A new mood of optimism pervades Egypt as it gears up to host a high-level investor conference this month and preparations continue to hold the parliamentary elections that will make up the final stage of the countrys political transition.
At the Egypt Economic Development Conference in Sharm el-Sheikh on 13-15 March, the authorities are hoping to win backing for a swathe of projects that will accelerate the countrys economic recovery and create tens of thousands of new job opportunities.
More than 2,000 heads of state, company CEOs and investors are expected to attend the event, for which 121 potential projects have been pre-screened across eight sectors.
The majority of schemes will be in the energy and mining, housing and utilities, and transport and logistics sectors, but there will also be investment opportunities presented in tourism, agriculture and other areas.
To accelerate the process, the Ministry of Investment has already allocated more than 30 projects for 15 investment banks to start working on. It is hoped the projects that find investors will help to cement Egypts economic renaissance and steer the country towards the targets set out in its medium-term macroeconomic policy, published in September 2014.
The five-year recovery plan sets out concrete growth targets and explains how the government intends to cut expenditure and boost income, as well as engage the private sector in order to return the economy to performance levels last seen before the global financial crisis of 2008.
The Egyptian economy has been battered by the political and social upheaval that began in January 2011. Government debt has swollen to 97 per cent of GDP, while the budget deficit has ballooned to 12.6 per cent. Foreign exchange reserves have been eaten up over the past four years as important revenue-generating sectors, such as the tourism industry, succumbed to the instability.
The five-year plan aims to reduce the fiscal deficit to 8.5 per cent of GDP and decrease government debt to a range of 80-85 per cent of GDP. By 2018/19, the aim is for GDP growth to reach 6 per cent, a level not seen since 2008.
|Largest listed companies in Egypt ($m)|
|Organisation||Market capitalisation||Net profit/loss*|
|Orascom Construction Industries||8,654||-190|
|Commercial International Bank (Egypt)||6,643||491|
|Global Telecom Holding||2,948||-3|
|Egyptian Company for Mobile Services (Mobinil)||2,235||-60|
|Juhayna Food Industries||1,400||43|
|EFG Hermes Holding Company||1,265||-44|
|Sidi Kerir Petrochemicals||1,063||170|
|Heliopolis Company for Housing & Development||987||24|
|Medinet Nasr for Housing & Development||922||28|
|*=Most recent year available. Source: EGX|
In terms of expenditure cuts, the government says it will focus on subsidy rationalisation and keeping control over wage bill growth. This has already begun. In July, the prices for some fuels were raised by as much as 90 per cent.
Public spending on subsidies fell sharply as a result, dropping 29 per cent to £E22bn ($3.1bn) in the first quarter of the fiscal year 2014/15. This compares with a total of £E31bn spent during the same period in the last fiscal year. Further reductions are on the cards, with the aim of eventually phasing out all fuel and electricity subsidies over the medium term, with the exception of liquefied petroleum gas for the poorest households.
On the revenue-raising side, the plan is to broaden the tax base, to incentivise the informal sector to join the formal sector and to clamp down on tax evasion. A new property tax is currently being implemented and a value-added tax (VAT) law will be introduced in the second half of the financial year. Other initiatives include a hike in excise taxes on cigarettes and alcohol.
While some of the reforms may prove unpopular, the government is committed to redirecting money saved from the removal of energy subsidies into increased spending on education, health and scientific research. Over three years, spending will be increased to 3 per cent of GDP on health, 6 per cent on education and 1 per cent on scientific research.
Although the government acknowledges this will reduce the fiscal benefit of the subsidy cuts, it says it will help secure public support for the reforms as well as delivering a material improvement in the quality of life for Egyptians.
Engaging the private sector is the third plank of the five-year plan and the policy framework document says investment will be the key driver of growth in the current year, with the private sector taking a leading role.
Restoring investor confidence has been a priority ever since the change in leadership in July 2013. Before then, hopes had hinged on securing a $4.8bn loan from the IMF to shore up the economy; however, talks broke down when conditional reforms failed to be implemented.
The new leadership that took over from Mohamed Mursi acted fast to restore order and enact a new constitution. Since Abdul Fattah al-Sisi became president in May 2014, the focus has been on achieving growth through public and private investment in infrastructure. Schemes that have long languished on the drawing board have been revived, such as the Suez Canal development project and plans for a nuclear energy programme.
Some $20bn in aid from the Gulf countries helped to jump start the economy and a number of confidence-boosting memorandums of understanding have been signed with companies from the UAE, Saudi Arabia and Kuwait over the past six months. The March conference aims to broaden the pool of investors beyond the Middle East, with attendees invited from Europe, North America and Asia.
To win back the faith of the private sector, the government has rushed through a number of reforms to key legislation in recent months. These include amendments to competition and antimonopoly laws, new investment laws to streamline foreign investment and minimise bureaucratic impediments, and new microfinance, mining and renewable energy laws. It is also working to address the energy crisis and settle arrears to international oil companies, which have slowed investment in the gas sector.
The efforts appear to be paying off. There is a newfound buoyancy in the economy, with GDP accelerating in the past three quarters and the Egyptian Stock Exchange reaching highs not seen since 2008.
In a sign of the progress made in recent months, the IMF and the Egyptian government are now back in dialogue and the funds Article IV report on the Egyptian economy, published in early February, is positive about the reforms that are under way.
The authorities objectives are ambitious, but are broadly within reach with steady policy implementation, it says. Egypt has chosen a path of adjustment and reform which, if followed resolutely, will lead to economic stability and growth. In particular, it praised the reform of fuel subsidies, which have been at the heart of Egypts structural and fiscal problems for years.
There are still risks to Egypts recovery, not least the threat of Islamist terrorism and the possible return of civil unrest. But, at the end of the day, the factors that made Egypt an attractive investment prospect prior to 2011 remain. It has the largest population in the Middle East, with a median age of just 24, an emerging middle class and genuine infrastructure needs.
Of course, Egypt cannot possibly execute all the projects that will be discussed at the investment conference, and the extent of financing that will be available remains untested.
But even if just a fraction of them goes ahead, they will deliver a major boost to the economy and generate much-needed employment. It is fair to say the prospects for Egypt are much better today than they have been in a long while.
Targets of five-year economic plan
- Sustainable real GDP growth of 6 per cent by 2018/19 (Growth was 2.2 per cent in 2013/14)
- Reduce unemployment rate to single digits (Joblessness currently sits at above 13 per cent)
- Bring inflation within the Central Bank of Egypts comfort zone
- Higher domestic investment
- Improved export performance
- Reduce the fiscal deficit to 8-9 per cent of GDP (Deficit was 12.6 per cent of GDP in 2013/14)
- Reduce government debt to 80-85 per cent of GDP (Debt currently stands at 97 per cent of GDP)
- Income tax broadened
- Real estate tax streamlined
- Mine and quarries tax increased
- Telecom licensing fees increased
- Higher excises on cigarettes and alcohol
- Introduction of VAT
- New tax regime for SMEs
- Better tax enforcement
- Energy subsidy reform
- Food subsidy reform
- Wage bill controls
- Public-private partnerships
Key legislative reforms
- Microfinance law
- Mining law
- Renewable energy law
- Special economic zones law
Hany Kadry Dimian
(+20) 2 2342 7984