If the government claims sound economic performance, why did Egypt come at the bottom of a World BankWorld Bank list of investor friendliness, asks Sherine Abdel-Razek

Last week started with a sombre report by the World BankWorld Bank which ranked Egypt 165th among 175 of countries where doing business is easy, but by mid-week two positive reports by HSBCHSBC and Merrill LynchMerrill Lynch on the Egyptian economy offered some cheer. Meanwhile, participants in the annual Euromoney conference held in Cairo last week were lectured by government officials, businessmen and foreign investors on the leaps and bounds Egypt has taken in economic reform. All this news is certain to have confused anyone about how healthy the economy really is.

Leafing through the World BankWorld Bank report Doing Business 2007, How to Reform?, which is the fifth in an annual series investigating how government regulations facilitate the work of investors, one is left with the impression that doing business in Egypt is a huge challenge. According to the report, entrepreneurs in Egypt can expect to go through 10 steps during an average of 19 days before they can launch a business, at a cost equal of 68.8 per cent of Gross National Income (GNI) per capita. They must deposit at least 694.7 per cent of GNI per capita in a bank to obtain a business registration number.

In comparison, investors tapping the South East Asian country of Singapore which ranks first on the list have to go through six steps in as many days to launch a business, at a mere cost of 0.8 per cent of GNI per capita and no deposit for a commercial registry number.

Adding insult to injury, Egypt came last among 17 Middle East and North Africa (MENA) countries including politically unstable Iraq, Iran and the West Bank. The top ranking countries in the region were Israel (at 26), Saudi Arabia (38), Kuwait (46) and Djibouti (161).

In addition to the ease of starting a business, the report uses several other criteria for judging an economy.

These include the regulations and time taken to employ workers, register properties, enforce contracts and pay taxes. Reformers, according to the report, are the countries which simplified business regulations, strengthened property rights, eased tax burdens, increased access to credit, and reduced the cost of exporting and importing.

Egypt, which ranked among the top 10 reformers globally in the World BankWorld Bank's Doing Business 2006 report, has undertaken two out of the 10 reforms that the report considers. It cut registration fees for new businesses, reducing the cost by 40 per cent; and implemented a flat 20 per cent corporate income tax rate. But these reforms were not enough to move Egypt up the list. Last year it ranked 141 among 155 countries surveyed.

Dubbing this year's report as unfair to Egypt, Minister of Investment Mahmoud Mohieddin said that it ignored all the macro- economic reforms taking place. A few days later, Mohieddin told the Euromoney conference that the report does not identify the real challenges facing Egyptian businesses, such as financing, dispute-settlement, land acquisition procedures and bureaucracy. He challenged the findings with heart-warming figures on Foreign Direct Investment (FDI), a clear indication of how investors feel about channelling their money to the country ranking in the bottom ten of the World BankWorld Bank report. Since 2004, FDI has increased from $2 billion to $6.1 billion in privatisation revenues, the bulk of which came from green field non-oil investments.

Even before Euromoney and just a few hours after the report was released, both Merrill LynchMerrill Lynch and HSBCHSBC gave Egypt's economy two thumbs up. The banks praised the improvement in growth rate through the fiscal year 2006-2007, thanks to the increase in FDI especially from the Gulf countries. The Merrill LynchMerrill Lynch report highlighted the positive economic indicators, citing the trade balance which has been registering a surplus amounting to 2.5 per cent of GDP since 2002. It also put projected FDI at seven per cent of GDP during the coming years.

So, how is it that views of the economy can be this polarised? The answer came in a press release by the World BankWorld Bank: "The rankings track indicators of the time and cost to meet government requirements in business start-up, operation, trade, taxation, and closure. They do not track variables such as macro-economic policy, quality of infrastructure, currency volatility, investor perceptions, or crime rates."

Last year's report noted the same: "ranking on the ease of doing business does not tell the whole story. The indicator is limited in scope. It does not account for a country's proximity to large markets, quality of infrastructure services, the security of property from theft and looting, macro-economic conditions or the underlying strength of institutions."

Moreover, the report may have missed some of the important reforms taking place since the beginning of this year. Although it is entitled Doing business in 2007, the report is based on data collected between January 2005 and January 2006.

Nonetheless, these shortcomings do not undermine the value of the report at least from the World BankWorld Bank's point of view. "The annual Doing Business updates have already had an impact," noted Caralee McLiesh, an author of the report. "The analysis has inspired and informed at least 48 reforms around the world. The lesson: what gets measured gets done." Doing Business allows policymakers to compare regulatory performance with other countries, learn from best practices globally, and prioritise reform.

© Al Ahram Weekly 2006

 

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