Sunday, 22 May 2022

As Egypt moves forward with its import substitution strategy, what sectors are in focus to shift to local manufacturing?

Which sectors are taking priority in the push towards localizing manufacturing to slash imports? The government signaled its focus on growing local manufacturing to limit Egypt’s imports. Since then, the Trade and Industry Ministry produced a list of sectors in which it is prioritizing domestic manufacturing to address local consumption needs, according to a report (pdf) based on a study of Egypt’s total imported goods and services between 2017 and 2019 to focus on the biggest drains on our import bill.

The sector selection methodology rests on three pillars: The products chosen add value to the local industry, whether through inputs, a fully-finished product, or both; the products contribute significantly to the trade deficit; and they have potential for growth locally.

Caveats: The report doesn’t specify a time frame for developing these sectors into local industries that become viable for import substitution, nor does it set expected investment values for these targets.

The targets of the strategy: Cutting imports and simultaneously boosting exports. During 2021, Egypt’s non-oil imports amounted to USD 76.8 bn while our non-oil exports fell short at USD 32.3, according to Trade Ministry figures. On the export side of the equation, Egypt is aiming to increase exports to USD 100 bn a year by 2025 as part of the government’s plan to increase the private sector’s role in the economy, Prime Minister Moustafa Madbouly said last week.

Out of >6.8k import categories, the ministry shortlisted 4.8k industrial categories that are viable for local manufacturing. These industrial categories cost us USD 60 bn in 2019 — or 85% of the year’s total import bill (USD 72 bn). Of those, 855 categories each cost USD 10 mn or more, representing 74% of the total amount of imports in 2019.

NOT PART OF THE STRATEGY: Agricultural and livestock products, fuel and petroleum products, handicrafts, and raw materials from natural resources not available locally.

The government is targeting nine industries to start: Wood and furniture, engineering, food and agriculture, chemicals, textiles, pharma and medical, printing and packaging, building materials, and metallurgical industries. These priority investment areas have a combined 141 product categories under their umbrella which together accounted for 23% of our 2019 import bill, or c.USD 17 bn.


#1- The chemicals industry has the greatest number of investment areas specified, including pipes and hoses to a variety of chemical materials. Our chemicals imports cost USD 10.3 bn in 2021, but was also the heaviest contributor to exports at USD 6.8 bn. Within the sector, the government identified six complete products to manufacture (including epoxy, paints, and varnishes), 25 for components production (including polymers such as polycarbonates and polyethers as well as ink for printers), and three for both inputs and fully-finished products. Under the plan, the sector is slated for 14 greenfield and 18 brownfield areas of investment, while production of rubber transmission belts and tires will see both types of investments.

The focus on the chemicals industry could be a boon for the automotive industry, particularly as the government rolls out its automotive strategy, by producing critical inputs such as lithium batteries (critical for electric vehicle production) and rubber vehicle parts. The strategy aims to increase local assembly, grow the component manufacturing industry, up the sector’s competitiveness to become a regional manufacturing hub, and bolster export volumes. We’re expecting to hear more about the automotive strategy by the end of the month.

#2- The government is also eyeing growing the engineering sector — but much of it will be from scratch: With the second largest number of investment areas (21), the engineering sector is a big player in the import substitution plan. However, all investment areas will require greenfield investments, the report shows. Egypt aims to manufacture 10 complete products including mobiles, tablets, and broilers, along with 10 components (including door hinges and solar cell chips). The plan also eyes producing complete products and components for electric motors. In 2021, engineering imports accounted for the lion’s share of imports at USD 22 bn, compared to USD 3.4 bn of exports.

LOOKING AHEAD- Egypt could expand into manufacturing the less complex variety of semiconductors such as those that go into household appliances including fridges and microwaves, a source from the electronics industry that asked to be off the record told Enterprise. These foundries require less capital expenditure and technical expertise and Egypt could become a regional hub for their manufacturing, the source added.

#3- Similarly, the building materials and metallurgical sector needs greenfields to expand: From stainless steel to metal plates, the sector will see components manufactured for all six product categories, with greenfield investments required across the categories. Imports for the sector reached USD 11.4 bn in 2021, while exports stood at USD 6.6 bn, accounting for the second-largest contributor to both imports and exports during the year.

#4- Pharma and medical: The sector will also need new investments to begin manufacturing diagnostics equipment, raw materials for meds, and oncology meds. The delta between pharma and medical exports and imports was significant last year, with exports recording USD 692 mn compared to imports of USD 5.12 bn.

#5- In the food and agriculture sector, the government is targeting introducing facilities to increase agricultural products such as dates, dried fruits, and dried onions while expanding their production of medicinal and aromatic oils, as well as dairy products. Several of these products contribute to Egypt’s export revenues: Dates exports, for example, brought in EGP 52 mn in 2021, increasing 21% y-o-y.

#6-9- Packaging and printing will need new investments for all areas while the textile industry is the only sector that exclusively requires brownfields, with these two sectors contributing the most to Egypt’s 1Q2022 export revenues. Finally, wood manufacturing will see increased MDF and plywood production.

WATCH THIS SPACE- A new council headed by the trade ministry was formed last November and tasked with laying out steps to encourage investments in the specified sectors with input from investors and will also set up partnerships with the private sector. Several other ministries will also be included in the council discussions including the housing, planning, finance, transport, military production, and public enterprises ministries. The Federation of Egyptian industries has also set up a committee with the same aims that met for the first time last Monday to further discuss the import substitution strategy in light of the current global market conditions, head of the committee, Bassim Youssef, told Enterprise.

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