Turning the AfCFTA into a real driver for industrialisation will necessitate targeted strategies to unleash the continent’s private sector, improve infrastructure and skills, and manage divergences. This chapter discusses two key issues to accelerate industrialisation benefiting from AfCFTA: mobilising finance and insurance at the continental level and updating national strategies (focusing on the case of Egypt). It builds on the OECD 2021 report Production Transformation Policy Review of Egypt: Embracing Change, Achieving Prosperity.
Production Transformation Policy Review of Egypt
Spotlight on the AfCFTA and Industrialisation
OECD Development Pathways
2. The continent is looking to use AfCFTA to accelerate industrialisation
Abstract
Introduction
AfCFTA is considered a critical steppingstone to meeting the Agenda 2063’s objectives for an integrated and prosperous Africa. Among the agreement’s main strategic objectives are to promote sustainable and inclusive structural transformation, enhance countries’ competitiveness and promote industrial development through diversification, the development of value chains and food security. To meet these objectives, and turn AfCFTA into a real driver for industrialisation, targeted strategies will be needed to transform the agreement into a driver for continental competitiveness. In particular, each country will need to identify what needs to be updated in national policy frameworks and incentives to make AfCFTA work to support local industrial development. It will also be important to identify which mechanisms are needed to compensate and manage divergences between countries, as small, less industrialised countries on the continent will require different strategies than the continental industrial hubs. Investing in upgrading infrastructure and skills will also be paramount.
This chapter discusses two, among the many, key issues to accelerate industrialisation benefiting from AfCFTA: financial services for industrialisation and national strategies (focusing on the case of Egypt).
Mobilising finance and insurance at the continental level
A dense and well-connected, reliable and effective finance and insurance ecosystem is crucial for continental trade. The continent’s development finance institutions have long supported African trade through financing transport, energy and trade infrastructure projects, by providing concessional finance to traders and by conducting capacity building. Recently, such actions have been expanded in collaboration with the AfCFTA Secretariat and the African Union to address two main areas:
Developing innovative infrastructures to underpin a continental payments and insurance ecosystem
The Pan-African Payment and Settlement System (PAPSS) was launched in January 2022 by Afreximbank in collaboration with AU to reduce transaction costs for African firms to allow them to pay securely and instantly for intra-African transactions in local currency. Prior to PAPSS, cross-border payments for goods had to be routed to an international bank outside of the continent for clearing and settlement, which caused delays and increased transaction costs. About 80% of transactions coming out of African banks for intra-African payments are routed offshore to be settled, according to estimates by Afreximbank (2022[1]). Existing regional payment systems have proven that there is scope to reduce such costs; for example in WAEMU and CEMAC, two of the continent’s monetary unions, only 2% of settlements involved a financial intermediary outside of Africa (SWIFT, 2013[2]). PAPSS collaborates with central banks to provide payment and settlement services that are used not only by commercial banks and traditional payment service providers (PSP), but also by fintechs, thus opening the door for boosting innovation around financial services on the continent. As of January 2023, there are eight participating central banks (Ghana, Nigeria, Guinea, Liberia, Gambia, Sierra Leone, Djibouti) and 36 commercial banks. Increasing participation of countries as envisaged (all central banks are to sign up by end of 2023) would enable the system to reach its potential to support intra-African trade. To achieve this, it will be important to continue working in collaboration with local stakeholders and address remaining obstacles to participation.
The Afreximbank-African Collaborative Transit Guarantee Scheme introduced by Afreximbank in collaboration with the AfCFTA Secretariat and RECs, aims at the use of single transit guarantees to replace the need for national bonds. For example, a good exported from Egypt to South Africa on the Cairo-Cape Town trans-african highway (still under construction) will need to cross eight countries to reach its destination (Sudan, South Sudan, Ethiopia, Kenya, Tanzania, Zambia, Zimbabwe, Botswana). Because few RECs fully implement regional transit guarantee schemes, traders are often required to post national bonds in each border, delaying trade. With this newly introduced scheme, Afreximbank can offer direct issuance of guarantee services to Intra-African Trade Champions, export trading companies, freight forwarders and clearing agents, transporters, authorised economic operators and other eligible ‘parties’ or counterpart guarantee/reassurance to national operators to boost confidence in local bonds and avoid requirements for cash-backed instruments.
Putting in place dedicated financing to manage challenges arising from liberalisation. There are two different funds that have been recently set up for this purpose, as part of AfCFTA’s set of operational instruments.1 The Adjustment Fund will aim to assist AfCFTA member states to manage revenue disruptions associated with liberalisation through grants, concessional funding, commercial credit and technical assistance. Afreximbank has committed USD 1 billion to this fund, with the total size estimated to reach USD 8-10 billion. Moreover, an Automotive Fund is earmarked, with Afreximbank again committing USD 1 billion, with the aim of developing the automotive sector in Africa and creating demand through consumer financing.
Further enabling the scaling-up and consolidating resources to support trade in Africa will be crucial. There is scope to further increase development finance. For example, while the continent counts about 84 national development banks and around 13 multilateral ones, these tend to be small with few exceptions, according to data by AFD and Peking University. Together these banks have combined assets of around USD 188 billion, a bit higher than Brazil’s BNDES (USD 150 billion), whereas China Development Bank alone had assets of USD 2.6 trillion (Xu et al., 2021[3]). Expanding trade finance is also important. Africa’s trade finance gap for instance was estimated to be USD 81.8 billion in 2019, about 5.5% of the global total, whereas the country accounts for 3% of global trade. Currently on top of continental institutions such as Afreximbank and the African Trade Insurance Agency, only ten countries in Africa (Algeria, Egypt, Ghana, Morocco, Nigeria, Senegal, South Africa, Sudan, Tunisia and Zimbabwe) have Export Credit Agencies that provide export finance, (Kim et al., 2022[4]; AfDB and Afreximbank, 2020[5]; AUC/OECD, 2022[6]). Plugging other related gaps in the financial ecosystem will also be needed for businesses to reap the benefits of AfCFTA, such as improving financial inclusion, particularly for MSMEs, and access to market finance for African businesses (ECA, AU, AfDB and UNCTAD, 2021[7]).
Upgrading national strategies to tap into AfCFTA: Focus on Egypt
Countries in Africa are updating their national strategies to bring existing frameworks in line with the requirements of the AfCFTA and to design specific policies and actions to benefit from greater integration. This section gives an updated snapshot of Egypt, following the Production Transformation Policy Review (OECD, 2021[8]) that examined Egypt’s participation into global value chains and identified how domestic policy, investments and international co-operation can accelerate sustainable development in the country.
Egypt is one of Africa’s top industrial and trade hubs, but trades little with Africa. The country counts on AfCFTA to diversify and upgrade its industrial capacities (Box 2.1). Egypt is Africa’s top producer in terms of manufacturing value added (MVA), accounting for approximately 22% of the African total. The country has developed a relatively diversified industrial base, with the top three industries by value comprising refined petroleum, food and beverages and chemicals. However, Egypt’s share of African exports is lower. Egyptian exports accounted for 7% of Africa’s exports to the world, the third largest after South Africa (20%) and Nigeria (9%). Within Africa, Egypt is a large exporter, accounting for about 6% of intra-African total exports and 11% of manufactured ones (Figure 2.1). Only 12% of Egypt’s exports go to African markets, a share similar to other big exporters such as Nigeria (11%), but lower than Ghana (19%) and South Africa (20%). The country’s share of intra-African imports is lower, at around 2%.
Figure 2.1. Egypt is one of Africa’s big exporters, but trades little with Africa
Source: Authors’ elaboration based on (UNCTAD, 2023[9]), Unctadstat, https://unctadstat.unctad.org/EN/.
Box 2.1. Egypt is one of Africa’s heavyweights
The country has a strategic position linking Africa, Europe and the Middle East. Egypt is the second largest economy on the continent, with its GDP (constant 2015 USD), second only to Nigeria in 2019-21 (authors’ elaboration based on (UNCTAD, 2023[9])). With 109 million inhabitants, Egypt is also the third-most-populous country, after Nigeria and Ethiopia.
Manufacturing has become an important activity within the country (Figure 2.2), accounting for 17% of total GDP, higher than the OECD average, as well as the Africa and MENA ones, but lower than in Southeast Asia where thick export-oriented supply chains have developed. Egypt has developed a relatively diverse industrial base with refined petroleum accounting for around 22% of total manufacturing value added in 2019, followed by food and beverages (19%), chemicals (13%), textiles and apparel (8%) and electronics and electrical (E&E) (6%) (authors’ elaboration based on (UNIDO, 2022[10])).
Egypt has also become a key investment hub on the continent (OECD, 2020[11]; 2021[12]). Egypt was the largest recipient of FDI inflows into Africa until 2020 and the second largest one in 2021 after South Africa. Prior to the pandemic, foreign direct investment flows had been growing at a modest rate annually since 2011, reaching an average of 3.3% of GDP during 2017-19 – higher than the rate observed in MENA (1.8%) and Africa (1.9%). During the pandemic, investment flows dipped, with the average reaching 1.4% in 2020-21. The top investors in Egypt in terms of greenfield FDI are made up of traditional partners of the country, such as the European Union (19% of jobs created), countries in MENA, such as United Arab Emirates (18%) and Saudi Arabia (10%), and the United States (5%), as well as new partners, such as China (18%) (data for 2018-21) (authors’ elaboration based on (Financial Times, 2023[13])).
Figure 2.2. Egypt is Africa’s top manufacturer
Note: MVA: manufacturing value added.
Source: Authors’ elaboration based on (UN National Accounts, 2022[14]), Analysis of Main Aggregates (database), https://unstats.un.org/unsd/snaama/.
While the country benefits from a government committed to economic transformation and a private sector that is willing to explore new competitiveness drivers, Egypt also faces long-standing structural challenges that can hamper future progress. Among these, the most important that emerge are:
Updating infrastructure. Egypt is home to the Suez Canal, which handles 10% of the world’s maritime traffic. However, infrastructure could be further improved, reducing fragmentation in the country’s port system, increasing co-ordination among modes of transport and upgrading the rail network. Digital connectivity has also improved, but it is still below potential. Based on measurements by Ookla, speed was 49.91 in May 2023. Meanwhile, the OECD average was 109 Mbps.
Changing economic specialisation and innovating. Egypt’s current economic specialisation poses challenges for environmental sustainability. For example, oil & gas is still a top economic activity, accounting for as much as 9.7% of GDP and 23% of exports. Investments in innovation are low. Egypt invests around 0.96% of GDP in R&D, about one-third of the OECD average (2.75%) with the majority coming from the public sector.
Benefiting more from trade. Egypt’s trade openness has remained relatively stable since the 1990s, with a trade to GDP ratio of 40-50% prior to COVID-19, lower than Morocco (83%) and the OECD (57.2%). Moreover, there is room to increase the value added and sophistication of exports.
Source: (OECD, 2021[8]), Production Transformation Policy Review of Egypt: Embracing Change, Achieving Prosperity, OECD Development Pathways, https://doi.org/10.1787/302fec4b-en.
AfCFTA has the potential to increase the scale of Egyptian exports by expanding market access on the continent beyond traditional North African destinations. Most of Egypt’s intra-Africa trade is with other North African countries (Figure 2.3). For example, the top three export destinations for Egypt in Africa in 2020‑22 were Libya, Morocco and Sudan, which together accounted for about 45% of exports to the continent. Egypt has enjoyed longstanding historical and trade ties with the Middle East and North Africa, partly explaining this concentration. The country, for example, enjoys market access through the Pan-Arab Free Trade Area (since 1998) and the Agadir Agreement between Egypt, Jordan, Morocco and Tunisia (2007), while Egypt is a member of the COMESA, where Tunisia, Libya and Sudan are also members from North Africa (2000 for the FTA). AfCFTA is set to preserve these ties, while adding 32 new FTA partners in Egypt, including some of the biggest African economies, such as Nigeria and South Africa, and several partners in West Africa, thus expanding the market reach of Egyptian products. Beyond the lower tariff barriers, the AfCFTA will also encourage the diversification of Egyptian exports within Africa by facilitating the mutual recognition of quality and standardisation certificates and by enabling investments and trade facilitation procedures that are more streamlined and harmonised. Finally, Egypt could leverage its geographic position to optimise AfCFTA and strengthen connections to European and Middle Eastern markets.
Figure 2.3. Egypt’s continental trade partners concentrate in North Africa
Source: Authors’ elaboration based on (UNCTAD, 2023[9]), Unctadstat, https://unctadstat.unctad.org/EN/.
In line with continental trends, trade with African countries also has the potential to enhance the sophistication of Egypt’s exports. Egypt’s exports to Africa are comparatively more sophisticated and show higher value added relative to its exports to the rest of the world (Figure 2.4). For example, fuels made up 26% of exports to the world, but only 3% of those to Africa. When it comes to food products Egyptian exports to the world are evenly split among processed and unprocessed ones, but most food exports to Africa are processed. In fact, almost none of Egypt’s top 20 exports to the continent are unprocessed ones with top items including chemicals (24% of total), textiles (6.9%) and electrical and electronics (5.4%). However, imports from Africa are generally less sophisticated than imports from the rest of the world, with about 25% unprocessed food items, and a further 13% classified as fuel. Other main items imported from Africa include copper (22%) and coffee, tea and spices (14%).
Figure 2.4. Egypt’s exports to Africa are more sophisticated than exports to the world
Source: Authors’ elaboration based on (UN Comtrade, 2023[15]), database, https://comtrade.un.org/.
The potential to benefit from preferential rates within AfCFTA, compared to the existing relatively high barriers that exist among RECs, and for cumulating value added across the continent could also encourage Egypt’s participation in continental value chains. Currently, Egypt participates little in value chains, with foreign value added representing only about 10% of its exports during 2018-20, compared to 21% for South Africa and 30% for Morocco (authors’ calculations based on (OECD, 2023[16])). While it takes much more to drive value chain development than low tariffs and regional cumulation, these can help reduce the burden on firms wishing to localise production in different countries to take advantage of the competitive assets present in different locations. For example, Egypt aims to become a hub in electronics, and it has taken steps in that direction with several export-oriented production facilities in screens, among others, established in the last few years (OECD, 2021[8]). Under AfCFTA, when Egyptian firms import components for electronics production from a party to AfCFTA, such as for example printed circuit boards from Mauritius or South Africa (the continent’s top exporters in this item), they would be able to count these inputs towards the value added that qualifies for preferential access.2 Moreover, the same rules of origin will apply regardless of what the final market will be in Africa. This setup could lower transaction costs and further incentivise investments in Egypt to tap into supply networks and markets in Africa. Nevertheless, the extent to which RoOs will strike a balance between encouraging continental industries and making preferential trade easy to access remains to be seen (Byers, Apiko and Karkare, 2021[17]).
Egypt has taken important steps to promote trade and investments in Africa (OECD, 2021[8]). The Egyptian government has set up a national committee for the implementation of AfCFTA, headed by the Ministry of Trade and Industry and with the participation of relevant agencies and the private sector. This is in line with similar actions by other state parties that look to build spaces with various institutional forms in order to streamline the implementation of the AfCFTA in a way that is aligned with national development goals, including Ghana’s National Coordinating Office, AfCFTA National Implementation Committees in Kenya and Rwanda and a National Action Committee on the AfCFTA, Nigeria (Sebahizi et al., 2023[18]). Egypt has also put the spotlight on raising awareness with the private sector. Moreover, the country has advanced in trade facilitation and infrastructure for trade. Egypt, for example, is speeding up clearance through the application of the Advanced Cargo Information (ACI) system with the Customs Law No. 207/2020, as part of the Egyptian Single Window System (the NAFEZA platform). ACI is a pre-registration system for shippers to ports in Egypt, which enables goods to be checked and cleared before they enter ports through a variety of digital tools including blockchain technology. The country’s overall trade facilitation programme also includes plans to establish and upgrade logistic centres in Cairo, East and West port Said, Port Tawfik, Ain Sokhna, Damietta, Dakhilah and Alexandria, as well as the construction of new port facilities, dry ports, and upgrades to the rail and road system. One of the key elements of this package is the Cairo-Cape Town Road or Pan-African highway, which will connect Egypt to Sudan, South Africa, South Sudan, Ethiopia, Kenya, Tanzania, Zambia, Zimbabwe and Botswana.
One way in which Egypt could benefit more from continental trade is by updating metrological, standardisation and accreditation services. Capturing consumer trust via the reputation and branding of Egyptian goods and services can provide Egyptian firms with an advantage vis-a-vis competitors in the African market, and ensuring quality is a critical step towards it. Egypt is home to one of the best-established and experienced quality infrastructure systems in Africa and the Middle East (Figure 2.5).
It consists of the National Metrology Institute (NIS) under the Ministry of Higher Education and Scientific Research (MHE&SR), the National Standardisation Body (EOS), the National Accreditation Body (EGAC), and the General Organization for Exports and Imports Control (GOEIC), all under the Ministry of Trade and Industry (MTI) and the Administration of Assay and Weights (AA&W), responsible for Legal Metrology, under the Ministry of Supply and Internal Trade (MSIT). Strategic orientation and co-ordination of these components is facilitated by the National Quality Council (NQC)3 under the MTI and a Secretariat within EOS. A new Law of Metrology approved in 2020 by the Egyptian Parliament is an important step ahead and is poised to change the governance of the quality infrastructure system with a National Council on Regulation of Metrology and Calibration under the Prime Minister and with multi-ministerial participation, and a Consultative Committee with representatives of the main institutions, tasked with providing technical support and carrying out research.
On top of ensuring that the new law is applied appropriately and its implementation monitored according to international best practices, Egypt could look to improve the articulation of the quality infrastructure system with actors that are key for the development of emerging technologies. For example, the Ministry of Electricity and Renewable Energies (MERE) and the Ministry of Communication and Information Technology (MCIT) are active in the development of standards relevant to Industry 4.0 but could be better linked to the rest of the national quality infrastructure system governance architecture. Moreover, academia and industry are not represented in the highest levels of decision making in Egypt’s QI system, even though the government works closely with the private sector throughout the policy process (represented by Federation of Egyptian industries (FEI), Federation of Egyptian Chambers of Commerce (FEDCOC), and the various Exporting councils). Closer co-ordination between the three main pillars (metrology, standardisation, and accreditation) and the ministries and institutions responsible for product safety, human health, food safety, energy, consumer and environmental protection is also needed to ensure Egyptian quality in international markets. Increasing Egypt’s co-operation with regional QI organisations – Pan-African Quality Infrastructure (PAQI), the Intra-African Metrology System (AFRIMETS), the African Organisation for Standardisation (ARSO), African Accreditation Cooperation (AFRAC) – could help to promote QI as a tool for advancing industrialisation and exports. In addition, Egypt needs to improve the availability and quality of services, including making them more available across the country. For some areas that are important to Egypt, such as agro-food, a more targeted approach is also called for. For example, chemistry and microbiology play a lesser role in Egypt’s calibration and measurement capabilities with regard to supporting agro-food quality. Moreover, there is currently 11 proficiency-testing providers that represent a good starting point, but these need to be expanded to improve the technical competences of testing labs. Currently there is also only one accredited certification body for agro-food and one for Halal certificates, and these could be expanded.
Figure 2.5. The governance of the national quality infrastructure system in Egypt, 2022
Source: (Göthner, 2022[19]), “Is Egypt’s National Quality Infrastructure fit for AfCFTA”, background document.
For Egypt to fully reap the benefits of AfCFTA, the country will also need to strengthen trust, south-south co-operation and production linkages with other members across the continent to ensure that integration will work in a way that is beneficial to all countries, independently of their initial manufacturing capacities. Expanding, for instance knowledge and co-operation opportunities though trade missions to African countries, in tandem with designing incentives and policies to enable players to access the country’s quality infrastructure services, particularly for MSMEs, would be beneficial in this respect. Along with other industrial hubs on the continent and in the framework of the AU, Egypt has a key role to play in investing in partnerships and knowledge sharing across the continent.
References
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Notes
← 1. The AfCFTA operational tools are: the e-Tariff Book, the NTB monitoring and reporting mechanism, the PAPSS, the Automotive Fund and the Adjustment Fund.
← 2. Whether the full value or only the value added of the components produced in the importing country can count towards cumulation and the method of calculating will depend on the outcome of the ongoing negotiations.
← 3. The Council’s members include: heads from EOS, National Quality Institute, General Organization for Import and Export control, Industries Federation, Industrial Control Authority, Chemistry Authority, Chambers of Commerce Federation, Consumer Protection Agency, the Executive Director of the National Council for Accreditation, Executive Director of the Industry Modernization Center, Chief of the Foreign Trade Sector, Ministry of Industry and Trade, Chief of the National Institute for Standards, and representatives from the Industry Council for Technology and Innovation, the Small and Medium Industry Development Center, and representatives of the Ministries of Defence, Military Production, Health, Agriculture, Internal Trade, Environment and Scientific Research and in areas related to quality affairs and market surveillance.