From our Egyptian Bureau

Streamlining Egypt’s investment landscape

 Analysis by Ahmed Kamel

A new investment bill will be a step on a long road towards improving Egypt’s business climate. However, it cannot on its own guarantee sustainable injections of local and foreign investments in the long run.

Last week, the Sherif Ismail-led cabinet approved a new investment bill in its second draft, and submitted it to parliament for endorsement. The new bill will replace the current Law No. 17/2015, which was passed in March 2015 ahead of the Egypt Economic Development Conference but has borne no fruit in terms of greenfield investment.

The new bill comprises of 115 articles, which financial analyst Ahmed El-Oteify described as a worryingly massive number. “Only specialists will understand it. This is wrong, as investors won’t assimilate it,” he said.

However, legal experts have welcomed the newly drafted bill, but stated that it would need to put an end to red tape, which has taken its toll on the business climate in Egypt over the past 40 years.

For business facilitation

The government is tipped to fully apply a one-stop shop system to facilitate licensing and other official procedures. Consecutive governments since 2002 have failed in putting the one-stop shop system into force.

It is the mentality of officials that must change, said Eissa Fathy, deputy head of the Securities Chamber of Commerce.

“The new bill won’t do anything if the old-fashioned mindset remains the same,” he noted.

 Analysts have called for a one-stop shop, where official delegates offer investors an “all-in-one service, including licensing, registration and property allocation procedures.”

 Free entry and exit of capital and eradicating bureaucracy are needed to attract foreign and local investments through well-designed, transparent and clear-cut legislations for investment, repatriation of profits, bankruptcy and dispute settlement.

Market-friendly environment

The World Bank has proposed a number of key factors for governments to lay out market-friendly environment for sustained investment rates. The study, entitled “Improving the Investment Climate,” urged governments to reduce costs and risks facing investors.

Higher risks entice investors to expect greater and speedier profits. Enterprises operating in some high-risk countries require more than twice the rate of return they would in lower-risk countries to compensate for the extra risks.

Investment decisions are forward looking, allocating resources today in the hope of future rewards. Many investment risks, like costs, are a “normal function” of commercial ventures, including uncertain responses from consumers and competitors, so firms should bear them, according to the study.

“Governments, however, have an important role in helping firms cope with risks associated with the security of their property rights. Governments can also increase the risks and uncertainties that firms face directly— policy uncertainty and macroeconomic instability rank consistently as the leading investment climate concerns of firms,” the World Bank study said.

Boosting competition

Investment rulemaking should eradicate all barriers to competition. Barriers to competition include favouring one firm while denying opportunities and increasing costs for other firms and to consumers. Competition is difficult to measure at the aggregate level, “but firm-level evidence shows how much competitive pressure can vary between countries,” the study stated.

“Governments also influence competitive pressure through their regulation of market entry and exit and their responses to anticompetitive behaviour by firms. The evidence confirms that improving the opportunities and incentives for firms to invest by reducing unjustified costs, risks or barriers has the predicted effect.”

From an overall perspective, business regulations should bolster transparency, transfer of funds and lay out a well-defined dispute settlement mechanism.

From a legal perspective, the investment regulations should complement the nation’s laws on labour, taxation, social insurance, customs and home trade, in addition to the fiscal and monetary policies.

Successful climate

The measurement of success will be the quality of investment, not quantity. A good investment environment creates jobs, improves the standard of living and ultimately reduces poverty.

According to Oxfam International, about 30 million Egyptians, mainly in the southern governorates, live below the poverty line, and two million people live on less than one dollar a day.

Unemployment in Egypt stood at 12.8 per cent of the nation’s labour force at the end of November, according to the state-run Central Agency for Public Mobilization and Statistics (CAPMAS).

The labour force in Egypt stands at 28 million people, CAPMAS data showed.

“Experience provides many examples of investment projects that yielded few or no benefits. This is most obvious with ‘white elephant’ projects in the public sector, such as the Tanzanian shoe factory that produced few shoes, the nuclear power plant in the Philippines that was never commissioned, and the numerous roads to nowhere,” the World Bank study said.

A white elephant project is defined as a project that incurs heavy costs over an extended period of time and yields insignificant or even no profits at all.

Therefore, the study advises governments that are committed to combating poverty to aggressively look beyond aggregate numbers and, “understand how investment climate improvements can enhance the lives of poor people directly.”



Sailing away from stagflation woes

Analysis by Ahmed Kamel

High interest rates, accompanied by escalating inflationary pressures may lead to stagflation in Egypt, casting a shadow on real growth and economic recovery in the medium term. London-based Capital Economics and Cairo-based investment bank Prime Holding warned that Egypt’s economic growth might not reach the government’s targeted rate of five per cent in the 2016/17 fiscal year, which began on July 1.

“Economic growth won’t exceed 3.4 per cent of gross domestic product (GDP) in the fiscal year 2016/17 due to austerity measures and reduced household consumption. The inflation rate may rise to 18 per cent,” Prime said in a note.

Capital Economics forecast the economy to grow by two and three per cent in 2017 and 2018, respectively.

However, the International Monetary Fund (IMF) forecast the Egyptian economy to expand by four per cent of GDP In 2017 on the back of reform measures adopted by the government.

The economic reform programme is expected to slash the inflation rate to below 10 per cent by the fiscal year 2018/19, said Ahmed Kouchouk, Deputy Finance Minister for Fiscal Policies.

Higher inflation

In November, the Central Bank of Egypt (CBE) raised the key interest rates by 300 basis points, or three per cent, to shore up the pound versus foreign currencies. The move is aimed at reducing the market money supply through luring more savings from the household sector.

However, the move, along with the currency float, is expected to stoke inflationary pressures as Egypt imports roughly 80 per cent of its food staples, economists say.

The consumer price index stood at 14 per cent in October. The core inflation rate rose to 15.75 per cent in October, up from 13.94 per cent a month earlier, CBE data showed.

CPI, which is computed by the state-run Central Agency for Public Mobilization and Statistics (CAPMAS), measures weighted price movements of consumer goods and services, which constitute a representative “consumption basket” purchased by households.

The core inflation rate, which is computed by the central bank, takes out fruit, vegetables and energy from CPI components to reveal a stable reading of price levels. The CBE relies on core inflation for laying out its monetary policy.

The nation’s money supply stood at LE2.2 trillion at the end of October, CBE data showed. The rise in money supply reflects upwardly spiralling prices, analysts say.


In their book “The Determinants of Stagflation,” economists Norbert Berthold and Klaus Gründler wrote that stagflation emerges when prices rise and output declines or stagnates. In some cases, a somewhat broader definition includes high or rising unemployment rates as a third element.

“Higher interest rates raise capital costs and lead to an increase in production costs and a decline in capital accumulation… rising costs for intermediates can lead to both inflation and a decline in output. Thus, we also study the development of the Commodity Price Index for raw materials.

“The price of oil traded on the world market influences the costs of production and transportation and affects consumption. A more thorough examination of national oil prices, however, uncovers a significant dispersion of oil importing costs.”

Global concerns

The local food industry is expected to take a blow, as producers will have to increase prices to cover cost hikes as the dollar strengthens. Higher prices will affect sales, pushing food producers to slash output to maintain cost-price balances.

Higher prices and lower production mark the beginning of cyclical stagflation in Egypt. The main driver of stagflation on the domestic scene is the declining purchasing power of the Egyptian pound, which fell from LE8.7 to LE18 versus the US currency in November.

Globally, stagflation looms after the victory of Republican Donald Trump, who is expected to adopt protectionist policies. US-based investment bank Goldman Sachs has warned against growing outlook of stagflation worldwide.

“President-Elect Trump’s proposals could lead to new restrictions on foreign trade and immigration, which could have negative implications for growth, particularly over the longer term. Stagflation could quickly set in if import prices rise and the immigrant labour force contracts,” the investment bank stated in a note to clients.

In the same vein, J.P. Morgan wrote in a note to clients last month that the global market might, “oscillate between reflation trade – higher growth and higher yields – and stagflation trade – higher yields, but mixed growth outlook.”


The government may have to cut taxes, for both households and the corporate sector, to lift supply and demand. In the medium term, the central bank may also slash interest rates to increase investment rates.

Nobel-laureate economist Robert Mundell suggests “deep tax cuts” would cure stagflation. According to him, investment and production should automatically increase if taxes are reduced, leading to a spike in employment and availability of goods and services in an economy.   

“The correct policy mix is based on fiscal ease to get more production out of the economy, in combination with monetary restraint to stop inflation. The increased momentum provided by the tax cut will cause sufficient demand for [money] to permit real monetary expansion at higher rates,” he wrote in his book “Monetary Theory.”



Trending port development in Egypt

 Analysis by Ahmed Kamel

Banking on itsseaports and highly strategic location, the Suez Canal Development Project and urban megaproject in the Western Desert are set to turn Egypt into a global trade and industrial hub.These will be the nation’s ground breaking value-added megaproject in the 21st Century.

Moreover, a market-friendly business climate will be a pacesetter for the megaproject’s success, relying on the government’s commitment to improving the investment environment and boosting the private sector,through a set of clear-cut legislations and regulations.

“Turning the Suez Canal into a global logistics hub will be a milestone breakthrough for the Egyptian economy. The Suez Canal Zone can significantly boost container traffic between Southeast Asia and Western Europe,” said Moustafa Abdel-Maksoud, professor of ship dynamics at German-based Hamburg University of Technology.

“Roughly one million twenty-foot equivalent units (TEUs) will flow from Southeast Asia to Western Europe annually via the Suez Canal zone,” said Abdel-Maksoud.

“Vessels coming from Western Europe may unload at the Port Said East Port, while container ships coming from Southeast Asia can unload at Ain Sokhna,” he noted.

A hub of six seaports

There are 15 commercial and 28 specialized seaports in Egypt, according to Transport Ministry data. The Suez Canal Economic Zone, which covers a total area of 460 square kilometres, is planned to house roughly 70 per cent of new industrial facilities in Egypt over the coming 5-10 years.

The General Authority for the Suez Canal Economic Zone (GASCEZ) is in charge of six seaports within the Suez Canal Development Projects: Ain Sokhna, Adabiya, El-Tor, Port Said East Port, Port Said West Port and El-Arish.

“The authority has held 71 promotional meetings with international investors and organizations. There are studies on the zone’s competitiveness and industrial advantages. The authority has conducted feasibility studies as well,” said Ahmed Darwish, head of GASCEZ.

The Suez Canal Authority and the Dar El-Handasah, which is carrying out the Suez Canal Development Project, have worked together to devise the“June 30 Corridor” linking the Northwest Gulf of Suez and Port Said West Port.

Sonker Bunkering Company has launched construction of a liquid bulk facility at Sokhna Port on 400,000 square meters, carried out by state-owned Petrojet, at investments worth US $400 million in its first phase.

In February, Egypt launched a side channel at Said Port East Port to ease access to the Suez Canal. Experts say the 9.5-kilometre long, 17-meter draft and 250-meter wide side channel means ships traversing the canal will no longer have to use the convoy system, allowing round-the-clock access to East Port Said Port, the northern gateway to the Suez Canal.

Streamlining overhaulmodels

In a study titled “Alternative Port Management Structures & Ownership Models,” the World Bank stressed that ports are being integrated into global logistics chains, and the public benefits they provide are taking on regional and global attributes.

“Many governments are directly or indirectly involved in port development. They often use a ‘Growth Pole argument to justify the direct financing of basic port infrastructure. This ‘Growth Pole’ rationale derives from the belief that investments in port assets have strong direct and indirect multiplier effects on the entire national economy and, further, that the commitment of public resources is necessary to encourage co-investment by the commercial and industrial sectors. These sectors are thus stimulated to make investments that they would not make in the absence of public ‘seed investment’ in port infrastructure,” the study said.

According to the study ports encourage the co-development of various value added services through franchising, licensing, and incentive leasing. “Today, ports aim at attracting enterprises that extend their logistics chains or provide them with specialized capabilities to add value to cargos that are stored and handled in the port. General services that many ports attempt to develop include chandlering, ship repair, container maintenance, marine appraisals, insurance claims inspections and banking.”

The World Bank set public-private partnerships (PPPs) as an ideal investment mechanism for port development projects via a landlord port model. In this model, the public sector is responsible for port planning, acts as regulatory body, and owns port-related land and basic infrastructure.

Development Corridor

After the January 25 Revolution in 2011, an idea of launchinganorth-south”development corridor” in Egypt’s Western Desert was revived. The Development Corridor is a long-term national project originally brainstormed by Egyptian-born geologist Farouk El-Baz more than 25 years ago.

El-Baz believes this project will “change the face of Egypt” by creating 200 cities and around 500,000 villages in the Western Desert.

The Development Corridor project includes a 1,200-kilometre superhighway to be built from west of Alexandria to the southern border of Egypt. It will include 12 east-west branches linking the highway to high-density population centres, a railroad for fast transport parallel to the superhighway, a water pipeline from the Toshka Canal and a power grid to supply electricity.

An even more ambitious projectto build a highway linking the Mediterranean city of Alexandria in the north of the continent and Cape Town in the far south would further increase inter-African trade.