Member of the Egyptian Parliament’s Economic Affairs Committee Amr El-Gohary said that the current government lacks the ability to attract foreign direct investment despite many economic legislation recently approved by parliament.
In an interview with Daily News Egypt, El-Gohary said that attracting FDI is not only linked to legislation, but also relies on the business environment and the ability to counter bureaucracy and routine.
He said that history will recall that the investment law approved by parliament during the last legislative term waived the state’s rights in collecting revenues through offering huge incentives and facilities.
How do you see Egypt’s ability to attract foreign direct investment following the adoption of the Investment Law and issuing its regulations?
I would like to say something very important: the ability to attract foreign direct investment is not related to the recently approved legislative package, but rather an environment and a climate that incubates capital in a manner that can overcome the bureaucracy and routine of the administrative apparatus.
The second critical point is that the law created a wide range of incentives and guarantees for investors, which denied the state its right to collect taxes and will force foreign funds out.
Moreover, foreign investors look at Egyptian businesspersons and the profits they make. So they come here to split the profits with their Egyptian counterparts.
But now in Egypt, there is a big increase in the interest rate approaching 20%, which stops many investors from expanding and launching new lines for their existing projects or creating new ones. It is simply very expensive.
The intervention by the Central Bank of Egypt (CBE) to raise the interest rate was necessary to curb inflation. In your opinion, was the intervention a mistake or did the government fail to handle it?
In order to curb inflation and price rises due to the economic decisions implemented by the government, we must be aware that the CBE is not the only entity responsible.
But this must be in the framework of fiscal policies implemented by the government and monetary policy of the CBE with coordination between both.
The CBE’s decision to raise the interest rate came to try to curb inflation, which rose at the end of last fiscal year and the beginning of the current fiscal year and comes within the framework of obtaining the first part of the second tranche of a loan from the International Monetary Fund (IMF).
Some people imagine that this loan obtained from the IMF will be directed to economic projects and this has not happened. The loan was channelled to repair the imbalance and distortions in state budget, which are all purely financial procedures.
The CBE has no way to fight inflation except through drawing liquidity from the market, so it raised the interest rates with the hope of curbing inflation.
The CBE is seeking to collect some of the liquidity from the market and into banks. It is natural that some of the industrial institutions wishing to invest will be damaged, along with individuals who wish to borrow from banks, or even those who borrowed in the past period.
Did the decision affect foreign direct investment?
Raising the interest rate did not affect foreign investment because foreign investors are coming with their capital of hard cash. However, it harmed domestic investments.
Projects looking to inject new investment or implement expansions to existing projects while avoiding to deposit their money in banks are heavily affected by the rate hike.
Also, in light of this situation, many of them will resort to save their money in banks for high interest rates without risk.
There are always investors who use their money in investments, but there are only a few of them. They would even rather deposit funds at banks and obtain interest. The majority of investors were negatively impacted by the decision.
Do you think the CBE had solutions other than raising the interest rate?
Prior to taking the interest rate decision, the CBE had to inject funds into small and medium enterprises (SMEs) to manage the crises of small investors.
This is what eventually happened, through expanding the framework for lending to SMEs under the EGP 200bn initiative by President Abdel Fattah Al-Sisi.
Apart from raising interest rates, are other problems related to increasing the budget deficit. How do you see this issue?
This is another very serious matter as the government is the largest borrower from banks, which means that the targeted deficit level by the end of the current fiscal year will approach EGP 450bn.
Therefore, the decision should have been further considered by the government and the CBE because it caused even more confusion in the budget.
I believe that the real entity in charge of confronting inflation is the government through the development of sound fiscal policies to stir the economy, increase its growth rates and thus reduce inflation and increase exports. But the government failed to do so, forcing the CBE to intervene alone.
Do you think the CBE’s intervention was influenced by the IMF?
Yes, there was great pressure to obtain the first installment of the second tranche. The government was unable to cope with inflation, so the CBE intervened.
Do you think that the government failed to set financial policies to remedy distortions, which forced the intervention of the CBE?
Indeed, the government has failed to follow a strong fiscal policy of economic reform; the economic decisions made were hasty and wrong.
There really was great anticipation for reform. And no one can say we do not need economic reform. The truth is that all the reform concluded was monetary reform. Reform means increasing production and exports, seeking to solve tourism problems and obstacles to domestic and foreign investment to attract foreign currency.
In addition, it also means restructuring the companies recording losses not just through economic reform with the sole aim of obtaining a loan to cover the budget deficit from abroad due to the high interest rate internally.
This is not an economic reform, but a monetary reform to remedy the imbalances of the budget, and in turn, you raised the burden on the citizen on the one hand, and raised the rate of inflation on the other. We are now trying to fight that through raising the interest rate, which led to widening the budget deficit.
The increase in the interest rate has led to the reduction of the inflation index to pre-floatation rates. Did the exchange rate fall to the expected under EGP 13 rate?
If the government is not able to reduce the deficit by the end of the current fiscal year to EGP 100bn, it will have to leave, as it will have been unable to achieve its target deficit of 9%.
I think the government should be formed with 15 ministers and three sovereign ministers. The number of advisers should be cut, reducing costs, controlling the administrative apparatus and thus reducing expenses.
How do we solve the problem then?
I disagree with the way the economic reform programme was carried out. The pace was very fast and it was necessary to implement some decisions before the exchange rate was floated.
If you want to gradually remove subsidies to deliver them to their deserving beneficiaries, it is important that a data network of the beneficiaries is completed. It was also necessary to expand the social safety nets and reduce the subsidy rates before the floatation. The citizens should have been surprised with many decisions to ease the burden on them at the same time. This did not happen.
The exchange rate is now at EGP 17.5. At the same time, we are going in the wrong direction through aiming to lift subsidies in general. If the government took the right decisions, the situation would have been very different, especially with regards to inflation and price hikes.
They said that the floatation aimed to attract remittances of Egyptians abroad as well as attract foreign direct investment and increase exports.
But in fact, you do not have investments. Since the 25 January uprising, investments have been fleeing.
The IMF forecasted an inflation of 18%. Do you expect inflation to settle soon?
The government gives false statements about prices. Prices will not fall unless the dollar falls against the pound.
The price of the dollar is falling as the indicators of non-oil exports and tourism improve, thus improving the purchasing power of consumers.
We have to realise that there are no import restrictions, but there are controls on low quality goods that have been entering Egyptian markets and consuming a much-needed hard currency.
Imports are still open, and I am against the closure of imports as a large proportion of industries are based on imported raw materials.
Why have importers not become manufacturers? What assistance can be provided by the CBE and banks in this regard?
Importers were not met with anyone who gave them assurances. In addition, there is a state of distrust in Egyptian products, but with the increase in prices in the recent period, they have become more accepted compared to the burden of buying imported goods.
It is necessary to communicate with major international companies through their partners in Egypt and help them sign partnerships with local investors. This would establish national production and increase customers’ trust in it.
What are the obstacles preventing importers from becoming producers?
Egyptian citizens during the recent period have become distrustful of their country’s products. For foreign companies to agree on building a production line in Egypt, they must see free trade agreements. These are present, but the conventions are not activated. This is the job of the minister of trade and industry.
There is a very serious fact that we must stop at: commercial representation offices of Egyptian embassies abroad do not operate on a full-capacity basis.
In this context, I spoke about the need to improve the representation abroad, especially in Africa and East and Central Asia.
The alternative is pivoting the status of Egypt to become a transit state for Africa’s international trade and vice versa from the countries of East and South Asia.
How do you see the direction to raise fuel prices again?
Raising fuel prices will have a severe impact on the street, and the government has to take quick moves on other aspects of the problem through developing other means of transport, such as the railway. This will curb costs and reduce prices.
I have great concerns about global oil prices rising. How will low-income citizens cope?
Why did the government implement a smart card system for gasoline, which cost close to EGP 500m?
This question is directed at the government. There are requests for government questioning around the non-activation of the implementation of smart cards for gasoline and diesel. The concerned minister will be questioned about wasting EGP 500m on these cards.
Is there a government strategy to reduce fuel consumption?
I do not think the government has a strategy. We have to reduce consumption. But it is clear the situation is still the same. We have to offer solutions for providing better transportation for citizens.
I object to the monorail project. The area between Salam City and the 10th of Ramadan is a labour-intensive area, not to mention that the project cost is very high.
The file of cash subsidy is debated. How do you see it?
I have been on the in-kind subsidy side. There is corruption, but there must be a probe committee to investigate this.
A data network for subsidy beneficiaries should be put together.
I can make a two-year agreement for example with the private sector so that the state can pay them part of the cost of the subsidised commodity, which would also help overcome the issue of subsidy goods being stolen.
Citizens complain about state inability to impose market controls and the lack of a quick parliament intervention or passing of a consumer protection law draws great criticism to parliament. Why has the law been delayed?
The fact is that the Egyptian market is a random one. The reason behind the delay is the investment law which was ratified during the last parliamentary session and the government that preferred to submit the protection law itself, even though there was a bill already submitted by parliament which was more than 60% complete.
How do you see the government inclination to offer state-owned companies in the stock market in the coming period?
In the draft budget of the current fiscal year, the government said it targets EGP 6bn from offering assets on the Egyptian Exchange. This is a very low figure in the first place.
Moreover, I am not just against the timing and the targeted figure, but I also object to the abandonment of the public sector. The administration of these institutions could be privatised through contracting with foreign companies to manage companies for a profit share.
The public sector is a national treasure and the government suffers from the inability to operate it.