By Lorena Rios
In Egypt’s Economic Development Conference, President Abdel Fattah al-Sisi gave a strong message to the international community: Egypt is back on track, stable and ready to receive investors. After four years of political turmoil, the government is making a vehement effort to redeem Egypt’s image on the international stage by introducing energy and fiscal reforms. In recent months, the president has toured European countries, finalizing investment deals and rallied billions in aid from Gulf States. As the country stabilizes and the economy recuperates, the government is moving to create a safe and attractive investment climate for private and foreign investors.
Overview of Egypt´s Economic Challenges
The years following the 2011 uprising were plagued with political turmoil and characterized by slow economic recovery. The government’s mounting debt, energy crisis, lack of investment and foreign currency reserves, inflation, rising unemployment, and systemic shortcomings in public services—particularly the fields of education and healthcare—led Sisi to launch a series of fiscal reforms to overcome the country’s economic ailments.
A paramount challenge currently facing the government is the rise in the overall fiscal deficit, jumping to 12.8% of GDP in 2014/2015 from 9.8% in fiscal year 2010/11. In March 2015, the account deficit stood at $8.38bn from $543m a year prior. This in turn has led to an increase in the domestic and external government debt, making up 90.5% of GDP at the end of 2014, according to Fitch Ratings. It is, however, important to note that based on 2015/2016’s approved budget draft deficit should decrease down to 9.9%.
Showing signs of sluggish growth, in 2013/2014 Egypt’s GDP grew by 2.2%, compared to 7% before the 2011 uprising. Foreign investors pulled out of Egypt and showed skepticism about investing in a country strangled by a critical state of insecurity. As a result, household consumer expenditure in 2012 outstripped investment expenditure, making up 58% of GDP, while the latter represented only 18%.
Low currency reserves and a fluctuating exchange rate are two more challenges jeopardizing a healthy investment cycle in Egypt. In 2013/2014, average inflation rose to 10% and the Central Bank of Egypt fell short of covering three months’ worth of imports. In addition, Egypt´s central bank weakened the official exchange rate at the beginning of 2015 to help reduce black market trading. At 7.53 per dollar, authorities have managed to stabilize the pound by reducing black market trading. Reuters reports that volumes for black market traders have fallen considerably since the central bank’s move to limit their transactions, including a cap on the amount of dollars that could be deposited in banks.
The high unemployment rate remains a major concern among the Egyptian people and one of the government’s top priorities. Unemployment has peaked to 13% in the last year and poverty measurements also increased to 26.3% of the population, adding pressure into attracting further investment and generating jobs.
Return of Foreign Investment Capital
Prior to the 2011 uprising, foreign direct investment was about $8bn annually; however, by the end of the fiscal year 2013/2014 it only reached $4.1bn. To lure investors back to Egypt, the Central Bank of Egypt has made periodic payments to its biggest lenders, paying around $3bn to Qatar in the last years. The central bank is making considerable efforts to decrease its external debt to $39.9bn from $46.1bn, lowering the government debt to 94% of the GDP by the end of 2014/2015.
In line with reviving the economy, the government introduced two stimulus packages, with a total value of EGP 63.6bn, to address the fall of industrial output. The first package of EGP 29.6bn, was put in place in July 2013 and focuses on infrastructure-related projects, such as strengthening electricity grids, the completion of 17 road projects to link all governorates, the construction of 50,000 residential units, reclaiming 32,600 agricultural acres and purchasing 600 buses for public transportation running on natural gas, reported Daily News Egypt. The second package of EGP 30bn consists of EGP 20bn of aid from the UAE, with the remaining 10bn allocated to financing the minimum income system and government’s social security programs.
The projects announced in the economic conference in March led to a rebound in sectorial performance for different industries in the first quarter of 2014/2015. Construction and building increased by 9.9% and real estate increased by 4.6%. The cost of the Suez Canal’s expansion is estimated at $4bn and is expected to double the canal´s revenue by 2023. Government officials also unveiled the plan to build an administrative capital northwest of the Gulf of Suez. The project is estimated at $45bn and will consist of foreign investment from major Gulf contractors. Both projects are a quick fix to the unemployment dilemma, since it will create thousands of temporary jobs in the real estate and construction industries.
The manufacturing and tourism sectors contributed two thirds of economic growth. A study by the Egyptian Center for Economic Studies (ECES) claims the textile sector experienced the highest recovery between January and March 2015, as seen by the 16 points improvement in their international sales index. Private investment accounted for 76% of total investments.
According to the Central Bank of Egypt, foreign investment grew by 32% compared to the year before, while the country´s credit score has increased. In light of these developments, made visible by the economic conference, Sisi has toured a number of European countries to further the Ministry of Investment´s goal to attract $8bn in foreign direct investment in 2014/2015.
To pave the way for foreign investment, Sisi created an economic reform program to create fiscal stability and growth that would build trust between Egypt and foreign investors. In July 2014, Sisi increased taxes on alcohol and tobacco and began to cut down on energy subsidies. According to the Egyptian Center for Economic Studies, these reforms have had a positive impact on the economy. Experts believe Egypt will double its economic growth from 2.2% in 2013/2014 to 4% in 2014/2015. The subsidy reform will serve to decrease the budget deficit from 12.8% to 11.3% of GDP. The GDP outlook for the next four years forecasts a growth to 5% and 6%.
Impact of Fiscal Reforms
The ECES forecasts an upturn in the economy as long as the government continues to introduce policies that increase and encourage investment, limit inflation, and control prices of goods and services. The government has revised investment legislation, trade policies, and improved the availability of credit. The policies implemented so far have made Egypt eligible for lending from the International Bank for Reconstruction and Development (IBRD), which is responsible for projects worth billions of dollars.
The tax reform plan announced by government officials during the economic conference is prone to facilitate investment by reducing the highest tax bracket on company and individual earnings of more than EGP 1m ($131,062) a year to 22.5% from 25% for 10 years.
Exchange rate flexibility is another fiscal reform introduced by Sisi’s government. By providing a more flexible exchange rate, writes ECES, the government strengthens competitiveness, attracts foreign investment, increases tourism, and supports exports of new industries. This move creates sustainable economic growth and improves the standard of living. Starting in 2015, inflation decelerated to 9.7% in January 2015, in part due to low oil prices, but reaccelerated in February and March 2015 due to the depreciation of the pound by 1.6% at the beginning of the year.
The International Monetary Fund (IMF) stated that “Egyptian authorities [are] well aware of the urgent need for structural reforms, and current plans to issue a revised investment law go in the right direction.” Last March, the Egyptian cabinet approved an investment law that provides investors with certain guarantees in deals signed with governments, and facilitates funding of labor-intensive projects. The law eases bureaucratic stalemates and protects business deals from legal disputes and changes in government.
Finally, the ECES expects a better investment climate arising from the government’s decision to lift the capital gains tax for two years, which will reflect positively on the stock market.
The IMF projected a 3.8% growth in GDP in 2014/2015 and for that figure to reach 5% in upcoming years. The investment climate experienced a complete overhaul from the years following the 2011 uprising. Institutions like the IMF are commending government efforts to narrow down the budget deficit by introducing fuel subsidy reforms— which amounted to one-third of the government’s current budget—and tax reforms. “Government efforts to cut the budget deficit and spur economic growth were now bearing fruit, though more needed to be done,” argued the IMF. Furthermore, Egypt and the IMF are currently discussing the implementation of a value-added tax (VAT), which would generate more than $4bn per year in revenues.
In an interview with Reuters, investment minister Ashraf Salman said the ministry hopes to bring in $18bn a year by 2018. In addition, the forecasted value of Egyptian GNP in 2020 is $334bn, and the forecasted total Egyptian imports and exports are of $33.2bn and $29.2bn dollars respectively.
Guaranteeing a safe and attractive investment climate is particularly important in the energy sector. President Abdel Fattah al-Sisi has signed a number of deals, such as BP’s West Nile Delta, and a $500m loan agreement with the World Bank to support a national natural gas project for 1.5m households. Gas pricing has also been adjusted to reflect the high cost and high-risk environment in the oil and gas sector, a decision showing government willingness to build back the trust with investors.
The oil and gas industry is a strong force guiding foreign and private investment. If Egypt wants to maintain close ties with IOCs and attract new investors to develop its vast oil and gas reserves, the economy must show holistic signs of growth and stability. For the oil industry to succeed, all of Egypt’s main industries must prosper from legislation that puts them back on their feet. Egypt´s rising energy demand requires a healthy investment climate, and in light of the most recent developments, government officials recognize the necessity for immediate action. A new investment law, which seeks to reform the stifling bureaucracy and red tape that characterize investment in Egypt, is one of many steps in this direction. There is still much work to be done, but expectations for the country’s quick economic rebound are high.