01 JULY 2024

Doing Business in a Fast Changing World

Keynote speaker:

H.E. Dr. Mahmoud Mohieldin, UN Special Envoy for Financing Sustainable Development

Current global geopolitics have created a deficit in trust coupled with a surplus in crises and economic turmoil. Countries need to be prepared to minimize the risk while anticipating the impacts on the local level.
Given the recent and ongoing shocks impacting the global economy — including the pandemic, the Russian-Ukrainian conflict, and the Gaza war — Egypt needs to establish an economic crisis group to anticipate and manage future emergency scenarios.
With the formation of Egypt’s new Cabinet, it is pertinent to emphasize the actions needed at the national, regional, global, and most importantly, local levels. The road to hell is paved with good intentions, however, and we must do more than just talk about what must be done.
Key areas of change under discussion since 2017  have been confirmed, tested and are now happening faster than ever before:

  • Demographic transitions. There is a growing need for talent and skills everywhere, especially in Europe. Egypt’s young population holds  a comparative advantage and opportunity as well as a challenge for  human capital formation. It calls for significant investments in education, health, talents and skills.
  • Fast urbanization. Egypt lost opportunities in farming and agriculture due to random planning. There is need for comprehensive urban planning and organized infrastructure to prevent informal settlements and the disappearance of rural spaces.
  • Climate change. We are currently experiencing unprecedented rising temperatures, disruptions to farming, and various climate-related disasters. Investments in resilience and mobilization of resources are crucial.
  • Commodity cycles. Dealing with the ups and downs of the market requires reliance on risk mitigation tools and diversification of trade.
  • Technological disruptions: Artificial intelligence (AI) can directly and indirectly affect macroeconomic stability, fiscal policies, monetary issues, as well as balance of payments. Developing countries are not necessarily ready to deal with AI for several reasons, including a lack of investment in human capital, insufficient digital infrastructure, and regulatory issues related to the ethical use of the technology. Creating clear regulations is essential to harness the opportunities that AI and technology present.
  • Fragility and violence. With all the disruptions happening within and across borders, countries need to be ready to deal with the spillover and outcomes. Countries in Europe are concerned with the spillovers related to forced migration and refugees.
  • Globalization: We live in a fragmented economic system suffering from around 3,000 trade restrictions now compared to 1,000 in 2019, in addition to an increasing number of restrictions on the flow of capital. Countries need to cooperate and collaborate, sharing expertise and technology. The U.S. investments in human capital to improve education in Egypt serves as an excellent example of effective technology transfer.
  • Shifts in the global economy: The center of economic gravity has been shifting towards the East. These countries grow faster, their economies are bigger, and they are investing in every aspect of society including human capital, education, and digitalization.
  • Readiness for future crises: There is a need for investments in resilience and in service management, in order to quickly adapt to shocks.

Critical factors that keep developing countries in trouble: What to Avoid

  • Relying on civil service to deal with joblessness.
  • Underpaying civil servants compared to the private sector.
  • Cutting fiscal deficits by sacrificing public investments, especially in infrastructure.
  • Subsidizing energy, except for very limited subsidies for highly vulnerable segments of the population.
  • Open-ended protection for specific sectors.
  • Imposing administrative price controls.
  • Banning exports and limiting trade.
  • Exchange rate misalignment.
  • Resisting urbanization and underinvesting in infrastructure.
  • Ignoring environmental implications.
  • Poorly regulating the banking system and excessive interference.
  • Ignoring the quality of education and measuring education progress only by enrollment rates.

What to do about our fast-paced changing world?

        • Stop doing the wrong things. (Avoid practices that have been tested and failed.)
        • Prioritize the right things.
  • Savings are much more important than investment, as a ratio. There has always been a savings gap here in Egypt. Back in 1960, the ratio of savings to GDP was 3.5%, compared to an investments-to-GDP ratio of 15%. In 1974 following the Open-Door Policy, the ratio of savings to GDP increased to 8% while the ratio of investments to GDP was 19%. Forty years later, in 2014, savings to GDP was around 5.2%, while investments to GDP was 14%. According to the World Bank, in 2023, the gap between the two ratios was around two percentage points, shrinking on the back of a decline in the investments-to-GDP ratio. If there is no domestic savings, then countries borrow or attract investments to get flows of capital.
  • Investments are not only about capital from foreigners. They are also about transferring the technology, skills, export orientation, and systems of management to the local workforce.
  • FDI should be prioritized, even when there are sufficient savings or a surplus. Countries in the Gulf with their surplus of savings are still keen to attract FDI by offering incentives and providing a decent business environment.
        • Exports and Imports.
  •  Egypt doesn't face a problem with imports, only challenges in this area. When comparing Egypt to other countries, the imports-to-GDP ratio is within an acceptable range. Most of our imports consist of essential commodities and machinery.
  • Our major issue lies in exports: we don't trade as effectively as we should. For example, Vietnam is importing 103% of GDP, while exporting 105% of GDP. Egypt is exporting around 13% of GDP.
  • Egypt needs a new industrial policy that supports and facilitates exports, incorporating green components, rapid digitalization, and incentives. For example, the U.S. industrial policy is supported by the Inflation Reduction Act, while the EU has the Carbon Border Adjustment Mechanism.
        • Public spending and tax revenues.
  • Our main problem is not with the ratio of public spending-to-GDP but rather in the ratio of tax revenues-to-GDP, which is less than 15%.
  • Public investment is required, in fact it needs to be doubled in some areas of the country, but private sector investments need to be multiplied by a factor of 5 to 6.

The way forward
We need to keep three main rules in mind: common sense, pragmatism, leveling the playing field. Our Extended Fund Facility with International Monetary Fund (IMF) is scheduled to end before the end of 2026, and with the fast-changing world, Egypt needs to be prepared. According to the IMF, Egypt will have positive growth rates, lower inflation, less debt to GDP and less debt service to GDP. How will this happen?

  • Investments by the private sector, in partnership with the public sector in human capital, infrastructure, and green transformation.
  • Governments cannot function on transactions alone; Egypt needs to support economic growth with the right policies and institutions.
  • We need to create a new home-grown development model to help the country work towards Vision 2030, which is fully compatible with the UN’s Sustainable Development Goals.
    • There is a need to strengthen financial resources and provisions for international reserves.
  • Even before shoring up its financial resources, Egypt needs to mobilize and invest in human resources. People with the right training will be prepared to manage shocks and unfamiliar situations.
    • We need to line up a standby agreement.
    • We need to level the playing field by applying the law that was passed a few months ago.