Despite the global economic downturn affecting its plans to attract foreign money and push reforms, Egypt is keen to lure investors to its agriculture, infrastruture and manufacturing hubs
In 2007, Cairo made the bold pronouncement that Egypt’s gross domestic product (GDP) would increase by 7 per cent a year until 2010. But then the global economic crisis hit.
For the 2008-2009 fiscal year, ended in June, it recorded GDP growth of 4.7 per cent and the country has since revised downwards its economic forecasts.
At the end of March, Egypt’s deputy finance minister Hany Dimian predicted growth of 5.2 per cent in the current fiscal year and 5.6 per cent for the year ending June 2011.
“It’s not to do with our domestic fundamentals, but the drop in international demand, particularly in the EU [European Union] area,” said Dimian during a public address at the end of last month.
He predicted that foreign direct investment (FDI) into Egypt would probably decline for a second consecutive year in 2010, and export demand would also remain subdued, suppressing economic growth.
- $6.5bn: New forecast for Egypt’s FDI for 2009-2010
- $2.7bn: Size of the stimulus package announced for the 2009-2010 fiscal year
- $764m: Amount invested in Upper Egypt Red Sea integrated project
“FDI into Egypt this year will probably fall short of last year’s $8bn and well below the $13.2bn posted in 2008,” Dimian added.
FDI stood at about $2.6bn in the first half of this fiscal year, compared with $4bn in the same period the year before, representing a 35 per cent drop.
Prior to the downturn, Egypt’s economic growth and liberalisation had been gathering pace, thanks to a programme of change set in motion following the appointment of a new government in 2004 led by Prime Minister Ahmed Nazif.
It has undertaken sweeping tax reforms that have seen customs duties slashed from an average of 14.6 per cent to 6.9 per cent, company tax halved from 40 per cent to 20 per cent and income tax reduced to a maximum of 20 per cent. The government has also lowered the registration costs for startup businesses, improved credit information systems and opened up the Egyptian stock exchange to foreign companies.
The surge in foreign investment brought about by Nazif’s reforms and simultaneous rise in hydrocarbon revenues have resulted in GDP growth increasing from less than 2 per cent in 2002-2003 to more than 7 per cent in 2007-2008.
The next 18 months will be challenging for the government to implement any major economic reforms
Reham el-Desoki, Beltone Financial
Total FDI was boosted from $2.1bn in 2003-2004 to $11.1bn in 2006-2007 and to $13.2bn the following fiscal year. But the downturn has put the brake on further growth in foreign investment. Egypt’s FDI levels slumped by 38 per cent in 2008-2009 to stand at $8bn.
“We believe the deputy minister’s expectations to be reasonable in light of the prevalent economic conditions,” says Reham el-Desoki, senior economist at Cairo-based investment bank Beltone Financial.
“We have also revised our FDI forecast for 2009-2010 to $6.5bn and to $8bn in 2010-2011, expecting current challenges facing businesses, coupled with slow global growth, to result in a slower injection of FDI into the economy.”
Egypt depends on FDI, along with revenue from its tourism sector and the Suez Canal, for foreign currency.
Of the three, only tourism recorded positive growth in the first half of the fiscal year, with revenue rising by 4.7 per cent to $6bn, according to figures from the Central Bank.
The EU is Cairo’s largest trade and investment partner. The economic problems in Greece, Spain and Ireland have weighed heavily on the bloc’s growth, which has had a knock-on effect on trade levels with Egypt.
Suez Canal revenue fell 16.7 per cent to about $2.3bn between July 2008 and December 2009. Exports fell 15.3 per cent to $11.5bn, while imports dropped 17 per cent to $23.4bn. There were declines in all import categories except consumer goods.
The government has introduced measures to try to mitigate the impact of the downturn. In December 2008, it announced a $2.7bn stimulus package comprising £E10.5bn ($1.9bn) in investment expenditure, £E2.8bn in export subsidies and £E1.2bn in one-year tariff exemptions for capital and intermediary goods.
This was followed in March 2009 by a second stimulus package of the same value for the 2009-2010 fiscal year, $1.4bn of which will be spent on infrastructure projects and $710m on export subsidies.
The government says it has deliberately targeted infrastructure in a bid to curb unemployment, as it is a sector that employs a large number of people with different skill sets.
The state has also been trying to distribute investment across the country through the General Authority for Investment (Gafi), the main government body responsible for regulating and facilitating investment.
Established in 2004, Gafi’s mandate is to facilitate the establishment of new companies by serving as a “one-stop-shop” for investors.
It currently manages 10 general free zones and close to 300 smaller private zones, based around individual firms, across Egypt.
Gafi is putting together an investment map of various regions nationwide, with different investment zones designed to fit the strengths of the local economy.
To date, it has launched six such zones: five dedicated to manufacturing and industry, and one for information and communication technology services. It is in the process of finalising another five zones, which includes transforming the town of Luxor into one of these hubs.
This is a planned way of developing the real resources of the country. Over the past few years, Gafi has been working hard to attract greater investment into Upper Egypt in the south of the country. In 2008, it established the Upper Egypt Red Sea Investment and Development Company with a capital of $36.3m to foster private-sector investment into the region.
“Historically, Upper Egypt, has been regarded as one of the underprivileged and underdeveloped areas of the country in terms of both the quality of infrastructure and measurements of economic development,” says Mahmoud Mohieldin, Egypt’s investment minister.
Gafi aims to develop a food-manufacturing zone in Upper Egypt – where at least 40 per cent of the country’s agricultural production takes place – as well as mining-related industries in areas that are generous in mineral resources, such as Aswan, Asyut and Wadi el-Gedid.
Gafi estimates about 40 per cent of crops in Upper Egypt are going to waste because of poor transportation and storage.
Consequently, there has been a specific emphasis on infrastructure development. Mohieldin is currently overseeing the construction of 412 kilometres of road networks linking the industrial cities of the Sohag, Qena and Assiut governorates in Upper Egypt with the Safaga port on the Red Sea.
“This road network will open up enormous opportunities for agricultural, mining and further industrial development,” says Mohieldin.
The government believes Upper Egypt is a region that has the potential to develop into a new export hub both for manufacturing and services projects.
“One of the main objectives of the project is to establish an agro-industrial compound to integrate agricultural activities with trading and services activities in the area, as well as construction and building materials,” says Osama Saleh, chairman of Gafi, who adds that there will be about 114,000 acres dedicated to these types of industries.
“The project area is expected to be a trading hub between the Upper Egypt governorates and the rest of the country, in addition to the Middle East and the Mediterranean,” says Saleh. “Therefore, there will be about 750 acres allocated to establishing six dry ports, which will contain logistics and trading facilities.”
Consequently, Egypt is now investing heavily in its ports in Upper Egypt, which it believes will prove especially popular for providing fast exports to the Gulf and the eastern hemisphere.
These plans are also in line with the government’s desire to attract greater investment from China and India in order to reduce its reliance on the EU.
Keeping up momentum
“We are starting to get decent interest from local, Arabic and east Asian investors to explore opportunities in Upper Egypt,”
There are currently 16 projects – a total investment of $764m – within the Upper Egypt Red Sea Integrated project. The Ministry of Investment expects the region to attract an average 20-25 per cent of total FDI over the next three years as of the current fiscal year.
“We need to keep up the momentum we had in the last five years to help us enhance the role of the private sector and foreign investment in the Egyptian economy,” says Mohieldin.
Indeed, the steady reform measures Egypt has taken since 2004 have resulted in significant breakthroughs in achieving greater economic freedom.
These reforms have been praised for easing the regulatory burden of carrying out business in the country and enabling it to resume its place in 2008 among the top 10 global reformers for the third time in four years, according to Doing Business 2009, published by the International Finance Corporation (IFC).
To continue the solid economic transformation that has been taking place, Cairo needs to ensure there are deeper reforms going forward.
Most notably, these include strengthening the judicial system, better protection of property rights and the eradication of corruption, which is considered widespread.
But the government is clearly working hard to try to remove bureaucratic hurdles. For example, it recently passed the Unified Construction Law to try to address the difficulty in issuing permits and licences.
Special economic courts have also been introduced to simplify investor dispute settlement procedures, and although voluntary exit procedures are not entirely in place, the government is working to introduce a bankruptcy law to address this.
“The series of reforms implemented since 2004-2005 have served to strengthen the financial, fiscal and monetary backbones of the economy,” says Beltone Financial’s El-Desoki.
“But I think that the next 18 months will be challenging for the government to implement any major economic reforms, because of the political and social sensitivities associated with [the] elections period.”
Egypt has scheduled parliamentary elections for late 2010 and a presidential election for 2011, and government officials are said to be wary of introducing any major new reforms before those polls.
In a global context, Egypt’s 38 per cent decline in FDI in 2008-2009 fares well when compared with the world average for FDI, which fell by 42 per cent.
And in contrast to some other countries around the world, Egypt’s economy has not been battered too badly by the global crisis. Its economic fundamentals remain solid – as the most populous Arab nation with 80 million inhabitants, the country has a large consumer base, as well as a strong financial sector and a relatively well-diversified economy.
The challenge for Cairo is ensuring it continues the pace of reform that enabled it to undergo the radical transformation of recent years, so that it can fully harness potential growth opportunities.