Despite the turmoil, the Egyptian economy is still growing. What are the reasons for this (the diversity of the Egyptian economy? the resilient mindset of the Egyptian people forged by their capacity to get through crises since the dawn of history?) and what can Egypt teach other “fragile” countries. This article attempts to answer these questions from the perspective of the Wadi Food Group and it also has a few things to say about the role of the private sector in driving economic development in general.
With two revolutions in less than twenty-four months, dwindling foreign currency reserves, a delicate security situation, and a relatively high unemployment rate, there is no real consensus on whether or not Egypt is a ‘fragile’ country. Although the OECD’s ‘States of Fragility 2016’ report classifies Egypt, the most populous Middle-Eastern and North-African state, as moderately fragile, the World Bank did not express a similar view.
There is always a difference between internal and external perspectives and working in Egypt after years abroad, I can clearly see first-hand that such an alignment is difficult to achieve. The past six years have proven the Egyptian economy to be more robust than the market expected as it continued to prevail despite a global economic slowdown significantly impacting expatriate transfers, Suez Canal revenues, and tourism income – the Country’s top three sources of foreign currency 1.
The Egyptian economy continued to prevail despite a global economic slowdown.
What makes some economies more robust than others during challenging periods? What is the private sector’s role in tough times? And why do some institutions withstand difficult situations better than others?
The Egyptian economy: overview
It is rather baffling to observers as to how the Egyptian economy is still growing when official numbers would suggest a complete slowdown. There are a few reasons for this, some less obvious than others. The key factor is the diversity of the Egyptian economy, which lessens the impact of any particular sector on the overall economy.
Another key reason is the thriving shadow economy. Studies2 have estimated that the Egyptian shadow economy accounts for 20% to 30% of GDP. This includes most self-employed blue-collar workers (cleaners, builders, delivery staff…etc.) serving people employed in the official economy, and the majority of the cash economy.
A final reason has to do with Egyptians themselves. Since the dawn of time, Egyptians are accustomed to dealing with crises – from Nile floods to various occupations since Pharaonic pre-dynasty times, to modern-day revolutions. This, combined with a civilization built around agriculture, has forged an acceptance of difficulties as part of life and a high level of belief in, and determination to, effect positive change.
Egypt post 2011
The past couple of years have witnessed a paradigm shift in fundamental economic reform with a keen focus on building a sustainable model while balancing the immediate needs of lower income brackets of society. With the decision to float the Egyptian pound on 3 November 2016, to cut subsidies and to invest in much-needed infrastructure, Egypt is definitely on track to regain international trust as one of the key potential regional markets.
Egypt is definitely on track to regain international trust as one of the key potential regional markets.
With significant foreign currency shortages in 2015 and 2016, the $12bn IMF Extended Fund Facility (EFF) was seen as a vote of confidence in the country’s efforts to bridge the balance of payments deficit. In itself, the EFF doesn’t mean much – it is the accompanying structural reforms that the private sector is keenly awaiting.
The private sector has embraced the newly-introduced VAT, higher utility costs, and inflation as the price of doing business in one of the most promising markets in the medium term. This is driven by confidence in a long-awaited overhaul of investment regulations and better transparency and stability in legislation.
The journey remains long however and all eyes are on the labour law that most investors believe will remove a major obstacle to FDI growth. There is widespread acceptance that an overhaul of this law has to be preceded by the introduction of a social welfare system that offers unemployment benefits that sustain families above the internationally-recognised poverty line; an ambitious target given the current state of affairs.
The private sector is the main engine of economic growth in Egypt, accounting for an estimated 80% of GDP growth (2015) and employing more than half of the 28.4 million workforce in 2015. The private sector is also the biggest exporter, contributing 52% of all exports in 2015, significantly more than the public sector at 36% 3.
From the mountains to the valley…
Wadi operates in this very particular economic context, which remains dynamic despite the crises. The company was founded in 1958 when, on a cold October morning, a young egg delivery boy pedaling through the narrow streets of Zahlé in Lebanon started planning his future company: a small poultry farm. Fifty-nine years later, Musa Freiji is Chairman of one of the largest groups in the poultry and agrifood industry in Egypt.
Founded with a vision to provide ‘affordable protein to the Middle-East’, Wadi Group was established in 1984 in Egypt after Musa joined forces with the late Philip Nasrallah, a prominent poultry producer in Lebanon. The Group has an estimated 17% market share of the Egyptian poultry industry , 15% of poultry feed production, ten thousand acres of olive trees and grape groves, six factories and a workforce of around 3,500. With turnover of approximately EGP4.8 billion (USD 300 million) per annum, it is companies like Wadi that are driving the Egyptian economy forward.
Over the past 30 years, Wadi has endured various difficult situations, the most significant being the avian flu pandemic in 2006 which changed the face of the poultry industry in Egypt. The Group, like Egypt as a whole, has prevailed through revolutions, currency devaluations, and evolving fiscal policies.
Adaptation in times of crisis
The past six years have been a real test of Wadi’s ability to cope with and respond to an ever-changing macroeconomic and fiscal environment. As the second-largest grain importer after China, Egypt’s food sector is significantly impacted by foreign currency availability and hence pricing. Demand in the Egyptian poultry sector has fluctuated significantly as roughly 70% of the cost of poultry meat is feed – usually imported yellow corn and soybean.
Our strategy has been to focus on the basics. People need to eat and as a responsible company, we have an obligation to continue to supply the market with an affordable source of protein even if this means compromising on profitability. Our employees need to be looked after in times of crisis and we have decided not to take workforce reduction decisions aimed at cost-cutting. Rather, we have focused on enhancing operating efficiency, “buying smarter” and reducing waste in our factories.
Our flexible financial strategy based around access to foreign currency, export markets, and preferential interest rates, also helps us to continue to compete in difficult times.
Despite investor uncertainty, Wadi has taken final investment decision on a project that aims to double its poultry production by 2020 and our poultry school – which aims to enhance our technical capabilities through vocational training – is fully operational.
PPP synergy is key
Looking back on our three decades of operations in Egypt, we believe the private sector has a key role to play in developing emerging economies. But this cannot be done in isolation as neither the government nor the private sector can singlehandedly achieve development. Working through an alternative PPP (Private-public partnership) model could result in significant synergies.
The private sector can be more effective as part of a centrally-orchestrated master plan. Having identified the key growth sectors of the economy, the private sector is best placed to help define the most appropriate investment incentives that need to be offered. The wealth of experience in the private sector – through years of knowing what doesn’t work – is a critical factor in shaping a “fit-for-purpose” incentive structure for a given economic sector.
A performance-driven mind-set in the private sector would fit well with a KPI-driven investment plan where investor rewards are linked to achievement of master plan milestones in each sector.
Finally, being the biggest employer, the private sector has a better chance of upgrading the skillset of the workforce. Incentives such as the tax-deductibility of training costs could help the private sector help the country more.
We believe in the fundamentals of the Egyptian economy, our industry, and the country’s ability to drive significant economic growth over the coming years. We expect an economic boom in the wake of the flotation of the Egyptian pound, fiscal reforms, and investor-friendly legislation. We continue to back up this belief with investments and we hope that other investors will follow suit.
2 Modelling the Egyptian Shadow Economy. Hassan & Schneider 2016.
3 CBE Annual Report 2014-2015.
4 Of Day-Old Chick (DOC) production
OECD (2016), States of Fragility2016: Understanding Violence,OECD Publishing, Paris.Available at: https://www.oecd.org/dac/conflict-fragilityresilience/states-of-fragility-2016-9789264267213-en.htm
Mai Hassan, Friedrich Schneider, Modeling the Egyptian Shadow Economy: A MIMIC model and A Currency Demand approach, 2016. Available at: http://kspjournals.org/index.php/JEPE/article/view/788
Central Bank of Egypt (CBE),Annual report 2014/2015, 2016.Available at: http://www.cbe.org.eg/en/EconomicResearch/Publications/AnnualReportDL/Annual%20Report2014-2015.pdf