The Food and Beverage (F&B) industry is a key facet to the Egyptian economy, given that Egyptians spend 40% of their monthly salaries on food. Egypt with a population of more than 90 million, represents a huge domestic market, and the biggest in the MENA region, as well as a center point for exports capitalizing on its existing Free Trade Agreements (FTAs) – COMESA, EFTA, GAFTA, Aghadir, EU Partnesrhip, Turkey, QIZ, TFTA – making it an excellent production base. With a growing population, Egypt’s demand for F&B continues to rise, regardless of the political and economic situation.
The industry has withstood many political and economic hardships, and most prominently the Egyptian Revolution in 2011, where it surprisingly surged as Egyptians spent USD 8 billion on snacks alone in the year of the Revolution. As many industries were collapsing since the revolution, the snack market has grown at a Compound Annual Growth Rate (CAGR) of 27.1% from 2010 to 2015 according to an Egyptian leading snack company. The overall F&B sector has been growing at a 25% growth rate annually since 2011.
The key reason for this growth lies in the obvious reason of the low prices of food products. However, due to recent measures imposed by the Government of Egypt (GoE) to manage the pressures on the Egyptian Pound (EGP), prices have hiked keeping up with the inflation, affecting the F&B Sector in Egypt.
From pre-shipment inspections (Decree 991/2015) to curbing imports (Decree 43/2016 amendment of Decree 992/2015), to customs amendments, to the passing of the VAT law; the industry has found itself hindered by many speed bumps impeding its otherwise increasing growth rate.
Decree 991/2015 | Decree 43/2016 Amendment of 992/2015
Decree 991/2015 and Decree 43/2016, both curbing imports, were intended as means to elevate quality of products entering Egyptian market, and most importantly were intended to reduce Egypt’s import volumes in order and reduce USD outflows, as a way to alleviate the foreign currency (FX) shortage faced by the country lately. According to an interview by Bloomberg with Eng. Tarek Kabil, The Minister of Trade and Industry, these import regulations measures could save Egypt $20 Billion in 2016 alone.
Decree 991 added an additional list of products which requires importers to have a pre-shipment inspection so they can be imported into Egypt. The list includes many F&B items such as dairy products, canned and dried fruits, edible oils and fats, chocolate and cocoa products, sugar products, pasta, grain products and bakery items, fruit juice, mineral and sparkling water, and soft drinks.
As the General Organization for Export and Import Control (GOEIC) started implementing the decree on shipments that have already reached Egyptian ports, the decree has left many F&B’s shipments blocked from entry in ports across Egypt. Also, many companies have had trouble issuing the pre-inspection quality certificates, and left their operations on hold.
The Ministerial decree No. 43/2016 amendment of 992/2015, was issued to register foreign factories producing a list of goods and exporting to Egypt at the GOEIC, in order to be allowed in the domestic market.
And as the decree states that the final decision to register the factory/trademark owner does not depend on the due submission of the documents, but on the decision of the Minister of Trade and Industry; there is no clear timeline for the factories to be registered presenting a huge set-back to such decision.
As the majority of the products listed in this decree belong to the F&B sector, companies operating in F&B have been dealt another blow, and more shipments were stuck in ports.
Customs Tariff Amendments
Early this year, in January, the President issued Decree 25/2016, amending the tariffs rates on a number of products, which included F&B such as some fruits, nuts, and sugars.
Luckily, these amendments were only applicable on imports that are not covered by Preferential Trade Agreements (PTAs) or FTAs.
Prices of some food items that contain ingredients listed in the decree have been affected as a consequence.
As one of the prerequisites for Egypt to be granted the International Monetary Fund (IMF loan), the Value Added Tax (VAT) Law had to be passed; which led to further inflation and consequently further price hikes. The VAT law, which became effective on the 8th of September, comes as part of an economic reform plan, which also included major devaluation of the EGP and cutting off subsidies.
Though most foodstuff are VAT exempt, many retail food items saw price increases; sugar and sugary foods increased by 5.5% , edible oils and fats increased by 5.3%, vegetables increased by 2.1% and meat by 1.8%.
And as usual, until inflation retreats to normal rates, consumers are always the ones carrying the burden; which can only mean a weaker purchasing power, less consumptions and thus dropped sales. Reduction of subsidies also major impact on purchasing power, with the price increases that were also caused by the devaluation of the EGP (twice!).
Following the VAT in September, F&B prices registered an increase of 0.7%, representing an increase of 0.38% in Consumer Price Index (CPI) compared to July, jumping from 18.4% to 19.3% against annual inflation in July and August respectively.
The ‘Sugar Crisis’
Egyptians have an undeniable sweetooth, and consume huge amounts of sugar that even local production is not sufficient, and Egypt imports about one million tonnes of sugar annually, which amounts to a third of its total consumption. A sugar shortage crisis hit the country as a consequence of the President’s austerity measures which included cutting off subsidies.
After the sugar shortage, which amounted to an 80% shortage and caused public disruption, the government resorted to confiscating sugar from groceries, supermarkets, and even private sector companies. The government even accused suppliers and traders of hoarding sugar stocks, and eventually seized what amounted to 9,000 tonnes for resale in state-run outlets at subsidized prices.
Seizing sugar from private sector companies however have put the F&B sector in Egypt at risk, as this may have led to these companies exiting the market altogether instead of investing more and expanding.
Challenges Facing F&B Producers
These restrictive regulations have given the local F&B industry a chance against imported goods. However, Egypt’s F&B industry depends on imports as Egypt imports 40% of its food and 60% of its wheat. This is mainly due to the fact that there is a major problem with suitable agriculture land availability and poor infrastructure. There is a dire need to develop F&B technology in order to meet the growing demand for food, but with the passing of the VAT law, taxing intermediary goods and services that are part of the manufacturing process, as well as taxing the machines that are part of the production process; up-scaling the manufacturing procedures have become a burden on local companies, and boosting manufacturing by building new factories and thus boosting exports, is pending solving this issue.
On the bright side, the Industrial Licensing Law which should be issued by then end of 2016, will ease the process of land allocation, and reduce the number of stakeholders associated with issuing land, from 8 to 1, which is the Industrial Development Authority (IDA).
The F&B sector has faced many challenges, especially in 2016, due to the strict economic measures and trade policies, yet it has remained intact. The economy might be undergoing major challenges, but GDP is expected to rebound in 2017, reaching a growth of 5.2% according to the state budget. With the IMF loan being granted to Egypt, the economy is beginning to pick up once more, import restrictions are expected to ease, inflation is likely to drop and F&B sales will likely to return to strong growth.
The industrial License Law will also likely to ease land allocations, and thus boost local manufacturing in order to reduce imports and rely on local development and local production; ensuring a brighter future for the F&B sector in Egypt.