17 July 2014
Egypt: Market Profile
Major Economic Indicators
- Egypt‘s economic growth slowed to 2.1% in 2013 from 2.2% in 2012 amid the country’s continued political unrest.
- Following the landslide victory of ex-army chief el-Sisi in the presidential elections of May 2014, many Egyptians are hopeful that the economy will regain momentum as political stability is restored and the new president can work on the needed economic reforms.
- Egypt’s exports decreased 19.6% year-on-year (YoY) to US$6.3 billion in the first quarter of 2014, while imports grew by 0.3% YoY to US$ 16 billion, widening the trade deficits.
Current Economic Situation
While Egypt has one of the most developed and diversified economies in the Middle East, economic growth has slowed considerably since the country’s popular uprising ousted President Mubarak in 2011, which marked a pivotal turn of the Arab Spring that later swept the Middle East and North Africa (MENA) region. In 2013 GDP growth eased to 2.1% from 2.2% in 2012 amid continued political unrest, which weakened business and consumption sentiment, way below the average growth of 5-6% evident prior to the Arab Spring.
Following the military-led removal of President Morsi in July 2013, former military chief Abdel Fattah el-Sisi took a landslide victory in the presidential election in May 2014. Many Egyptians are hopeful that the economy will regain momentum, as political stability is restored and the new president can work on the needed economic reforms. The IMF expects the Egyptian economy to grow by 2.3% in 2014 and 4.1% in 2015.
Egypt is facing a number of economic challenges to put its own house in order, typically unemployment and inflation that are at double-digit levels, a widening budget deficit aggravated by fuel subsidies, and the strong need for external financing. Egypt’s inflation increased from 7.3% in 2012 to 9.8% in 2013, edging up further to reach double-digit levels in early 2014. Inflation is expected to remain high due to the increase in minimum wage for state employees in January 2014, and the loose monetary policy adopted by the central bank.
Nonetheless, the Egyptian economy has been kept afloat by aid from Gulf Arab states since the ouster of Morsi in July 2013. The UAE, Kuwait and Saudi Arabia have pledged to grant US$13.9 billion to help Egypt manage the transition. This, together with the newfound stability after the presidential elections, may revive business and consumer confidence.
The services industry accounts for the largest share of Egypt’s economy, representing 46% of the country’s GDP in 2012, followed by manufacturing (15%) and agriculture (14%). Tourism, an important economic pillar overshadowed by security and terrorist concerns in recent years, may contribute more to economic growth now that political stability is being restored. The number of tourists who visited Egypt reached 755,000 in March 2014, up more than 20% from 617,000 in the previous month.
Another challenge for Egypt’s business sector is the imposition of a temporary tax of 5%, which became effective from mid-June 2014 to last for three years, targeting companies with profits above one million Egyptian pounds (about US$140,000). This temporary tax comes on top of the corporate tax, which was raised in 2011 by 5% to currently 25%. This, coupled with the rising wage rate, may induce companies to raise prices and further push up inflation.
Amid the slow improvement in political stability and a weakened Egyptian currency, exports from both the services and manufacturing sectors remain weak. In the first quarter of 2014, merchandise exports fell by 19.3% YoY to US$6.25 billion amid a decline in oil exports. Nonetheless, Egypt recorded a current account surplus of US$ 523 million in Q1 2014 compared with a deficit of US$7 billion in Q1 2013, thanks to the hefty aid from the Gulf states after the removal of President Morsi. It is expected that exports will recover gradually in light of the improving economic sentiments in Europe, the main trading partner of Egypt, as well as the pickup in the global economy.
Egypt has gradually moved towards a more liberal trade regime. It became a member of the World Trade Organisation (WTO) in 1995, and revamped its tariff regime in 2004 as agreed in its accession agreement. The changes in the tariff structure lowered the official tariff rate (weighted average) from 14.6% to 8.9%. According to the WTO, Egypt’s MFN trade weighted average tariff was 10% in 2011. More than 90% of agricultural products and 86% of non-agricultural items on the tariff schedule are now charged at less than 15%.
As a measure designed to protect the local automotive industry, a 40% tariff is charged on most imported vehicles. Other than the automotive industry, the local textile industry is also highly protected. In November 2011, a fund with US$46 million (EGP280 million) was set up to subsidise the local spinning and weaving factories. With surging food prices, the government imposed a ban on rice export in 2008 until October 2012, and resumed export restrictions in November 2013. According to the Egypt Ministry of Supply, the policy is to ensure sufficient domestic supply of rice at reduced prices and to avoid over reliance on rice imports.
Egypt requires restrictive labelling for imports of food products. All food products should be packed in appropriate packages, which should be clean, intact, and odourless so as to preserve the products and not affect its characteristics. Imported products must be marked and labelled in Arabic. The language requirement is mandatory for all information, including the brand and type of the products, country of origin, date of production, expiry date, and instructions on handling products. For imported tools, machines and equipment, a user manual in Arabic has to be attached.
There are a total of ten free trade zones in Egypt - Cairo (Nasr City), Alexandria, Port Said, Suez, Ismailia, Damietta, Media, Shebin El-Kom, Qeft and Port Said East Port. Goods exported from or imported into the free zones are not subject to normal import/export customs procedures, duties or other taxes and fees. Likewise all instruments, machinery, equipment, and transportation equipment necessary for establishments authorised within the free zones are exempt from customs and duties.
The EU-Egypt Association Agreement entered into force in June 2004. The EU lifted all trade barriers to Egyptian industrial exports, while Egypt committed itself to removing all related trade barriers over a 12-15 year transitional period. In June 2013, the EU and Egypt began an exploratory dialogue on deepening the bilateral trade and investment relations through the possible negotiation of the Deep and Comprehensive Free Trade Agreement (DCFTA). It will extend largely beyond the existing Association Agreement.
Besides the Association Agreement with the EU, Egypt has signed a number of free trade agreements (FTAs) to help Egyptian exports gain preferential access to markets of the signatories. Such FTAs include the Pan Arab Free Trade Agreement (PAFTA, with 17 members including Egypt), the Common Market for Eastern and Southern Africa (COMESA, with 19 members including Egypt), the Agadir Agreement (with Egypt, Morocco, Tunisia, and Jordan as members), MERCOSUR-Egypt FTA (with Argentina, Brazil, Paraguay and Uruguay), EFTA -Egypt Free Trade Agreement (with Iceland, Liechtenstein, Norway and Switzerland) and the Egypt-Turkey FTA.
Egypt also has a preferential trade agreement between the US and Israel, under which the US grants Egyptian exporters in Qualified Industrial Zones (QIZs) tariff-free access to the US market provided that they import at least 10.5% of the content from Israel.
Hong Kong Trade with Egypt ^
Hong Kong's total exports to Egypt surged 32% YoY to US$158 million in the first four months of 2014 following an expansion of 7.2% in 2013. Major exports in the period included telecom equipment and parts (US$59 million, 37.7% of total, +66.1% YoY), television receivers (US$10 million, 6.2% share, +603.6% YoY), computers (US$10 million, 6.2% share, +153.8% YoY), household electrical and non-electrical equipment (US$5 million, 3.3% share, -14.4% YoY), and woven cotton fabrics (US$5 million, 3.3% share, -39.7% YoY).
On the other hand, Hong Kong's imports from Egypt decreased 31.1% YoY in the first four months of 2014. Major imports in that period were glassware (US$10million, 37.0% share, -57.8% YoY), leather (US$6 million, 24.3% share, +4.6% YoY), fruit and nuts ( not including oil nuts), fresh or dried (US$5 million, 17.7% share, +177.4% YoY) and crustaceans, molluscs and aquatic invertebrates, chilled frozen, dried, salted or in brine (US$1 million, 4.1% share, -34.2% YoY).
In the first four months of 2014, a total of 5,095 Egyptian visitors came to Hong Kong, increased 30.9 % from the year-earlier period.