Foreign Direct Investments, Infrastructure and Safety Series – Specific overview - Egypt

Foreign Direct Investments in Egypt

Overview

Considered a vital catalyst for economic growth, Foreign Direct Investment (FDI) plays a major role in bringing different technologies to emerging economies to stimulate domestic investment (Ali & Mingque, 2018). Mostly affected by management, saving, revenue, and foreign exchange gaps, FDI fills these spaces as the saving rate is lower than the investment needed in developing countries. The main focus of broadening investment in a country is to close in on employment and expand the revenue collected (Tarek & Ghoneim, 2018). Increased imports cause a nation's exchange rate to rise while its account deficits decrease, which is a key driver of economic growth. According to Ghoneim (2021), Egypt has always been a major investment destination in Africa, ranking highest over the past 20 years as the top FDI recipient on the continent while taking the third position in a comparative study with Arab countries. Despite the sharp decrease in FDI inflows from 2021, which was primarily due to the pandemic, Egypt still ranked first in Africa. This paper assesses Egypt's major investment and policy reforms supporting FDI and any obstacles hindering the sector's exponential growth.

Egypt, which boasts a population of more than 109 million people, according to 世界银行 (2021), can attract significant FDI. The Government of Egypt (GOE) thorugh it's agencies such as General Authority for Investment and Free Zones (GAFI) has actively pursued strategies to drive economic growth forward in a sustainable development model. This includes, but is not limited to, interbank foreign exchange reactivation, polished investment law, customs laws (2020), infrastructure development such as the Suez Canal, bankruptcy laws, and safety improvement. As a catalyst for economic growth, these measures have been at the focal point of Egypt's economic policies, allowing for the intersection of all domestic and international operations to maintain an attractive arena for all to do business (Tarek & Ghoneim, 2018). As Egypt continues to enjoy top performance in terms of an improved business environment for FDI in various industries, the infrastructure and Fintech sectors are slightly predominant. In 2016, Egypt was ranked among the top five destinations internationally for greenfield FDI, with Cairo holding a position among the top ten cities that hosted startups the same year (Rezk et al., 2023).

The GOE has made investments in the business climate to support economic growth because it recognizes the contributions that FDI makes to the expansion of its economy. Despite their efforts, investors face hurdles such as a lack of skilled labor, a transparency deficit, excessive bureaucracy, customs delays, issues with intellectual property, and corruption. Many industries do not differentiate between foreign and local investors, but joint ventures with capped equity are required in the maritime, transport, real estate, gas, and oil industries. A limit is also placed on the total amount spent in some industries, such as the electrical and wiring sectors. The The United Nations Commission on Trade and Development ( UN Trade and Development (UNCTAD) ) records a significant reduction in FDI inflows in 2021, which dropped by a margin of $0.4 billion from the pandemic, which is quite substantial for the nation's progress. Will the measures put in place aid in strengthening Egypt as an investment choice in Africa and beyond, allowing for increased FDI inflows into the nation in the near economic recession the globe has almost faced?

Factors Boosting Foreign Direct Investment in Egypt

The legal framework for foreign direct investment (FDI) has a significant impact on Egypt's investment climate because it directly influences foreign investors' decisions to choose Egypt as their African investment destination ( 美国国务院 , 2023). Among the key factors foreign investors hope for is a business-friendly legal environment that will make the process seamless, along with proper infrastructure and the availability of skilled labor, making it easy to retain foreign capital. Egypt boasts a rich history, diverse economy, and strategic location, placing it a notch higher in terms of FDI, directly correlated to economic growth. The key factors influencing investors to choose Egypt include infrastructure development, economic reforms, strategic positioning, and policy initiatives.

Infrastructure

According to Rezk et al. (2023), different megaprojects are underway, including (1) Benban Solar Park ( Benban Solar Power ) , a photovoltaic power station aiming to produce 1,650 MWp. This power station will be the largest in the world; (2) Zohr gas field hosted in the Mediterranean Sea and the largest of its kind; (3) El Dabaa nuclear power plant (first State Atomic Energy Corporation "Rosatom" major nuclear power plant in Africa, which should be observed carefully); (4) the new administrative capital valued at $20 billion; (5) the speed rail system, which is the world's sixth largest; (6) the seaports upgrade, which is valued at $4 billion; and (7) a line for the third and fourth phases of the Metro.

Egypt is rich in natural resources such as iron ore, hydrocarbons, limestone, talc, asbestos, zinc, phosphate, lead, manganese, and gypsum (Ghoneim 2021). Also, the workforce is relatively cheap, making the country attractive as a service and manufacturing sector. Having the resources does not make the GOE comfortable; rather, it works to improve infrastructure. In the recent past, frequent power cuts have been a characteristic of the business environment in the country, an issue that has been resolved. A power surplus of 25% emanates from power generation and regulatory reforms (Energy Central 2018) (Nader, 2022). As of 2017, the GOE had drawn up a five-year strategic plan and issued it to the public with restructured rates on electricity to phase out subsidies while issuing power at the cost of production to save approximately $1.14 million (Ghoneim 2021). The country has opened the door for private investors to bid on contracts geared towards handling the management of power plants. The government has also constructed mega power stations in Borlus, New Capital City, and Beni Sweif and replaced power substations in Eastern Sohaq and New Ismailiyah, which has resulted in an increase in electricity production of 14,000 megawatts (MW). In the country's Vision 2030, aligned with Sustainable Development Goal 7 (SDG 7) on providing "affordable, reliable, sustainable, and modern energy for all", Egypt focuses on generating half of the nation's power from renewable sources. The country is rich in wind, hydro, biomass, and solar power, which has allowed the GOE to make a paradigm shift to support the expansion of such firms, among them wind farms located in the Gulf of El-Zayt and Zaafarana, which can produce 750 MW of power. The Financial Year (FY) 2021/22 saw an increase in FDI inflows from $14 billion in the previous FY to $22.2 billion, which is believed to stem from the efforts geared towards improving the business environment in the country.

The country has experienced exponential growth, with projects worth 1.7 trillion Egyptian pounds completed within two years. These road networks include the June 30 Axis Road linking the capital city of Cairo to Canal Cities, the Shoubra-Benha Road, which reduced traffic in Cairo, and the Al-Fouka Road, which links to the North Coast. Marginalized areas have also been focused on in an attempt to expand coverage of FDI in the country, with roads such as Dahshur-Wahat-Fayoum being constructed to cover West Egypt, the Sohag-Red Sea road to cover Upper Egypt, and the El-Galala Road, which makes areas along the Red Sea accessible. Constant upgrading of the roads and a few changes have been implemented in the recent past to make way for local and international businesses to thrive. A big project that has revolutionized how businesses in the region operate is the Suez Canal expansion project, originally opened in 1869. In 150 years, it has continued to influence and direct foreign investors to harbor in the nation due to the ease of trade routes, making the zone a hub for economic growth and a regional influencer.

Policy Initiatives and Financial Reforms

The Organization for Economic Co-operation and Development (OECD) 2021 report presents Egypt as liberal compared to North African peers such as Libya and Algeria. However, Egypt has higher air, maritime, transport, and construction restrictions. An example is Maritime Law 1 of Egypt (1998), which restricts foreign investments in joint ventures. On the other hand, construction Law 104 (1992) restricts foreign investments from entering into joint ventures where equity does not exceed 49% (OECD 2021). Foreign investment in the electrical wiring and building industry is restricted to projects worth less than $10 million, curbing competition that would otherwise improve the sector's quality. Lifting these restrictions would allow Egypt to be better placed to attract high-value industries.

Progress has been felt in Egypt's investment arena with the 2017 Egyptian Investment Law (Law No. 72 of 2017), which seeks to abolish discrimination between domestic and foreign investors (Egypt's New Investment Law 2017). Additionally, the law is being amended to allow investors a residence permit throughout their investment projects in Egypt and is awaiting approval by the Prime Minister. Besides, investors will be allowed to receive international finance for direct imports of raw materials, spare parts, and equipment with no restrictions, such as prior registration at the importation registrar. Other incentives include the allocation of plots of land for free for specific businesses, a special gate for customs allowing exportation and importation for an investment project, and a tax reduction of up to 80 percent on the date of starting the project for all paid-in capital (Egypt's New Investment Law 2017). The investment law allows persons of interest to choose a system to operate under, including private free zones, investment zones, free zones, internal investment zones, and technological zones, each providing specific benefits.

Other laws that should be considered regarding foreign investment in Egypt include the Company's Law No. 159 of 1981, which forms the basis for market entry and business establishment for local and foreign investments. Investments may be in any sector, including limited liability companies, joint-stock companies, or share-limited companies. Another law that comes in handy is Bankruptcy Law No. 11 of 2018, which prevents reconciliation while regulating corporate bankruptcy and introduces the out-of-court restructuring system. Additionally, the Industrial Permits Act was passed, cutting the time it takes the Industrial Development Authority (IDA) to respond to a new factory's license application to a maximum of 30 days. Furthermore, the Egyptian government has signed into law 100 bilateral investment treaties, as well as boosting the existing fiscal and monetary policy to attract foreign investment (Ghoneim 2021). The country is a member of the Greater Arab Free Trade Area (GAFTA), the World Trade Organization (WTO), and the African Continental Free Trade Agreement (AfCFTA).

The Russia-Ukraine war in February 2022 limited the economic progression in Egypt, according to the 2023 Investment Climate Statements: Egypt, where many foreign investors fled the emerging markets ( 美国国务院 , 2023). This stressed Egypt's budget, which was made worse by the rising energy and wheat prices vis-à-vis protecting the value of the Egyptian pound (CBE 2021). On December 17, 2022, the Egyptian government celebrated an approved International Monetary Fund (IMF) loan worth $3 billion under the Extended Fund Facility within an arrangement of 46 months ( 美国国务院 , 2023; IMF, 2022). These loan conditions included state ownership policy implementation to encourage the privatization of Egypt's economy, a flexible exchange rate, and a lift on import restrictions, enacted in the spring of 2022. Additionally, the loan was conditioned on $14 billion in co-financing, where $8.7 billion is expected to be sourced from the sale of state-owned assets and $5.4 billion is expected to be sourced from other loan sources. With a growing economy that made a rebound of 5.2% in Financial Year (FY) 2021/22, an International Monetary Fund review insisted on the need to control public debt, further cuts on public expenditure, and promotion of sustainable and inclusive private sector companies to create employment (International Monetary Fund, 2021; Abdel-Haleim, 2016). Among other challenges the Egyptian economy faces, seeking funds that call for major reforms continues to inhibit its focus on independence and a free-run economy that pulls in direct investment from foreign economies.

There was an upward trend in urban inflation in 2022, with Q1 recording a 7.3% upward trajectory in January of the same year and 8.8% and 10.5% in the subsequent months, according to UNDP (n.d.). Following the COVID-19 pandemic, the world economies were on an upward trajectory, only to be slowed down by the Russia-Ukraine war. The global inflationary pressure was heavy as basic commodities gained a sharp rise in cost, which was made worse by disrupted supply chains and remarkable freight costs. Emerging markets experienced high volatility in financial markets. At the same time, this pressurized the trade balance, calling for several reflections that need to be considered in the future, such as shortage of resources, preparedness for emergencies, and global repercussions when a pandemic hits. The economic reform program saw the Monetary Policy Committee (MPC) hold an emergency meeting in March 2022 to raise the rates of deposit, lending, and operation by 9.25%, 10.25%, and 9.75%, respectively, as a measure of cushioning the economy from rapid volatility ( Central Bank of Egypt , 2022).

Egypt has worked hard to reform the legal sector to spur private sector entry and retention in the market. Cemented by the IMF 2022 agreement, Egypt's transparency and consistency within government bodies have experienced tremendous changes, barely influenced by private and bureaucratic interests (International Monetary Fund, 2022). Though awaiting streamlining, the private sector faces hindrances, specifically in enforcing tax laws and the frequent imposition of lengthy impediments upon appeals (US Department of State, 2023). The laws passed via a transparent model face the challenge of lack of public access since there is no centralized online space where summaries or final regulatory decisions are published. The government is now sharing the final regulations with labor unions and business associations, though they are yet to be fully institutionalized (US Department of State, 2020). A few tweaks are necessary to make Egypt's economic zone efficient to ensure investors' attraction and retention.

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Conclusion

There has been a remarkable improvement in Egypt's policy sector, which aims to make the business environment friendly for both local and foreign investors, which has led to an upward trajectory in FDI inflows. Besides, major infrastructure investments have been geared towards merging major and minor cities all around the nation, a move aimed at broadening the scope of doing business. Strengthened by the high population, Egypt is rich in natural resources, making the transport of raw materials easy and affordable, enhancing the possibility of Greenfield investments. Challenges revolve around reforms and the intrusive political system in the country that have hindered proper economic growth. A critical analysis shows that Egypt is now strong regarding FDI inflows despite joining the global crisis that hit the economy after the COVID-19 pandemic, a measure of economic strengthening. With the reforms laid down by the government, primarily in the growing fintech and construction industries, the nation has seen considerable economic growth, as seen in FY2021/22/23. Egypt has also taken advantage of its strategic positioning that connects it to the Mediterranean Sea and the Atlantic, encouraging it to invest in expanding projects such as the Suez Canal. Besides, investors find it easy to bring in goods and have their exports enjoy a seamless flow. The policy reforms in both structural and economic factors have made Egypt gain traction in recent years. As a result, Egypt is an emergent economy that has the potential to attract more FDI to make it an economically independent zone.

Reference

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Rezk, F., Hashish, M., & Diaa, N. (2023, October 3). A general introduction to Foreign Investment Regulation in Egypt. Lexology. https://www.lexology.com/library/detail.aspx?g=e9f0504d-8250-4417-a7e1-c8433c662af8#:~:text=Egypt%20was%20recognized%20as%20 one,hosting%20start%2Dups%20that%20 year .

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General Authority for Investment and Free Zones (GAFI) Ministry of Finance | Egypt 世界银行 International Monetary Fund World Trade Organization IFC - International Finance Corporation AVCA - The African Private Capital Association

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