Egypt Economy and Foreign Investment

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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…

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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/ranking


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