The Egyptian industrial sector has gone through a difficult year due to international supply chain challenges exacerbated by the Russo-Ukrainian war, foreign currency shortages and import restrictions that prompted the backlog of imports in Egyptian ports, and the accumulation of letters of credit in Egyptian banks, which amounted to 25,000 letters of credit worth more than $4.5 billion. These were the main challenges facing the Egyptian industrial sector this year.
2022: The Year of Challenges
The Russo-Ukrainian war that erupted at the end of February 2022 provided enough reason to pressure the already fragile global supply chains. As a result, industrial companies around the world struggled to obtain manufacturing inputs. This caused delay in production operations, halting them in some industries, and increasing costs of others. Egypt was among those countries which suffered a complex crisis in the industrial sector. The first of which is the global supply chain crisis, which limits the capacity of Egyptian industrial companies in providing the needed row material. The second crisis is related to the Egyptian economy and emerging markets, namely the foreign currency shortage crisis. This resulted in implementing economic policies restricting import operations to relieve pressure on the US dollar, as well as other policies calling for replacing imported products and encouraging the localization of industries. In such context, the state launched the National Initiative for the Development of Egyptian Industry (EBDA, Arabic for Start), which aims to invest EGP 200 billion over 4 years to support existing industrial projects and establish new ones. Start Company is the investment arm of the Decent Life Foundation, whose objective is social development for citizens. To this avail, the Decent Life Initiative aims to create 150,000 direct and indirect job opportunities within 4 years, and launching 64 projects in different sectors with the participation of 33 local companies and 20 foreign companies from 12 different countries. The EBDA financial model focuses on supporting firms facing difficulties by acquiring a share of about 40 percent of the company in order to provide liquidity by increasing its capital. Management is assigned to the private partner as well as the technical partner appointed by the EBDA Company in the board of directors. As for firms that are being established, the EBDA Initiative offers a number of incentives to encourage firms to invest in the industrial sector, including tax exemptions for 5 years, allocating land with the usufruct system, and supporting issuing licenses and legal establishment procedures. At least 1,500 industrial firms have benefited from the Initiative to date through enabling them to legalize their status, issue licenses and submit necessary documents. On the other hand, the State Ownership Policy Document was the second step that sets a long-term strategy for the complete or partial governmental exit from about 79 strategic sectors, with the aim of doubling the share of the private sector in the economy to about 65 percent within 3 years. The strategy was formulated following several workshops for the textile and clothing sectors, the automotive and engineering industries, the printing and packaging industry, consumer goods, the pharmaceutical industry, and the furniture industry.
In 2022, Egypt was the highest country among 6 countries in the region- namely Kuwait, Bahrain, the United Arab Emirates, Saudi Arabia, the Sultanate of Oman and Egypt- in terms of automation capabilities. Automation in the industrial sector amounted to 48 percent, especially in the household appliances sector, food and beverages, and pharmaceutical and chemical industries. This rank was achieved thanks to industrial compounds developers joining efforts to develop smart industrial zones, in addition to international companies such as IDG and Polaris Park as well as Suez Industrial Development Company, which contributed to the establishment of the infrastructure for industrial compounds to turn them into smart complexes implementing the approach of sustainability, integration, resource efficiency and waste reduction. However, Egypt still misses steps towards the Fourth Industrial Revolution. It is still stuck in the Second Industrial Revolution, which depends largely on labor. This can be related to Egypt’s demographic advantage in terms of large population and low labor costs.
Nevertheless, the biggest crisis was that of import. Industries struggled to continue working under import restrictions that hindered the delivery of components and production requirements. Such restrictions caused losses of millions of dollars, according to the Federation of Egyptian Industries (FEI). It took a presidential intervention to solve investors’ problems before the end of the year. The crisis affected the increase in the price of imported products, and the consumers’ shift to the local product, especially in goods that have alternative local products.
2023: The Year of Egyptian Industry
The year 2022 was hence loaded with challenges such as the shortage of foreign currency, high prices of raw materials, and high inflation. On the contrary, the first signs of 2023 indicate that government’s policies will be more tolerant regarding the industrial sector. It launched initiatives to stimulate key industrial sectors, alleviate the logistical bottlenecks it previously faced, and provide a new funding initiative contributing to bridging the funding deficit facing the sector.
The government identified 9 main sectors classified as priority sectors within the import substitution program, including the construction materials industry, chemical and textile industries, and the pharmaceutical and medical industries, constituting about 23 percent of the import bill, or about 17-19 billion USD. EBDA Initiative plans to invest about 200 billion EGP in these sectors, and provide other incentives such as allocating more land to manufacturers with the usufruct system. The other decision in early 2023 was canceling letters of credit and going back to collection documents to finance imports. This spread a sense of optimism among key players in the industrial sector, whose goods were piled up at different ports due to difficulty in accessing letters of credit, greatly affecting the shortage of industrial and consumer goods.
On the other hand, the initiative to finance the industrial sector worth 150 million EGP at an interest rate of 11 percent in light of the current interest rate of approximately 19 percent had a positive impact on Egyptian manufacturers. It addressed one of the most important challenges of the industrial process in Egypt, namely the high cost of loans. As for facilitating the licensing processes, the first International Manufacturing Convention and Exhibition witnessed the President’s announcement of launching the golden license to all manufacturers and investors wishing to invest in Egypt.
The Egyptian industrial community is waiting for the launch of the Egyptian Industry Strategy 2022-2026, announced last September, which aims to develop and advance the Egyptian industry and increase the industrial output contribution to the gross domestic product (GDP), thus provide more job opportunities. Egypt’s imports of industrial production inputs represent about 56 percent of total imports, which requires Egyptian policymakers to encourage industrial processes related to manufacturing production inputs. It is expected that the Strategy will provide other incentives with the aim of promoting the growth of those sectors witnessing an increase in the added value using local components. Yet, no draft has been announced thus far, although last January was the date set for launching a societal dialogue. However, such delay in announcing the Strategy is due to the special conditions of the industrial market in Egypt, with no room for any surprises. This requires the participation of all industry players in the strategy design to avoid any market shocks. The most important point in promoting Egyptian exports is to speed up the process of disbursing export support incentives, among the most important financing sources for companies to avoid the need to high-cost loans or funding from banks. There are many companies in the market that have dues with the Ministry of Finance exceeding 2 years. They resort to high-interest-rates loans to finance their production operations, although these dues are sufficient to provide for their production operations.
