The relationship between uncertainty and foreign direct investment is clear. Investors need to know that their interests will be safeguarded before they commit resources, so more uncertainty means less investment.
Egypt has reaped the rewards of long-term political stability and sustained economic growth, reflected in an 80 per cent rise in foreign direct investment in 2007. But several recent actions by Cairo could take their toll on investment levels.
The government’s decision to force the EAgrium ammonia project to relocate, which could in turn lead to the scheme collapsing, is being seen as a one-off by many observers. Even so, it has not done much for Egypt’s image, and some investors will no doubt be left wondering whether similar interventions could happen again.
The consequences of new income-tax legislation affecting free zone companies will be more lasting. Levying a 20 per cent tax on investors was not wrong – Cairo’s view is that energy-intensive industries have had it easy for long enough – but it could have been handled better.
Despite government claims that it consulted the affected parties beforehand, it seems it did not have enough time to make sure everyone involved knew what to expect.
One group of Kuwaiti investors has already pulled out of a project as a result of the additional costs, which were not factored into their original investment plans.
Other investors who have worked out the economics of their projects before the tax was introduced are also likely to be affected, rather than prospective new investors.
If more companies decide that it no longer makes sense for them to invest in Egyptian projects, the country risks losing a lot more than the revenue from the tax. Cairo will also have to forgo the abundant job opportunities that foreign investors bring with them. For a population as young and as large as Egypt’s, this could be particularly unfortunate.