Egypt needs to update its policy approach to economic transformation to fully benefit from the African Continental Free Trade Area.
A woman sews clothes at a factory in Luxor, Egypt. The country is Africa's top manufacturing hub. © World Bank/Dominic Chavez.
The African Continental Free Trade Area (AfCFTA) could add at least 32 new trade partners to Egypt and help diversify and upgrade the country’s economy.
But to fully benefit from the AfCFTA, Egypt needs to update its policy approach for economic transformation, says the country’s Production Transformation Policy Review (PTPR) released on 8 June.
An economic heavyweight
Egypt is among Africa’s economic heavyweights. Although Africa is a small industrial player, accounting for only 2% of world manufacturing, Egypt is the continent’s top manufacturing hub, accounting for 22% of its value added in this sector.
The country’s fast-growing economy has been increasingly attracting international investors, who are choosing Egypt to produce for the African continent and the Middle East.
Between 2017 and 2020, Egypt attracted the highest percentage of foreign direct investment (FDI) in electronics and electrical manufacturing in Africa (21% of the total number of projects), and the second highest of knowledge-intensive ones (14%), according to the report.
However, Egypt still trades little with other African economies, with only 15% of its goods exports traded on the continent.
A recovery package
Egypt reacted quickly to mitigate the economic effects of the pandemic.
The recovery package mobilised in 2020 accounted for 1.9% of Egypt’s GDP, including tax breaks, loan repayment deferrals and subsidized credit to firms.
Since 2017, Egypt has been reforming its governance and regulatory framework to attract investment, foster trade and digitalisation in firms, the report says.
Among the country’s key reforms carried out, the implementation of a national single window, an online platform to speed up customs processes, in 2021, stands out.
Egypt has also been investing in raising quality, as demonstrated by the establishment of the National Food Safety Authority in 2017.
The country has also become one of Africa’s top hubs for start-ups. It accounts for 14% of the continent’s start-ups and 10.5% of its venture capital.
However, Egypt continues to rely predominantly on traditional tools to support industrialisation, including special economic zones.
The report says Egypt needs to continue implementing effective reforms for more economic progress. Although the agenda is vast, the report identifies three actions that could be game-changers in the current context:
- Investing in making AfCFTA a real development driver: An important step will be implementing effective industrial policies and observing their impact by setting up a monitoring and evaluation system to track the progress of AfCFTA’s implementation in relation to the country’s Vision 2030 and the National StructuralRreform Programme for 2021 to 2024.
- Engaging the private sector in innovation. Egypt falls short, by international comparison, of the typology of tools and the budget allocated to innovation and research and development. The introduction of fiscal incentives through Law no. 72/2017 is a step forward. The country should increase public support for innovation to all firms across all sectors, leveraging existing tools, such as the ones managed jointly by the Industrial Modernization Centre and the Science and Technology Development Fund.
- Getting policymaking ready for the future. Egypt would benefit by rationalising and strengthening implementation institutions, for example by building their capacities to operate across the whole country and modernizing its infrastructure to operate better in an industry and Agro 4.0 landscape.
The report is the product of a 21-month policy support process requested by the Government of Egypt and implemented by the Development Centre of the Organisation for Economic Co-operation and Development (OECD) in collaboration with the United Nations Conference on Trade and Development (UNCTAD), the United Nations Economic Commission for Africa (ECA) and the UN Industrial Development Organization (UNIDO).
Malaysia and Italy made peer contributions and the German international cooperation agency, GIZ, supported the production of the report. Afreximbank contributed to the process.