By Nadine El Sayed
A lthough Egypt is well on its way to a brighter economic future paved by fiscal reforms and a legal framework to attract new investments, obstacles to growth remain in the form of a stubborn fiscal deficit, increasing costs for importers and raised cost of living, concluded the Oxford Business Group (OBG) 2017 Egypt report.
“While the road forward from that point has been rocky, Egypt still has huge potential in terms of manpower and resources and is looking to ensure and cement its position as a leader in the region,” OBG said.
Founded in 1994 in Oxford, OBG is a global business intelligence leader and employs more than 200 people, publishing annual reports on 34 countries. The 2017 report on Egypt, released on April 1, is published in coordination with the American Chamber of Commerce in Egypt and focuses on the recent economic reforms and the challenges still ahead.
“Egypt has been undergoing a transformation into an increasingly market-oriented economy,” the report reads. “It currently holds lower-middle-income status.”
Egypt 2017 starts with an interview with President Abdel Fattah El-Sisi on building friendly-investor relations and regional and domestic security issues. El-Sisi stressed the need to create more favorable conditions to attract more investments through combating corruption, streamlining bureaucratic procedures, issuing unified investment laws and adopting a market-led economic approach. “We are keen on increasing the flow of investment to Egypt by improving the infrastructure, stabilizing the foreign exchange market, eliminating administrative impediments and putting in place a mechanism to resolve investment disputes,” El Sisi explained.
One of the biggest challenges facing foreign investors is the security situation over the past few years, which has caused a slowdown in FDI flows, El Sisi told OBG. The situation has since stabilized politically and investors have shown more confidence in the country in light of recent reforms. El Sisi added that the long-term strategy to combat terrorism is to address economic, social, cultural and religious roots and renew religious discourse.
“The government of Egypt is committed to pursuing equitable growth,” El Sisi told OBG. “It has embarked on an economic reform program to address longstanding challenges as it seeks to recover from the severe economic and financial losses it incurred due to political instability between 2011 and 2014, in addition to a fierce battle against terrorism, both of which led to the build-up of macroeconomic imbalances that needed to be addressed.”
El-Sisi added that the government is trying to mitigate the “harsh” economic impact of the reform measures on the economically disadvantaged through providing them with basic goods and services at affordable prices and ensuring access to quality health and education services. “Strengthening social safety nets by increasing spending on food subsidies and cash transfers was one of the program’s key pillars,” El-Sisi explained. El-Sisi also explained that the social program Takaful and Karama (Solidarity and Pride) aims to reach the neediest segments of society—like the elderly, handicapped and families with children who live in extreme poverty—by injecting cash transfers to help them live better lives.
The report also carries interviews with key figures and officials in various industries, including Minister of Petroleum and Mineral Resources Tarek El Molla, Chairman of the General Authority for the Suez Canal Economic Zone Ahmed Darwish, Chairman of the General Authority for Investment (GAFI) Mohamed Khodeir and Chairman of the Egyptian Financial Supervisory Authority (EFSA) Sherif Samy.
Khodeir told OBG that the net FDI 54.6% increase since the 2011 revolution to $6.8 billion in the fiscal year ending June 30 is a result of fiscal and legislative reforms adopted by the country since 2014 and comes during the first period of sustained political stability since 2011. “The government put into effect a law that safeguards signed contracts between the government and investors and it has amended the current investment law to improve the business climate while in the process of promoting a new law,” Khodeir said.
GAFI’s chairman added that the biggest challenge facing foreign investors is the difficulty and length of the investment process, something the authority is trying to address. “Efforts are still being directed towards enhancing information disclosure, transparency and accountability to investors and towards process automation and streamlining to establish a company with the introduction of a new comprehensive online system,” Khodeir added.
El Molla explained that the strategic vision of the ministry is to maximize private sector participation in oil and gas activities in a more effective manner, especially in the petroleum industry. He cited the Egyptian Refining Company as one of the most significant joint ventures in the private sector. Speaking about foreign debt to its partners, El Molla said the ministry “was able to reduce the amount due from about $6.3 billion at the end of 2013 to about $3.5 billion by the end of 2016.”
The minister projects that Egypt is to become an energy center given its geographical location and natural resources as well as the infrastructure from the Suez Canal. “The gas surplus in our system by 2020 will be used for two things: To satisfy local demand—electricity, industry and so forth—including an expansion of our petrochemicals industry,” El Molla said. “Second, it will go toward meeting our contractual obligations for export. Between four big gas developments—BP’s West Nile Delta, Atoll, Zohr and Noroos—total production will amount to more than 5.5 billion cubic feet per day, representing more than $30 billion worth of investments.”
Abdulwahab Al Bader, director general of the Kuwait Fund for Arab Economic Development, argued that Egypt’s energy and electricity sectors have a lot of room for growth and receive greater support from development finance institutions due to increasing demand, which is driven largely by population growth. He cited small- and medium-sized enterprises are also key to the economic growth.
EFSA’s Samy believes we have all that’s needed to put regulations in place and encourage new listings on the main board and Nilex. The issue is rather “how the international and domestic climate is impacting decision-makers,” Samy argued. “Being an emerging market, which we have not seen since 2008.” He added that in 2015 Egypt had the largest number of initial public offerings in five years and the momentum continued in 2016.
The economy at a glance
Egypt’s GDP stood at $3,615 in 2015, significantly lower than world average of $10,0058. Read GDP, however, for the year 2014/15 grew by 4.2% at market prices; the most rapid rate of expansion since 2011. Official figures put 27.8% of the population below the poverty line of the monthly $25.5 income and indicated that 56.8% of those in Upper Egypt’s rural areas cannot meet basic needs.
“The nation’s transition from an energy exporter to a net importer of gas have resulted in a stubborn current account deficit, which grew from $4 billion in the first quarter of the fiscal year 2015/16 to $4.98 billion by the same period in the fiscal year 2016/17.”
Although enjoying a significant degree of diversity, manufacturing is the leading industry in the economy, accounting for 16.6% in the past fiscal year, followed by wholesale and retail trade and the extractive industries, according to the report. The public sector accounts of 11.2% of the GDP while tourism has accounted for only 1.8% of the GDP in the fiscal year 2014/15.
The report listed various economic reforms, including subsidy cuts, raised taxes, the VAT bill and the currency free float in November 2016 in Egypt’s bid to secure the IMF loan. “Such funds will be crucial for the government, as other sources of funding from regional donors in the Gulf become more precarious and remittances decline,” the report concluded. “However, the loan also puts the government in a difficult position politically. leading to short-term hardship for the average Egyptian household.”
In an effort to ease this burden on lower-income segments, the government is continuing its cash transfer program launched in 2015 and financed by the World Bank. The Strengthening Social Safety Net Project offers $21 to $35 monthly aid to cover the cost of food. This, along with a new food subsidy scheme to ensure aid goes to the needy, aims at easing the burden of the reforms all the while maintaining an efficient use of the government’s funds. As of April 2016, 71.6 million of Egypt’s 92 million population are receiving subsidies.