As Egypt braces for the impact of the Ukraine crisis and a surge in import costs, the country is implementing longer-term measures to bolster local production, ramp up exports and capitalise on the new continent-wide free trade area. Felix Thompson reports.
For millennia, bread has been the most important food item in Egypt. In Egyptian Arabic, the word for bread, aish, means “life”.
Such is its political significance, efforts to reform a long-running subsidy scheme have been put off for decades. Riots erupted across Egypt in 1977 when former President Anwar el-Sadat attempted to withdraw its funding, with the violence only ending when the government backed down and reversed the cuts.
The state has kept the price of bread heavily reduced ever since, with over 60 million Egyptians still eligible for five loaves daily at a cost of 0.05 Egyptian pounds (US$0.0032) per loaf.
But this lifeblood is at risk of being cut off. The Ukraine crisis has pushed wheat prices to multi-year highs and disrupted supply chains, yet Egypt is reliant on the war-torn country and Russia for 80% of its import needs.
The World Bank forecasts wheat costs will leap by more than 40% this year and reach an all-time high in nominal terms, as uncertainty prevails over Russian and Ukrainian supplies making it to market.
Physical disruptions at Black Sea ports are hampering exports from Ukraine, while grain producers in Russia say sanctions imposed by the US, UK and the EU are limiting logistics, insurance and access to payment.
“Egypt is very exposed to the crisis,” says Ana Boata, head of macroeconomic and sector research at credit insurer Allianz Trade. “The country is trying to substitute from Romania and elsewhere, but it is not enough and is happening at a much higher price,” she tells GTR.
Egypt has moved quickly to strike deals with new suppliers, with Reuters reporting in May that an agreement to buy 500,000 tonnes of the grain from India will go ahead despite New Delhi announcing a wheat export ban that same month.
The government has also held talks with Kazakhstan, France and Argentina, Egyptian supply minister Aly Moselhy told the news agency.
But for now, it is unclear whether the African state will have sufficient supplies this year – and fears are growing of the potential for civil unrest in a country where bread remains a politically charged issue.
A mere decade ago, during the 2011 uprising that toppled former President Hosni Mubarak, chants of “bread, freedom and social justice” were the rallying cry.
“The crisis will cost Egypt more and eat into the budget,” says Ralf Peters, chief of the trade information sector at the United Nations Conference on Trade and Development (UNCTAD). “I doubt they want to risk political unrest, so they will do their utmost to ensure a stable supply of wheat. The situation is serious, as you can’t always get what you want from the global market.”
The government has had to step in and fix the price of unsubsidised bread in the private market at 11.50 Egyptian pounds a kilogram, amid reports costs have increased by as much as a quarter in some bakeries, to 1.25 Egyptian pounds a loaf.
Egyptian authorities have also turned to the International Monetary Fund (IMF) and friendly countries for financial aid as they work to weather the impact of the crisis and retain public trust.
In March, Saudi Arabia, Qatar and the United Arab Emirates (UAE) pledged US$22bn in financial support for Egypt, while the IMF said weeks later the African country had requested a new programme of support citing “spillover effects” from the war.
Import dependency
The Ukraine crisis has thrown Egypt’s import dependency into sharp relief and forced the government into a bind: on the one hand it needs to secure stable supplies of wheat, while on the other, to manage growing economic risks.
Recent price increases could nearly double Egypt’s annual state spending on wheat imports to US$5.7bn from about US$3bn, finds a March study from the International Food Policy Research Institute.
This will add to an already hefty import bill, which credit insurer Credendo estimates grew by 34% in Q3 last year, as compared to the same period in 2020.
As import costs surge, authorities are now accelerating efforts to bolster and protect domestic supply in a bid to safeguard the economy.
In addition to sourcing wheat from new international partners, Egypt recently announced it would mandate local farmers to sell at least 60% of their wheat to the state, and require them to obtain a permit to sell the rest elsewhere.
Domestic growers have been offered incentives, such as higher pay, while those who fail to comply could face jail. The government is aiming to procure more than 6 million tonnes of wheat from Egyptian farms, representing roughly 60% of the expected harvest and an increase of more than 50% over 2021 levels.
The country is also looking beyond short-term stop-gap measures in a bid to balance its books.
In April 2021, Egypt’s government unveiled a new phase of its National Structural Reform Programme (NSRP) and said it would focus on development of the manufacturing, agriculture, telecommunications and information technology sectors.
Through the range of new measures, the country aims to have agricultural products comprise 25% of its total exports by 2024, up from 17% in 2020, and to increase total agricultural output by nearly a third. The wider plan is to grow the contribution of the three sectors to roughly 30% of GDP by 2024, a bump of about 4% from 2020.
Kheireddine Ramoul, an economics affairs officer at UNCTAD, tells GTR Egypt will likely once again try to ramp up production of staple crops, with farmers having switched to more lucrative produce in recent years.
“Instead of growing strategic crops such as wheat, farmers reorientated production to earn hard currency and have been selling citrus and other products. Egypt is thinking seriously about reversing this.”
Egypt has also talked up the prospect of boosting manufacturing, particularly for products it largely buys from abroad, to slash its unruly import bill.
In March, Egypt’s minister of trade and industry Nevine Gamea announced the government had identified more than 130 products that could be manufactured domestically.
Gamea said the ministry and affiliated agencies would provide various forms of support to investors seeking to fund local manufacturing, for both new and existing projects.
Tied in with these plans are ambitions to diversify exports away from oil and gas, with 2021 data from UN Comtrade showing Egypt’s largest export group in US dollar value terms was mineral fuels, oil and related products, standing at roughly US$13.2bn.
Ongoing challenges
Whether the government will be able to enact these forms and hit such targets is another matter, given warnings the Ukraine war could hinder efforts to overhaul Egypt’s trade sector.
“It comes back to the strategy of how does Egypt boost exports? In the end, all these strategic plans that the president has implemented have been done just before the start of the current crisis,” says Boata.
“This is complicating the implementation of these plans, because we know that now the focus is really on coping with the crisis, avoiding the food shortages, as well as the social crisis and potential further financial stress on the bond market and currency,” she says.
In fact, export volumes and revenue may dip this year as major markets in Europe, including France, Germany and the UK face up to economic pressures and a looming recessionary threat.
“The forecast has been downgraded for these economies, and Egypt is highly dependent in terms of exports to those markets,” says Mesut Saygili, an economic affairs officer at UNCTAD. “Around 30% of their exports are going to the European market. That means there will be some secondary effects impacting export performance in the near future.”
Ultimately, there are also deeper structural issues facing the Egyptian government, as it works to modernise the economy.
The largest export industries in Egypt are oil and gas, food, textiles, and chemicals, all of which are dominated by state-owned enterprises, with a World Bank 2020 Enterprise Survey showing less than 10% of private firms in Egypt participate in export activities – either directly, or through sales to exporting companies.
“Among exporters whose direct exports are at least 10% of sales, about 27% identify corruption as the biggest obstacle to doing business,” says a report published by the IMF in July 2021.
“As many as 30% also report that access to finance is a major constraint. This is supported by the evidence that only about 2% of investment by export firms is financed by banks,” the report adds.
The IMF also flags the impact of “extensive” non-tariff barriers, including stringent technical requirements for goods, as well as cumbersome documentation and customs procedures, and bans on certain imports or exports.
Further questions remain over Egypt’s ability to quickly regear a trade sector that remains reliant on primary commodities exports.
As detailed in the IMF study, Egypt’s export volumes are comparably smaller than those of countries with similar-sized populations or per capita income, suggesting “significantly underutilised potential”.
“Goods and service exports accounted for about US$50bn or 17.5% of GDP in FY2018/19,” the report notes, adding this likely reflects the fact Egypt exporters sell “fewer products to fewer destinations”.
By contrast, Indonesia, India, the Philippines, Turkey, South Africa, Morocco, Jordan, Lebanon, Tunisia, Ukraine and Thailand are cited as countries where goods and services exports make up a greater percentage – at least 20% – of GDP.
AfCFTA opportunities?
Even though opportunities may be uncertain elsewhere, they are hoped to flourish regionally as a result of Egypt’s involvement in the African Continental Free Trade Area (AfCFTA).
“Intra-African trade flows are big on the agenda. There are several export development initiatives that the central bank has introduced, and many of the Egyptian banks are eyeing Africa as the next big thing,” Norhan Ezzat, head of global transaction banking at Arab African international Bank (AAIB), tells GTR.
AAIB has in recent years expanded its financial institution and correspondent bank coverage in a bid to support Egyptian exporters who are increasingly targeting new markets on the continent, she says.
“We have grown our appetite in East Africa, because we know there are a lot of flows that are going there, including Egyptian goods like cables and steel. We are also eyeing our Northern African counterparts in terms of the flows that are going from Egypt.”
Egypt is also well-placed to capitalise on the AfCFTA by becoming a major manufacturing hub on the continent, says a 2021 report from UNCTAD.
The study notes Egypt is the continent’s top manufacturer and contributes the second largest share (21%) of manufacturing value-add in the Middle East and North Africa (Mena) region, behind the Kingdom of Saudi Arabia.
“In Egypt, manufacturing accounts for 16% of GDP, putting it on par with the OECD average, and above Africa’s average of 11% and Mena’s of 10%, but lower than in Southeast Asia (22%),” the analysis notes.
The signs are promising already, with Egypt attracting approximately 21% of foreign direct investment in electronics and electrical manufacturing projects across Africa between 2017 and 2020 – the most of any country on the continent.
LG and Samsung are two multinationals which have invested heavily in Egypt in recent years, with Samsung agreeing to pour US$30mn into a new tablet-producing facility outside of Cairo last year.
UNCTAD suggests that with the right policy decisions, Egypt could further cement its place in Africa’s value chains and become a key manufacturer of more advanced, high-technology products.
Such an evolution would be significant, with the UNCTAD study noting Egypt’s exports to the African continent languish at a meagre 15%, and the country’s participation in global trade remains anchored in the export of primary commodities that are processed elsewhere.
As of press time, Egypt is one of 41 countries to have ratified the AfCFTA, which came into effect in January 2021.
With countries signed up to the agreement set to eliminate tariffs on 90% of goods over the next decade, UNCTAD’s analysis says Egypt could add up to 32 trading partners from across the African continent.
Still, the AfCFTA is facing numerous challenges: countries remain protective of some of their prized industries, non-tariff barriers must be overcome, and sizeable sums of cash will be needed to overhaul Africa’s poor quality trade infrastructure.
While Egypt has ambitious plans to reform its economy and capitalise on new export possibilities arising from the AfCFTA, which could provide some respite, short-term challenges are mounting.
Like many emerging market economies, the country faces tough choices if it is to stave off growing political pressures and keep its lifeblood flowing.
