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Motivational economic reforms, legislations insufficient: Officials - Daily News Egypt

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Motivational economic reforms, legislations insufficient: Officials

The government considers with economic decisions and actions serve the foreign investor only, without considering the local investor, Holding Company for Spinning and Weaving member 

EEDCThe government is hoping to gain foreign direct investments in the Economic Summit, which will take place from 13 to 15 March. As such, various Egyptian ministries and agencies have rallied to announce the projects proposed to foreign investors during the conference. The government worked on some economic decisions and laws aiming to stimulate the appetite of investors, whether in small or large-scaled projects in various fields, including energy, electricity, housing, tourism and the Suez Canal axis project.

The most important decisions:

1 (1)Reducing the price of the pound against the dollar

The Central Bank of Egypt (CBE) began majorly depreciating the value of the Egyptian pound this year in a push to end the black market, hoping to trigger a steep recovery in foreign inflows into equities and bonds; a step that would be critical in ensuring the success of the Economic Summit and the Eurobond issue, expected after March 2015.

Before the CBE’s dollar auctions, which started in December 2012 on a weekly basis, the government was interfering to save the value of the Egyptian pound. This led to activating the black market, which was buying dollars at higher prices than the official prices, and thus companies were losing money because they had to deal with the official market.

The value of Egyptian pound has continued to depreciate against the US dollar, from EGP 6.04 at the end of the transitional period marked by the election of former president Mohamed Morsi in June 2012, to EGP 7.63 officially on 7 March.

On 18 January the value of the US dollar rose against the Egyptian pound in the official market to register EGP 7.19, compared to the EGP 7.14 rate that lasted throughout the previous six months. However, the value of the dollar versus the Egyptian pound ranged between EGP 7.70 to EGP 7.75 in the unofficial market (black market).

On 26 January, CBE dollar sales prompted banks to increase the price of dollar to EGP 7.47 for selling and EGP 7.44 for buying, according to the rates announced by the National Bank of Egypt (NBE).

On 2 February, the Egyptian pound continued to fall against the US dollar, registering EGP 7.53, up from EGP 7.51 on the previous day. Meanwhile, on the black market, $1 registered EGP 8, up from EGP 7.78 the previous day.

On 4 February, the US dollar’s value stabilised for the first time at EGP 7.53 in the CBE and EGP 7.63 at Banque Misr and NBE, since the CBE’s dollar auction on 19 January.

This devaluation is believed by economists to reassure foreign investors who would like to invest in dollars. Others argued that prices of consumer goods, such as medicine, oil and some food products will get higher.

The current rise of the US dollar value against the Egyptian pound will benefit the economy on the long term; however, it will harm the budget on the short-term, said head of the Federation of Egyptian Industries (FEI) Mohamed El Sewedy in a press conference on 28 January.

Holding Company for Spinning and Weaving member Magdi Tolba said the decision to float the Egyptian pound in itself is positive so as to ensure the presence of foreign currency, but it was necessary to provide foreign currency in banks, especially for labour-intensive sectors.

Tolba criticised the lack of coordination between the government and the CBE with respect to devaluation of the pound, which empties the decision of significance.

He criticised the government’s consideration of economic decisions and actions that only serve foreign investors, without considering local investors, as the economic basics say that nearly 95% of the investment is internal growth rather than external. Foreign investors study the local market before the decision to invest in the country.

Economic scholar at the Carnegie Middle East Center Amr Adly said that reducing the Egyptian pound exchange rate has come at this time and at this pace in anticipation of the conference in March in order to reduce the risk of currency conversion, especially as the global financial institutions consider the pound to be overvalued.

Adly added that the reduction in the exchange rate so suddenly and at a relatively large rate (about 6.4%) comes to hit the black market.

“All these procedures are designed to provide dollar liquidity in the banks and then in the official market, and then pay the efforts of re-unification of the actual exchange rate again,” said Adly. “The depreciation decision before the March summit comes in response to the recommendations of international financial institutions, particularly the International Monetary Fund (IMF)”.

 (AFP Photo)
(AFP Photo)

Legislative reform

The government seeks to reform the investment climate before the economic conference through reforming a number of laws that pave the way for investors.

Unified Investment Law: Once the government announced the conversion of the donors’ conference to an economic summit, it started work on new law to shorten the 78 step for the extraction licenses into a single step. The Ministry of Investment was assigned to prepare the final wording of the law proposal, in order to take the necessary procedures for its issuance.

On 4 March, the Cabinet approved the draft law on investment and waiting for presidential ratification.

Electricity law: Minister of Electricity and Renewable Energy (MOEE) completed the Electricity Law proposal on privatising electricity production, distribution and transmission and the cabinet approved it on 18 February.

The Electricity Minister Mohamed Shaker confirmed that this law will open the door for investment in power in Egypt and encourage investors, in addition to restructuring the administrative and regulatory system of the ministry.

There are other laws awaiting issuance before the summit, such as the exit from market law, which allows mechanisms and procedures to facilitate the rapid liquidation of companies through referral to the business liquidation rules. In addition there is a renewable energy law to encourage the entry of the private sector into the field of electricity production from renewable energy sources, and the law of land allocation, which includes allocation of industrial land by direct order for investors, in order to facilitate access to lands.

Economics professor and former assistant to the director of the International Monetary Fund Fakhri Al-Fiqi said that regarding economic legislation, the most important is new investment law that will provide the advantages for small-, large- and medium-sized businesses.

Al-Fiqi added the most important of these advantages is the equality between Egyptians and foreign investors in treatment in business and investment.

Economic expert and Director of the Center for Economic Studies Salah Gouda said that the unified investment law is a good step, but it was more important to solve the Egyptian investor’s problems, which became increasingly complicated by the presence of so-called dispute settlement committees of the General Authority For Investment and Free Zones (GAFI) .

Gouda added that these committees lead to lengthy procedures because they delegate proposed solutions to other committees, until they reach the prime minister to take a final decision, which is considered tampering.

“The government must put a specific term for a group of investment committees to resolve all problems related with government agencies,” said Gouda.

Magdi Tolba said that the government should issue the unified investment law before then, in order to be capable of testing and experiencing it, adding that the delay in the issuance of this law led to Egypt being delayed by about 50 years in the field of investment.

“I hope that this law is promulgated without legislative defects, as well as the important issue of exit from the market law, where it includes the proper mechanisms to exit from the market to ensure the right of the investor and Egypt,” added Tolba.  “More important is capacity-building and training of the human resource and Egyptian employment.”

Tolba noted that this summit is Egypt’s announcement that it has a positive climate for investment, and Egypt should prove this by displaying a new way of thinking and a new spirit of management to be prepared for the implementation of those economic decisions.

Tax Reform

The government took some tax reform procedures by expanding the umbrella of taxpayers to integrate the informal sector into the state’s formal sector.

Among the most important taxes is the value added tax (VAT). The government intended to impose the VAT before the Economic Summit because of the increase of the budget deficit in the fiscal year (FY) 2013/2014, at 13% of GDP, which requires reducing through imposing new taxes. In addition, the government imposed the Real Estate Tax on all residential units and real estate valued at more than EGP 2m.

Tolba said the increase in taxes puts a burden on the committed citizens, which accounted for 30%, which is registered, but about 70% of the parallel economy is not registered and therefore these taxes will not be imposed on them.

He demanded that the government pay attention to the domestic industry because it is the most important element for attracting investment.

“One of these local industries is the textile industry because it is a labour-intensive industry, and Egypt has a great potential in this, which may also help solve the unemployment crisis in Egyptian society, but the government is only interested in the economic summit,” added Tolba.

The investment in the petroleum sector rose to $8.3bn in 2013-2014, an increase of up to 3.75% from the previous year, according to MEES (AFP photo)
The investment in the petroleum sector rose to $8.3bn in 2013-2014, an increase of up to 3.75% from the previous year, according to MEES
(AFP photo)

Solving the energy crisis

The government is seeking to resolve the energy crisis before the March summit through importing gas and coal to reassure investors as to the importance of energy in various investment projects run the factories, as more than 60% of the factories stopped working in the past year.

With regards to oil and gas, the Egyptian government is set to repay its debt to foreign oil companies operating in Egypt, and has borrowed about $1.5bn from local banks last November to repay foreign debts.

According to the Middle East Economic Survey (MEES) report issued in early January, the investment in the petroleum sector rose to $8.3bn in 2013-2014, an increase of up to 3.75% from the previous year. Egypt currently operates 70 international oil companies in the areas of research and exploration.

Further, the government declared at the end of 2014 its intention to import coal so as not to stop work in cement factories.

Minister of Electricity Mohamed Shaker announced on 26 February the establishment of a coal-fuelled thermal power station with a total capacity of 2640 MW in the Oyoun Moussa area in Suez.

The Egyptian government has taken these steps in an attempt to resolve the power crisis, alongside its decision to invest in new and renewable energy. The Ministry of Electricity declared that the cost of the first phase of new and renewable energy projects is up to $6bn to generate 4,300 MW, and will be implemented by 136 Egyptian and international companies.

Meanwhile, the Egyptian government took steps to establish its nuclear power plant, as President Abdel Fattah Al-Sisi signed agreement with Russian President Vladimir Putin on cooperation to establish a nuclear power plant during Putin’s last visit to Egypt in February.

Magdi Tolba added that he has major concerns regarding the implementation of those motivational decisions taken by the government to stimulate investment in Egypt.

Tolba explained that the government’s administrative climate has to be changed, because it has disallowed the implementation of those decisions, and for the new laws to be issued.

Tolba said that without a good investment climate, reducing administrative constraints and bureaucracy will not have a good return for investors.

Salah Gouda said that the government has to place economic reform programme for Egypt during the next eight years, demonstrating how to overcome the problems, and achieve growth rates of up to 8% during the upcoming four years, instead of 2.2% currently.

In addition, he said the government must find a way to increase exports and reduce imports, and recover the balance of payments and the required volume of investments in accordance with the required economic reform programme.

Gouda has similar concerns over legislations that are repellent to investment; will they be cancelled, and will they solve the specific investors’ problems, such as lack of energy, lack of trained labour, lack of respect from the state for its contracts, and the lack of land supply.

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