Economic opportunities between Egypt and the EU: reconsidering the potentials of the Egyptian economy.

Researcher: Hussien el Fawal

Under the supervision of:

Aly Shaheen,

Dr Javier Porras

 

Introduction

According to the Cambridge Dictionary, a trade agreement is a formal agreement between two or more countries about improving trade with each other. A trade agreement between the EU and Egypt may have not met projected expectations before, however this paper will surely introduce new ideas and data supporting the claim that new trade agreements are mutually beneficial for all parties involved. Warren Buffet once said “In trading, everything works sometimes and nothing works always”.  An unsatisfying agreement between Egypt and the EU may have been the case in 2004, however with the changes that took place and the material as well as fundamental improvements Egypt has undergone, it would potentially be extremely rewarding for all parties.

Below, a case will be made to support the aforementioned claim. The data offered will be undeniably informative, projecting sustainable growth in trade between Egypt and the EU. To begin, an introduction of the different trade models followed by a history of Egypt and its encounters with various trade agreements then finally, a summary of the key findings as well as a recommendation.

Introduction to trade liberalization

Trade liberalization promotes free trade with member countries, which allows trade to commence with no regulatory barriers or tariffs. This reduced regulation decreases costs for member countries that trade with other nations and may result in lower consumer prices given that imports will be subject to lower fees and competition will most likely increase. Increased competition from abroad as a result of trade liberalization creates an incentive for greater efficiency and cheaper production by domestic firms. This might push a country to shift its resources towards industries it may have a competitive advantage[1].

Since the establishment of the General Agreement on Tariffs and Trade (GATT), it has been globally understood that there are three main trade fronts. Unilateral, Preferential with a few partners and Multilateral within the GATT, now incorporated by the World Trade Organization. Of the above approaches, preferential trade liberalization gained the most popularity. Below are brief definitions of each trade front.

Unilateral

A unilateral approach is when a country pursues a specific agenda with no prior engagement with other nations. This method/strategy is usually used by under-developed countries.

Preferential Liberalization

Preferential liberalization or, as it is also known, discriminatory liberalization is when a country liberalizes its regulations for a specific group of countries (referred to as ‘member countries’) often giving them the opportunities of free trade and no regulations and tariffs. Non-member countries on the other hand face more stringent regulations. These types of regulations almost eliminated competition between member and non-member countries[2].

Multilateral

The multilateral approach, also known as reciprocal liberalization, is when a written agreement is signed between two or more nations with regulations and rights distributed equally amongst all parties involved. Multilateral trade agreements, however, are commerce treaties among three or more nations. The intent of such agreements is to reduce tariffs and make it easier for businesses to import and export[3].

Egypt and Trade Agreements

Egypt’s unique strategic geopolitical location offers an ideal advantage of access to markets with various trade agreements. The multiple Free Trade Agreements Egypt is part of, provide access to 1.5 billion consumers, 100 million of which are located in Egypt. Furthermore, and for the purpose of this paper, due to its geographic location Egypt is renowned for connecting investors with established and emerging markets. With 8% of world trade passing through the Suez Canal, both shipping time and costs are lower than any other route (7 days less to the USA than from China and 50% cheaper compared to the UAE).

Previous agreements and current opportunities in the Egyptian economy 

The EU-Egypt Association Agreement has been in effect since 2004, creating a free-trade area between the EU and Egypt, by removing tariffs on industrial products and making agricultural products easier to trade. This agreement led to an extensive rise in the trade exports from EU countries to Egypt however, Egyptian exports did not equally flourish which led to the intensive criticism of the agreement.

Egypt’s main exports to the EU in 2017 ranged from fuel and mining products to textiles and clothing, while the main imports ranged from machinery and transport equipment to agricultural products (Figure 1).

Figure 1:

Nevertheless, the new regime that took the lead in 2013 marched towards a tight economic reform programme with the IMF. These policies aimed to stimulate the manufacturing sector through supporting SME’s, conducting more efficient fiscal spending and stabilizing the economic atmosphere to support the recovery of the Egyptian economy.

Since then, import and exports increased between the EU and Egypt. In 2017, the EU’s main imports of goods from Egypt were fuel and mining products (€3.2 billion), chemicals (€1.3 billion) and textiles and clothing (€8.6 billion). The EU’s main exports to Egypt are machinery and transport equipment (€6.9 billion), chemicals (€3.1 billion), fuels and mining products (€2.6 billion) and agricultural products (€1.3 billion) (Figures 2a and 2b).

[4]Figure 2a:

Figure 2b:

The free trade agreement focused on increasing trade between both regions by gradually reducing custom duties fee on trade annually until they were completely eliminated for certain products. Since the creation of the agreement, EU-Egypt bilateral trade has more than doubled from 2004-2017, starting at €11.8 billion to €27.9billion in 2017 (Figure 3).

Figure 3:

[5] GAFI(2017)

The Emerging Exports Sector in Egypt

Before the implementation of floatation policy in 2016 the exporting sector was profoundly shrinking, where due to the severe foreign reserves crisis the Egyptian government implemented the floatation policy that made the Egyptian economy more competitive in the global markets as well as in other exports-oriented policies. According to the World Bank the Egyptian exports had increased from 34 Bn$ in 2016 to 54 Bn$ in 2019 where the impact of the policies was rapid and significant (Figure 4)[6].

Undoubtedly, the gas exploration that started taking place in the Mediterranean region in 2016 opened the door for more trade and investment opportunities in the Egyptian economy especially with its EU neighboring countries.

Figure 4:

Source: World Development Indicators

The Egyptian economy was one of the major Natural Gas exporters globally; however, as was the case with many Egyptian industries, economic instability negatively affected the natural gas sector turning Egypt into a net natural gas importer. The introduction of gas exploration was extremely beneficial for the Egyptian economy. The Egyptian government exploited the opportunity adequately by enhancing its LNG infrastructure and establishing new pipelines which had a clear and positive impact[7]. Egypt has officially become a net exporter of LNG last year, bringing gas ambitions ever closer. Egypt’s LNG imports fell to zero in 2019 while exports reached USD 1.24 Bn, making a nearly 150% year on year increase according to Capmas (Figure 5).

 

Figure 5:

Source: Ceicdata (2020)

European Importers of LNG from Egypt in 2019, were reportedly almost quarter of all Egypt’s LNG exports (Figure 6)[8]. While the LNG industry is rapidly growing in Egypt the Energy-Hungry European countries should approach the Egyptian government for trade agreements related to the LNG industry in order to insure a consistent energy supply in the upcoming years.

Figure 6:

Source: OEC (2020)

The Future of the Gas industry in Region

After the establishment of the Eastern Mediterranean Gas Forum, in January 2019 which aims to develop the region’s gas market; it’s clear that the government aims to develop and stabilize the natural gas market as well as minimizing the infrastructure costs involved in production. As well as the Exclusive economic zone agreement between Egypt and Greece that insures the exploration and drilling rights of both countries. Khaled Abu-Bakr stated that after turning the EMGS into an international organization that is internationally well-recognized made Egypt the leading spot for the regional gas market. The organization aim is to stabilize the political relations between the involved countries to reduce the industry risk. Simultaneously, the organization aims to enhance economic co-operations between EM countries to minimize the production costs through major infrastructure projects. These roles works on maximizing the economic return of the gas industry in the region. Apparently, the establishments of this organization gives the green light for the foreign investors and international organizations to invest in the Egyptian gas industry.

Egypt as the leading FDI Destination

Promoting the economic atmosphere for foreign investors was a crucial task for the Egyptian government in order to increase FDI inflows. They accomplished it by improving infrastructure and doing business procedures. The Egyptian government worked intensively to ease the process of doing business, jumping 8 places in 2019, according to the ‘Doing Business in Egypt Report 2019’. The efforts Egypt put towards improving its infrastructure have noticeably paid off rapidly. Based on the 2018 GCI report, Egypt’s ranking rose 15 spots, ranking it as 56^th in terms of infrastructure, GAFI (2019). The report also showed the advancement in the labor market efficiency as the ranking of the Egyptian economy increased by 4 spots as a result of Women and Youth Empowerment through the provision of better career opportunities. When it comes to the market size index, the Egyptian economy is preforming outstandingly by capturing 24^th place for its tremendous well-known human power. The above-mentioned statistics make Egypt one of the most appealing destinations for foreign investment globally and the most appealing in the MENA region. According to a report made by the World Bank, FDI inflows to Egypt has increased from USD 4.2 Bn in 2013 to USD 9.01 Bn in 2019, making Egypt the leading destination for FDI in Africa (Figure 7).

Figure 7:

[9]

World development indicators (2020)

According to a study mentioned in the African Economic Overview, the most attractive industries regarding FDI in Egypt are (Real estate, Oil, Gas and renewable energy).

Summary of key findings

The Egyptian economy suffered during the earlier trade agreement with the EU in 2004 for its unsatisfactory performance in terms of trade exports which lead to a growing body of criticism to be directed to the agreement. After the structural changes that took place during the last 6 years, the Egyptian economy was able to reinforce its exporting front significantly, thanks to the floatation policy and other export oriented policies. The Egyptian economy gained back its confidence as a key economic player in the region; particularly, after the exploration of a mass natural gas supply in the Mediterranean Sea where Egypt returned back as a net natural gas importer. The establishment of the EMGF and then turning it into an international organization made the potential of the regional gas more spectacular through minimizing production costs and reducing industry risk. The Egyptian government had its agenda for attracting FDI in the past year. The Egyptian economy improved its infrastructure, doing-business procedures and Labor market efficiency with FDI inflows more than doubled in the past 6 years, undoubtedly, the Egyptian economy is the most desirable FDI destination in Africa.

Policy Recommendation             

It’s crucial for the Egyptian government to consider further projects to improve the infrastructure required for LNG industries, to minimize the production costs. As well as, considering further trade agreements with the EU-countries related to this industry as the EU countries attempts to find an alternative Gas supply. Regarding the FDI the government should continue improving its infrastructure through the mega projects, as well as women and youth empowerment projects that well boost the economic atmosphere further and further. For the EU countries further agreements with Egypt is fundamental for its economic importance in the region so trade particularly in the gas industry. Also increasing FDI outflows is recommended for the high economic return resulted from its low production cost and the high economic growth potential . To sum up Egypt is considered as emerging markets with very high economic return and special geography that puts the Egyptian economy on a stable economic development track.

The EUNACR insight

For all these reasons, the analysis of independent experts, like consultants and think-tanks, who work together with the public administration and who know the reality of Egypt-EU relations is necessary. Only an objective and realistic assessment of the needs and opportunities that may arise can lead to the success of bilateral investment between Egypt and the EU. For the EUNACR, it is believed that Egypt is more capable to engaged to a preferential trade agreement with the EU as opposed to other north African states such as Tunisia and Morocco in spite having stronger relations with countries in the EU such as France and Spain. The Egyptian idiosyncrasy as well as its projected potential makes it the most significant potential partner for the EU. The Egyptian government and firms should find opportunities for European investment and simultaneously approach the European markets gradually. Where it is crystal clear that it is feasible and can be done in both the short and medium term.

 

 

Sources

1. https://ec.europa.eu/commission/presscorner/detail/en/IP_18_6664
2. https://www.consilium.europa.eu/media/23942/eu-egypt.pdf
3. https://www.thebalance.com/multilateral-trade-agreements-pros-cons-and-examples-3305949
4. https://gafi.gov.eg/English/Sectors/Pages/Trade-Agreements.aspx
5. https://www.investopedia.com/terms/t/trade-liberalization.asp
6. http://www.yorku.ca/andreyst/files/Stoyanov-Yildiz-FTA.pdf
7. data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?locations=EG-ZA-MA-CG-ET
8. https://www.ceicdata.com/en/indicator/egypt/natural-gas-exports
9. world/en/profile/country/egy/?depthSelector2=HS6Depth&tradeScaleSelector2=tradeScale0#top