The Egyptian government is committed to export promotion. Senior government officials have been stating that, “Exporting is a matter of life and death for the Egyptian economy”. And over the last ten years, this statement has been supported by sustained reform efforts to reduce the bias against exports through such measures as trade liberalization, the adoption of duty drawback/tax rebate and temporary admission schemes, and the simplification of customs procedures. Yet, the export record does not correspond to this commitment and reform effort. The trend, composition and destination of exports have not grown sufficiently to generate the foreign exchange needed to boost economic development.
Clearly something is not working – either reform priorities are not well targeted, the measures taken are insufficient, or a mix of both. This Policy Viewpoint addresses the export puzzle in Egypt. The novelty of this study is not in identifying the variables that impair Egyptian exports. Several studies have identified such variables, which include lack of exchange rate competitiveness, high levels of protection, excessive costs of transport and communication, and large transaction costs in dealing with customs and tax administrations. Rather, the novelty lies in the attempt to estimate the extent and origin of the disincentives to export, with a view to proposing a set of priority actions that correspond to the most important variables. The analysis is guided by the simple notion that producers favor selling in domestic markets because prices and cost structures make it more attractive to sell at home rather than abroad. Any measures to change their behavior will have to change the bottom line to make importing more attractive. Measures that only affect profitability marginally are not likely to make a noticeable difference.
To build the case, the Viewpoint first reviews the export performance record over the past decade. Next, an attempt is made to explain that performance record by comparing the rates of return of two hypothetical producers in which one is an exporter and the other sells exclusively in domestic markets. The analysis moves on to compare the effects of Egypt’s export incentive structure on profitability with those of other developing countries. On the basis of the above, the note simulates the impact of different variables on the profitability of Egyptian exporters in an attempt to identify reform priorities.
Author(s): Ahmed Galal and Samiha Fawzy