of years, gone from non-existence to becoming a $350 million-a-year industry. “It’s scary, because it’s been taken from someone else’s share of the market,” he said, alluding to Egypt’s centuries-old experience in the industry. “We need to see a quantum leap in exports,” he added. Making this a reality, though, is awkwardly bound up with the political considerations involved in pushing FTA negotiations with the US. The on-again-off-again “talks about talks” faced a serious setback in July, when US trade representative Robert Zoellick abruptly put the prospect of negotiations on hold after Egypt pulled out of a US-led complaint (over EU policy on genetically modified foods) lodged with the WTO. Despite the falling out, the industry specialists interviewed for this article argue that securing free access to the US market may very well be no less critical than customs and monetary reform. “The devaluation was an important step, but it isn’t enough on its own,” said the World Trading Company’s Kassem. “We need duty free access to the US market.”
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