Doing Business in Egypt: Barriers and Opportunities

Government and Regulatory Barriers

The legal and regulatory environment for doing business in Egypt is challenging. 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 began 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 began in 2015. One of the major changes was to float the Egyptian pound, which 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 holding stakes in the nation's media companies. The government still exerts substantial control over most businesses, not just the media, as the el-Sisi government's 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 key 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 although these reforms might indicate a reduced role for government, they raise the cost of doing business in Egypt significantly. Striking a balance between the needs of Egypt's large, young population for jobs and the needs of large businesses remains an ongoing challenge.

Egypt's Position in the Global Trading System

On the macro level, Egypt is a participant in the global trading system. Despite numerous regime changes and authoritarian governments, it has a history of honoring 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. 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 domestic labor pool is insufficient, such as high-technology industries (State Department, 2017).

Overall, Egypt still presents many challenges for foreign investors. Corruption remains a major issue (Transparency International, 2016), and the country ranks just 122nd in the world on the World Bank's ease-of-doing-business survey, highlighting how far the country's reforms still need to go (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 operate and presents substantial barriers that foreign companies will need to overcome. The fact that the government actively recognizes the need to encourage foreign investment stands as one of the few clear positives.

Emerging Investment Opportunities

One of the most significant new opportunities lies in the oil and gas sector. The government has committed to developing this sector as a means of increasing foreign exchange, and it has become the largest portion of the Egyptian economy. While direct participation in the sector presents challenges for foreign companies — especially smaller ones — the low cost of oil also creates opportunity. Whether this opportunity is greater than in other nearby countries is a separate question, but for industries that rely on ready supplies of low-cost hydrocarbons, Egypt holds some promise. The country has free trade zones that allow for the production of goods for export, and it has a large labor pool that can be leveraged to produce goods. Plastics is therefore a potential industry for Egypt to develop — or for a company to invest in — 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 its advantages. The country possesses several preconditions for trade, including the Suez Canal, oil resources, and a large population. It also has some free trade zones, but Egypt should be capable of doing considerably more than it has done to facilitate trade. First, the country needs more free trade zones with more flexible rules. Second, Egypt needs to open up its financial industry — historic ties with the UK and the possibility of developing an Islamic banking sector would both help. Investment in education would also create additional opportunity. With these elements in place, Egypt would be a better platform for a trading company seeking to leverage the country's free trade arrangements within both Africa and the Arab world, combined with its advantageous geographic position.

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 7, 2018, from http://www.oecd.org/countries/egypt/40252444.pdf

Transparency International. (2016). Corruption Perceptions Index. 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