Egypt is trying to improve its business regulations, but major challenges remain, writes Nesma Nowar
Concerns over the performance of the Egyptian economy are growing. The 2015 Business Barometer Index (BBI), an index that tracks business environment changes in Egypt over time, slipped one point in the first quarter of the 2015-2016 financial year, compared to the fourth quarter of the previous year. The ranking reflects the business community's concerns about the economy's slow recovery.
The Business Barometer (BB), conducted by the Egyptian Centre for Economic Studies (ECES), a think tank, shows that these concerns followed a drop in real GDP growth from 4.3 per cent in the second quarter of the 2014-2015 financial year to three per cent in the third quarter.
The index findings are based on a survey of 474 firms on their perceptions about the performance of the Egyptian economy and based on their own businesses for the first quarter of the 2015-2016 financial year.
The BB reveals that the firms' evaluation of economic growth declined in the first quarter of the 2014-2015 financial year, compared to the preceding one. Such an evaluation is reflected in the firms' performances, where production fell by two points and both domestic and international sales declined. However, the evaluation is still higher compared to the lower performance in 2013.
This decline in performance has pushed the firms' outlook for the upcoming quarter (October to December 2015) to be less optimistic than their expectations for the previous two quarters. Firms expect a decline in domestic sales and a huge increase in inventory despite a modest increase in exports, resulting in lower expectations for production and capacity utilisation.
This should ring an alarm bell for the government to revisit its monetary and fiscal policies with a view to stimulate the economy, the report says. It added that efforts in this respect would help reverse the more pessimistic outlook reported by the business community over the period October-December of the 2015-2016 financial year.
The businessmen surveyed identified four major business constraints in the economy: namely, inflationary pressures, corruption, high taxes and red tape. The ECES report showed that businessmen believe that inflationary pressures are by far the most severe hurdle for business in the country, and firms are also concerned that the depreciation of the pound may cause the inflation rate to rise further.
Egypt's annual urban consumer inflation soared to 9.2 per cent in September, compared to 7.9 per cent in August, mainly driven by higher food prices.
Corruption was cited as the second major impediment facing the business sector, indicating that more anti-corruption measures are needed. High taxes were another constraint for the sector, showing that the new investment law, which cut the corporate tax rate from 25 per cent to 22.5 per cent, is yet to be felt across the business sector.
Taxes are a particular concern for investors. Egypt has also slipped five points in the category of "paying taxes" in the World Bank's Doing Business 2016 report, to stand at 151st place out of 189 countries. The government has also been slammed for its "unpredictable" tax policies.
The Doing Business report is an annual study that measures the ease of doing business around the world, including the time it takes to open a business, register property, get credit, and protect minority investors, among others concerns.
The report covered 189 economies, with Egypt ranking 151 compared to 126 last year. Egypt's deteriorating position has been attributed to the slow pace of reform.
The report shows that over the past five years the pace of reforms has declined with Egypt implementing only two reforms, compared to four on average for other economies in the MENA region. Egypt's ranking on the ease of doing business has not improved over that period and entrepreneurs still face challenges in several areas.
According to the report, importing products to Egypt is time-consuming, requiring an average of 120 hours to comply with procedures compared to a global average of 87 hours, making Egypt perform poorly in the "trading across borders" area (ranked at 157).
In the "enforcing contracts" field, Egypt is one of two economies in the region where it takes more than 1,000 days to resolve a commercial dispute through the courts, giving the country a ranking of 155.
One area where Egypt has made some important progress is in strengthening minority investor protections by prohibiting subsidiaries from acquiring shares issued by their parent company. The report says that Egyptian minority investors can now be more confident about their investments as conflicts of interest are better regulated.
The report also shows that Egypt is among the best performers in the MENA region in the area of "starting a business." "Over a decade ago, an entrepreneur in Cairo took nearly 40 days to start a business, but the required time is now only eight days," says the report.
Additionally, Egypt requires no minimum capital, unlike the majority of MENA region economies, so budding entrepreneurs in Egypt face fewer barriers. But young entrepreneurs may beg to differ, thinking this is the least of their troubles, with bureaucracy being their biggest problem.
The report reveals that Egypt is the best performer in the region in "getting credit" for the holders of bank accounts as credit bureaus cover a significant share of the adult population and collect all the main areas of information to assess credit worthiness.
The government has been looking into legal and administrative overhauls to breathe life into an economy strained by four years of political turmoil following the 2011 Revolution that ousted former president Hosni Mubarak. Economic recovery has been slow, raising concerns across the business sector.
© Al Ahram Weekly 2015
