•Egypt’s economy expanded 5.2% year-on-year (YoY) in the first quarter of 2012, thanks to a lower base in the year-earlier period, when GPD growth was -4.2% as a result of the political turmoil of the country.
•The Egyptian revolution in January 2011 resulted in the removal of President Mubarak, with political disputes continuing well into 2012 and exerting negative impacts on economic growth and investor confidence.
•Egypt’s exports growth slowed to 4.2% YoY in the first quarter of 2012, while imports surged 27.1% YoY in the same period, widening the trade deficits and putting pressure on the country’s balance of payments.
Current Economic Situation
Egypt’s GDP growth in the first quarter of 2012 was 5.2% YoY, up considerably from 0.4% in Q4 2011 and thanks to a lower base in the year-earlier period, when GPD growth was -4.2% as a result of the political turmoil touched off by Tunisia’s Jasmine revolution. In the midst of the severe political unrest during January-February 2011, long-reigning president Mubarak was ousted. Despite the uptick, GDP growth was still well below the average growth of 5% in 2010.
Despite the lack of a new constitution being redrafted, Egypt went ahead with its presidential elections in May 2012. On the other hand, Egypt’s Supreme Constitutional Court declared in June 2012 that the lower house election held in January 2012 was invalid and ordered the dissolution of Parliament. Recent political developments in Egypt have created so much uncertainty that economic growth looks set to be affected negatively.
Owing to the international financial tsunami, Egypt’s inflation eased from around 20% at end-2008 to about 10% in 2011. In Q1 2012, inflation fell further to 8.9 % YoY. Yet, inflation is expected to rise in upcoming quarters due to the depreciation the Egyptian pound and higher world commodity prices.
One of the current challenges for Egypt’s economy is the weak external environment. The lingering European debt crisis and the slow US recovery reduced have hurt Egypt’s exports as well as its Suez Canal receipts. Meanwhile, slow global growth may also contribute to lower earnings from tourism.
Another major challenge for Egypt is the ongoing political uncertainty. Since the revolution in 2011, Egypt’s political unrest has been hurting investors’ confidence. Exports were weakened due to the disruption of manufacturing and the decline in tourist arrivals. With the Supreme Constitutional Court ordering that Parliament be dissolved, and the military represented by the Supreme Council of the Armed Forces (SCAF) opposed to the legislature and presidency of the Muslim Brotherhood while wielding legislative and fiscal control, the future of economic policymaking may be severely affected amid a gloomy economic outlook.
In addition, there is a growing risk of capital outflow from Egypt. Financial account deficits rose to US$3.6 billion in the first three quarters of FY2011/2012, worsening from US$1.7 billion in FY2010/2011 and imposing further pressure on Egypt’s BoP position.
The services industry accounted for the largest share in Egypt’s economy with the value added at 49% of its GDP in 2011, followed by manufacturing (15%) and agriculture (14%). Egypt’s household consumption expenditure rose 1.3% in 2011, while its imports of goods and services grew by 21% for the same period. To an extent, Egypt’s large domestic market can help offset the adverse effect of weak external demand.
Egypt has gradually moved towards a more liberal trade regime. It became a member of the World Trade Organization (WTO) in 1995, and revamped its tariff regime in 2004 as agreed in its accession agreement. In September 2004, the Egyptian government announced a new tariff structure, which removed services fees and import surcharges inconsistent with the WTO. These changes in the tariff structure lowered the official tariff rate (weighted average) from 14.6% to 8.9%. In 2007, the government further cut duties for 1,114 items, which reduced the weighted average tariff rate to 6.9%. 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.
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 number of 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.
Besides the Association Agreement with the EU, Egypt has signed a number of free trade agreements (FTAs), which give Egyptian exports 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.
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