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Lack of clear industrial strategy, US dollar appreciation threaten to stop production - Daily News Egypt

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Lack of clear industrial strategy, US dollar appreciation threaten to stop production

US dollar crisis facilitates flourishing of informal economy, says exporter


­­­Egypt’s industrial sector is one of the most affected by the turmoil that followed the 25 January Revolution, despite pledges by successive governments to prioritise the industrial sector. However, reality reflects the failure of those pledges. The US dollar shortage is a disease eating away at the backbone of the Egyptian industry.

At a time when the current government is trying to treat the wounded sector of diseases that infected it over the past five years, the industry is witnessing a contraction.

Meanwhile, Minister of Industry and Trade Tarek Kabil alleged that his ministry targets raising the proportion of industrial production contribution to the gross domestic product (GDP) to 23-24% in 2020, compared to 17% currently. By the end of 2017/2018, the ministry targets to achieve an industrial growth rate of 8%.

Additionally, the ministry aims to increase exports by 10% year-on-year (y-o-y), starting from the beginning of the current year until 2020.

Nevertheless, industrial stakeholders confirmed that industrial production is declining as the value of the Egyptian pound is decreasing, coupled with the US dollar’s appreciation.

Kabil confessed that the US dollar shortage has had a significant effect on Egypt’s industry, saying that 60% of the industry depends on local products, and 40% on imported raw materials.

He added that the US dollar crisis caused a drop in exports of $22bn to $19bn, and an increase in imports to $67bn in 2015.

The minister noted that the lack of US dollars had hindered the country in paying foreign factories’ dues in time, pointing out that this is an obstacle to investment.

Daily News Egypt monitored the effect of US dollar shortage on several industrial sectors.

info daily  (1)-page-001National industry is weak due to imported raw materials

Board member at the Chamber of Pharmaceutical Industries at the Federation of Egyptian Industries (FEI), Mohamed El-Bahi, said that all inputs [raw materials] of Egypt’s industry are imported, going as far as packaging materials. These imported inputs affect the operating cycle in factories.

El-Bahi added that the appreciation of the US dollar’s value negatively impacts the competitiveness of Egyptian products at home and abroad.

El-Bahi noted that the depreciation of the Egyptian pound does not increase exports because Egypt is not China, as China’s added value on its products increases its export value. However, Egypt mainly depends on imported inputs—the added value doesn’t represent much of production inputs.

El-Bahi pointed out that the US dollar’s appreciation also affects the local component strategy, which was launched by the Ministry of Industry and Trade and stipulates that any product should consist of at least 40% local components. The issue is that the local component consists of parts that are local and parts that are local imported raw materials from abroad and the US dollar’s value controls this second part of the local component.

“The US dollar issue consists of three problems. The first is the unavailability of US dollar. The second problem is the 50% appreciation of the US dollar’s value in the informal market. Thirdly is the criminalisation of dealing with the informal market,” said El-Bahi. “These three problems led to the shrinking of the industry in Egypt and the halt of some factories, while others work at 20-30% of their capacities.”

He said that there are some industries that cannot compete in light of the hard currency appreciation, such as the pharmaceuticals industry, because at least 80% of its input of raw materials is imported.

Factories with one cycle have completely stopped, while factories that have the financial solvency could hold out for a longer period, according to El-Bahi.

US dollar shortage leads to informal economy growth

Some informal factories use alternative materials that do not match international standards, while registered factories cannot use such low-quality materials since they are watched. This led to an increase in the revenues of informal factories, at the expense of the formal economy.

Instability of currency value causes difficulty in product pricing

Head of the Engineering Export Council of Egypt (EEC) Amr Abu Frekhha said that manufacturers are facing problems in pricing their products. Pricing depends on the cost of production and the market price. The market price is not determined by the local market, but by the global market price, which is related to the US dollar’s value.

Abu Frekhha added that, currently, the discrepancy between the cost and market price is big.

He explained that the US dollar’s value determines and controls all manufacturing inputs, such as steel, electricity, gas, and equipment. In addition, the manufacturers face issues in buying materials, as to whether pay according to the banks’ dollar price, or the price in the informal market, which has now reached EGP 13. The banks’ price is illogical because it is considered a low-material cost, and they cannot depend on the informal market price because it is considered a security risk, said Abu Frekhha.

Annual hard currency gap of $20m

Abu Frekhha noted that the lack of hard currency sources, such as exports, tourism, Suez Canal revenues, and the drain in foreign currency caused a hard currency gap of about $20m year-on-year.

Most of Egypt’s industries are based on assembly with low added-value

Most of Egypt’s industries are based on assembly, which consumes more US dollars than it provides. Additionally, the industrial investment climate is not attractive, as obtaining a licence to establish a plant in Egypt takes about three years, while in Dubai it takes only 48 hours, according to Abu Frekhha.

Lack of clear industrial strategic plan

Abu Frekhha pointed out that there is no industrial strategic plan for deepening and promoting the use of local components in products.

For instance, one of the important local components for the engineering industry is hydraulic industries, which do not exist in national engineering industries. If this industry is provided it will participate in promoting and developing the engineering industry.

For his part, vice president of the Woodworking and Furniture Industries Chamber, Abdel Halim Eleraky, agreed with Abu Frekhha regarding the lack of an industrial strategic plan or vision to develop the national industry.

Eleraky noted that there are no raw materials in the market to have a strong local component, which is required to participate by 40% in manufacturing products.

Overstocked goods at customs hurt companies’ export plans

Since February 2015, the Central Bank of Egypt (CBE) has imposed tight restrictions on the amount of US dollars that may be deposited in cash in banks. Banks were notified in early February that individuals and companies would be permitted to deposit a maximum of $10,000 (or the equivalent in other hard currencies) a day and $50,000 a month.

The CBE issued this measure to stop companies from buying large amounts of US dollars from the informal market, and then briefly depositing them in banks in order to open letters of credit for imports.

Meanwhile, Abu Frekhha said that the delay in receiving imports due to the US dollar shortage and limiting the amount of deposits causes stacked cargo in ports and customs, which badly affects the manufacturers. The delay of two or three months harms the companies’ exports by raising the cost of the goods’ storage.

He explained that the delay in receiving cargos, besides the continuous change in the value of the US dollar leads to losses and a decrease in the companies’ ability to export.

Further, Eleraky noted that the overstock of goods affects factories and manufacturers more than the client.

30-50% decrease in metallurgical industries factories operations

Executive director of the Metallurgical Industries Chamber at the Federation of Egyptian Industries (FEI), Mohammed Hanafi, said that the core of the US dollar problem lies in its price and availability. Therefore, an increase in its price leads to increases in production costs, which in turn leads to higher sale prices in a market characterised by recession. In this regard, Hanafi added that one tonne of steel currently costs EGP 6,200, compared to EGP 5,500 in mid-June.

As well, the lack of US dollars significantly affects the metallurgical industries since 80-85% of their raw materials are imported, causing halts in production.

Hanafi added that the problem of the US dollar became very complicated after the government started chasing the informal market as the only alternative source. The manufacturers produce as much as they can according to their supply of US dollars.

Hanafi noted that the US dollar shortage and appreciation caused a 30-50% decrease in the factories’ operations.

Egyptian pound depreciation, weak export support negatively affect exports

Hanafi said that exports didn’t increase due to a decline in production, but rather due to the increase in hard currency, which led to lower production rates.

He noted that the export support programme is an export incentive, but that the government is not committed to it. Therefore, production is irregular.

Eleraky claimed that the export support programme is not effective, noting that “in five years of export, I didn’t receive a single pound”. He added that “the main reason for decline in the furniture industries can be attributed to the fact that our export markets are Arab Spring countries”.

Shortage of US dollar causes lack of required gas for factory operations

The Minister of Industry and Trade confessed that the lack of hard currency caused a shortage in the required imported gas needed to run factories, which has caused many halts in steel, fertiliser, and cement factories.

He went on to say that it is not easy to provide the required quantities of gas for all factories, hinting that some industries, such as fertilisers, consume large amounts of gas.

For his part, head of the Federation of Egyptian Industries (FEI) Mohamed El-Sewedy said that reducing the gas price for factories reduces the cost of production, which contributes to increasing the competitiveness of local products at home and abroad.

El-Sewedy called on the government to amend the price of gas for factories to be close to the international price, in order to enable factories to operate at full capacity.

In March, the government approved decreasing the gas price for steel factories from $7 per million BTUs to $4.5, to help them re-run their operations in full capacity and reduce the steel import bill; thus, alleviating the pressure on hard currency. So far, the government has not implemented this decision.

Hanafi said that the energy crisis, which is connected to the US dollar exchange rate, decreases the operation capacity of steel factories.

“If the government solved the energy problems related to steel factories, their production would increase by 40% over the market needs, and could be exported,” said the director of the Metallurgical Industries Chamber.

Evolution of US dollar crisis causes cessation of furniture industry over time

Vice president of the Woodworking and Furniture Industries Chamber, Abdel Halim Eleraky, said that the furniture industries cost is very high due to the lack of US dollars and the increase of the currency’s price in the informal market by about 100%. This led to a 100% increase in production input (50% increase in energy prices, and 50% increase in employment wages). The increase led to a 50% increase in the price of products, which is offered in the market by 75% over its real price.

Eleraky added that furniture factories are subject to closure once their stock of hard currency runs out.

“The losses of furniture SMEs increased from EGP 450,000 to EGP 1m in the last five months due to the US dollar crisis. These losses cause erosion in the enterprises’ capital,” noted Eleraky.

Solution to rescue the national industry from US dollar

Abu Frekhha revealed that the EEC submitted a proposal to the CBE to solve the issue of the US dollar shortage and to stop the drain of hard currency. The EEC suggested setting three prices of the US dollar exchange rate, depending on the type of imported commodity. This includes setting a specific price for strategic commodities (wheat, medicine, food), another price for necessary commodities (production inputs, raw materials, equipment), and a third price for the other commodities.

Eleraky called on the government to stop promoting mega projects and pay more attention to the national economy and its local enterprises, as well as give SMEs more incentives to produce.

He opposed the strategy of restricting imports, noting that there is no local alternative to stopping imports.

Necessity to accelerate investment law issuance

Board member at the Chamber of Pharmaceutical Industries at the Federation of Egyptian Industries (FEI), Mohamed El-Bahi, said that the state has to accelerate the completion of the investment law to attract more investments.

He noted that this law takes years and hasn’t been issued yet, adding that Egypt doesn’t have the luxury of time.

El-Bahi stressed the importance of developing small and micro-enterprises to promote feeding industries for big industries in order to reduce the input cost.

The country has to pay its dues to foreign companies, because the delay in payments causes a negative impression of Egypt.

Head of FEI Mohamed El-Sewedy agreed with El-Bahi on the importance of the completion of the investment law, in addition to working on a clear plan for a monetary policy to attract foreign investment.

Removing the peg between Egyptian pound and US dollar, and shifting to multiple currencies

El-Bahi called on the government to stop pegging the Egyptian pound to the US dollar, because the United States is not Egypt’s only trade partner.  We can better handle trade exchange with other countries by shifting to multiple currencies, said El-Bahi, which would help boost foreign currency and reduce losses when currency is converted.

Open new markets to attract foreign currency

Abu Frekhha called on the government to seek entering new markets, in which Egypt may have a competitive advantage.

Eleraky echoed this solution, adding that Egypt needs to find an alternative to exporting to Arab Spring countries, since the fluctuation in exports to these countries negatively affected Egypt’s trade balance.

He also called on the Egyptian Commercial Service offices to find other markets for exporters.

Increase export support allocations

El-Sewedy said that it is essential to increase the export support programmes to reduce the import and tax burden, which increases exports.

El-Sewedy stressed on the application of the Egyptian pound trading system to decrease the impact of the informal market, smuggling, and money laundering, while working on a tax policy that applies to everyone in a fair regulation system.

 

Boxes for infographs

GOIEC – General Organization for Import and Export

Export

2014 $22.110bn
2015 $18.5bn
2016 until May $8.4bn

 

Export support fund – Ministry of Industry and Trade

2013/2012 $3.1bn
2015/2014 $2.6bn + an exceptional support of $1.1bn in September

Total $3.7bn

 

Imports

2015 (until April) $22.5bn
2015 $65bn
2016 (until April) $18bn

 

Industrial growth

2012-13 2.3%
Q4 of 2013-14 6.9%
Q3 of 15-2014 3.5%
2015 (Jan-Sept) 0.2%
https://www.dailynewsegypt.com/2016/09/19/lack-clear-industrial-strategy-us-dollar-appreciation-threaten-stop-production/
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