Egypt Economy and Foreign Investment

Government Barriers
The legal and regulatory environment for doing business in Egypt is challenging. The current deals with the international community to secure financing call for reforms to the structure of the Egyptian economy, which remains heavily dependent on government intervention. The state of economic reform is a work in progress, begun in earnest several regimes ago in the mid-2000s. During that period, one of the key reforms reduced the time it took to start a company from 55 days to 3 days, a positive step towards creating a more entrepreneurial country. Other Nazif-era reforms were to begin the process of establishing the role that government should play in each sector, as a precursor to specifying which reforms are truly necessary (OECD, 2008).
More recent reforms have begun in 2015. One of the major reforms was to float the Egyptian pound, which has resulted in significant inflation. This inflation is slowing, but will still be at high rates through at least 2019 (Ghafar, 2018). The government is moving towards authoritarianism, as evidenced by intelligence agencies having stakes in the nation’s media companies. The government still exerts substantial control over most businesses, not just the media, as the el-Sissi government and the reforms are not aimed at creating a more positive environment for entrepreneurs. Indeed, the average Egyptian has suffered from the economic reforms due to inflation and the country’s strongly negative trade balance, without any counterbalancing uptick in the conditions for economic growth (Ghafar, 2018).
The US State Department report in 2017 highlighted some of the challenges. While the current regime appears to understand the need for foreign investment as a means of spurring economic growth, it has imposed a new value-added tax (VAT), cut fuel and electricity subsidies, and while these reforms might indicate a lower involvement of government, they raise the cost of doing business in Egypt significantly. Striking a balance between the needs of Egypt’s large and young population for jobs with the needs of large businesses.
On the macro level, Egypt is a participant in the global trading system. It has a history, despite numerous regime changes and authoritarian governments, to “honor its laws, treaties and trade agreements”, and the country is a member of the World Trade Organization (WTO) (State Department, 2017). The only sectors where there are special rules for foreign companies are oil and gas development and real estate, both of which are commonly subject to those sorts of conditions in most countries.
There are some barriers in terms of disputes. First, dispute resolution processes are slow (State Department, 2017) and there are labor rules that limit the percentage of foreign workers. Given Egypt’s large pool of underutilized labor, this is really only a burden in industries where Egypt’s labor pool is insufficient, such as high technology industries (State Department, 2017).
Overall, Egypt still presents many challenges for foreign investors looking to do business in the country. Corruption is still a major issue (Transparency International, 2016) and the country ranks just 122nd in the world in the World Bank’s “ease of doing business” survey, highlighting just how far the country’s reforms need to come (World Bank, 2016). An investor seeking to do business in Egypt will find that while it has some positive characteristics and is moving in the right direction in most industries, it is still a very difficult country in which to do business, and presents substantial barriers that foreign companies will need to overcome. Only the fact that the government actively recognizes the need to encourage foreign investment will serve as a positive for the country.
New Opportunities
One of the most significant new opportunities lies in the oil and gas sector. The government has committed to the development of this sector as a means of increasing foreign exchange, and it has become the biggest portion of the Egyptian economy. While direct participation in the sector presents a challenge for foreign companies, especially smaller ones, the low cost of oil presents opportunity. Whether this opportunity is greater than in other countries nearby is a different issue, but for industries that rely on ready of supplies are low-cost hydrocarbons, Egypt holds some promise. The country has free trade zones that allow for the production of goods for export, and has a large labor pool that can be leveraged to produce goods. Plastics is then a potential industry for Egypt to develop, or for a company to invest, because it relies on oil, and because Egypt ships so much of its oil out of the country prior to processing.
Trade is another area where Egypt can leverage itself. The country has some of the precursors for trade, such as the Suez Canal, some oil, and a large population. It has some free trade zones as well, But Egypt should be able to do more than what it has done for trade. First, the country needs more free trade zones, and with more flexible rules. Second, Egypt needs to open up its financial industry – historic ties with the UK, the possibility of developing an Islamic banking sector will both help. If the country invests in education, that will also create opportunity. With these elements in place, Egypt will be a better place for a trading company to leverage Egypt’s free trade within both Africa and the Arab world, combined with its advantageous geographic situation.
A third emerging opportunity for Egypt is the education sector. There should be strong demand, given that Egypt has to start thinking in terms of leveraging its demographics but also in terms of the fact it needs to maintain its agricultural land to feed itself, and with limited other non-petrol resources the country needs to leverage its human resources. There is little capacity on the part of the government to invest in the education sector – it will take too much time and too much money.
Thus, education is a great opportunity for foreign companies. First, there are many companies that have developed expertise in the education sector, with private institutions across the Middle East. Egypt has generally not been a player in these markets, unlike the Gulf states. For one, Egypt’s demand mainly comes from the poor and middle class segments of the country. They need the education, and authoritarian tendencies aside, the government must realize that there are tremendous benefits to developing the education sector.
Distance and online learning holds the most promise. For one, it can be developed at scale. Since Egypt has one language, it would be easy to reach Egyptians. Mobile usage is high, so any company that can educate Egyptians using mobile, in Arabic, should be able to gain a foothold. The large population of the country, combined with how young it is, delivers the possibility of delivering online education at scale. This delivery can be done even with minimal actual investment in Egypt – much of it can be run from other countries in the region in order to circumvent the rules that dictate 90% of staff being Egyptian.
Services represent another opportunity for Egypt. The country has a large Arabic-speaking labor pool, and can serve as an outsourcing center for the entire Arab-speaking world. There are around 300 million Arabic-speaking people, and while dialects can vary, the reality is that Egypt can serve a similar role to what India does in terms of running call centers and other forms of support. They have trade deals with the other Arab and African countries – basically anybody they would serve – and a large, young labor pool that needs jobs. This business would benefit from having an open telecommunications sector, especially one that allowed foreign companies to build out the necessary infrastructure. A lack of infrastructure would be the main barrier to setting up this sort of company – the labor rules wouldn’t pose much of a barrier because the service force can be quite large.
Conclusions
All told, Egypt represents a modest opportunity for investment. While in principle the government understands how important attracting foreign investment is, it has proven to be limited with respect to its ability to remove the barriers to such investment. While Egypt has a large labor force, Egyptian workers typically have a high school education and nothing more. This puts restrictions on the types of industries that can leverage the workforce, and will often necessitate foreign managers. The country’s high rate of corruption poses a barrier, while its declining foreign exchange actually provides some opportunity.
There are still a few good opportunities in Egypt, mainly ones that leverage the country’s large, young workforce, its trade position and the Suez Canal, and any opportunity that can be done without the need for land – most of Egypt’s land is of limited value, being that most of it is in the Sahara desert. Continued pressure on the government to loosen restrictions on industries like education and telecommunications would provide the most significant opportunities for the country, and for investors, because services seems like the best category of business for Egypt to pursue in terms of foreign investment at this point in time.
References
Ghafar, A. (2018) Egypt’s long-term stability and the role of the European Union. Brookings Institute. Retrieved April 7, 2018 from https://www.brookings.edu/blog/order-from-chaos/2018/03/01/egypts-long-term-stability-and-the-role-of-the-european-union/

OECD (2008) Background on the state of economic reform in Egypt. OECD. Retrieved April 7th, 2018 from http://www.oecd.org/countries/egypt/40252444.pdf

Transparency International (2016) Corruption Perceptions Index Transparency International. https://www.transparency.org/research/cpi/overview

US Department of State (2017) Egypt. US Department of State. Retrieved April 7, 2018 from https://www.state.gov/e/eb/rls/othr/ics/2017/nea/269974.htm

World Bank (2016) Economy rankings. World Bank. Retrieved April 7, 2018 from http://www.doingbusiness.org/rankings