03 July 2017

Egypt needs to create an industrial plan, quickly release the framework of its new investment law and issue new rules to boost the small- and medium-sized businesses if it wants to carry through on its bid to hasten economic growth, experts say.

The most populous Arab nation - home to 91.51 million people, according to official statistics - has managed to push through a fiscal reform plan that includes unpopular austerity measures.

Inflation hit a 30-year high of 31.5 percent in April following several cuts to state subsidies and a more than 50 percent decline in the value of the Egyptian pound after the currency was floated in November 2016.

The reform plan was essential for Egypt to secure a $12 billion loan from the International Monetary Fund, which eased a prolonged financial crisis stretching back nearly six years to when political uprisings led to the ousting of two political regimes and drove investors and tourists away.

“Now that the fiscal reform plan has moved ahead, economy policy’s emphasis needs to shift to how to stimulate growth,” Mohamed Abu Basha, a senior economist at the Cairo-based EFG Hermes investment bank, told Zawya in a phone interview in June.

Abu Basha said the state must have a clear plan identifying the industries and services that best suit the country’s aims of improving the economy’s competitiveness and creating employment, and then introduce incentives to attract investors to those industries.

Egypt’s Minister of Planning Hala Al Saeed earlier this year said the government is targeting GDP growth of around 5 percent in the 2017- 2018 fiscal year, which starts on July 1, according to Reuters.

Egypt’s current economic growth rate is 4 percent and Saeed said the hope was to boost this to 6-6.5 percent in 2020.

“Despite the tough austerity measures, the low value of the pound makes Egypt a very attractive spot to many foreign investors, which makes the current economic situation a golden opportunity for Egypt to achieve growth and incur new investments,” said Abu Basha.

“Now is the time the government needs to quickly release the details of its new investment law and come up with new ways to encourage very small businesses that are functioning outside the formal economy to get into the economy.”

New investment law
After years of delays, Egypt in May passed a new investment law, which aims to lessen the bureaucratic burden on companies. Egypt languishes in the 122nd place in the World Bank Ease of Doing Business rankings.

Yet the law, which will be vital to revive inward capital flows that withered following the 2011 uprising, still needs an executive framework to become effective.

Angus Blair, the chief operating officer of the Cairo-based Pharos Holding investment company, predicts the investment ministry will release the law’s executive framework “very soon”.

Abu Basha agreed, adding the government understands the urgency of such procedures. The new law is supposed to provide incentives to entice new investors, such as offering 50 percent tax reductions on certain industrial sectors or for projects sited in underdeveloped areas that the law’s framework has yet to specify.

An investment law was first issued by the government in 2015 but was later amended after criticism for coming up short.

Egypt’s president Abdel Fattah Al Sisi ratified the new law on June 1. Egypt’s investment Minister Sahar Nasr told Reuters in a recent interview that the law should increase the inflow of foreign direct investment (FDI) in the current fiscal year above the initial target of $10 billion.

The minister also revealed Egypt would launch an electronic investor map to provide investors with detailed information on the incentives and resources available to them based on their area of interest.

“The law is one crucial step to increase the flow of investments and foreign currency into the country,” said EFG Hermes’s Abu Basha.

Egypt’s strategic stock of foreign reserves, on which it relies to pay for imports of wheat and other vital food products, had dwindled to $19.6 billion in September 2016, prior to November’s currency flotation and devaluation. The reserves rebounded to $31.13 billion as of the end of May, closer to the $36 billion it held prior to 2011’s uprising.

Small and Medium Sized Enterprises (SMEs) are the backbone of most Arab economies, especially in highly populated countries such as Egypt. Over the past few years, the government has launched several initiatives to boost SMEs, including a pledge last year to incentivise banks to inject $25 billion into the sector over the following four years.

“I still think more needs to be done to help (SMEs),” Blair said. “The problem is many small companies do not like to be in debt. And many banks like to focus more on big companies.”

Blair said the government should provide would-be entrepreneurs with training on how to create a business plan and how to get access to capital as part of a wider aim to create a more entrepreneurial society.

Many Egyptian SMEs work without licenses, do not pay taxes and are not trusted by the big lending institutions.

“Most banks focus on big companies given their low risk profile and their readiness to access funding,” said Abu Basha. “So the government needs to find ways to make SMEs appealing to banks; this could be achieved through easing regulations to create businesses, drafting laws to simplify tax treatment of SMEs and also establishing frameworks to avail funding, not only from banks.”

Small companies of less than 10 workers account for 97 percent of Egypt’s businesses, according to a report last year by state-owned Ahram Online news website, which cited official figures. Medium-size businesses account for 2.7 percent of Egypt’s companies, while large firms with over 50 employees represent only 0.4 percent.

Subsidy cuts
Egypt seems determined to end a tradition of state subsidies that dates back to the 1950s. Food and energy subsidies take a big chunk of the state budget.

Shortly after Sisi was sworn in as president in June 2014, the government announced a plan to cut fuel subsidies. Two government sources told Reuters last year that the country plans to end fuel subsidies in three years.

Blair said that with the poor making up a large part of Egypt’s population, it would be better if the money the state spent on subsidising people to drive cars was instead allocated to other sectors such as education, health and infrastructure.

Egypt reduced its spending on fuel subsidies by about 43 percent in the 2016-2017 financial budget and had also cut electricity subsidies. The most recent fuel subsidy reduction was on Thursday - one day before the fourth anniversary of the June 30 mass protest that ultimately brought Sisi to power.

“The recent (subsidies) cut is an additional confirmation that the government is really determined to tackle the economy’s structural problems,” said Abu Basha.

The state budget deficit shrunk to 8 percent of Egypt’s gross domestic product (GDP) in the first nine months of the 2016-2017 fiscal year, compared to a deficit of 9.4 percent in the previous period. For the financial year beginning on July 1, 2017, the government target is for a 9.1 percent deficit.

Food subsidies remain untouched, with memories still fresh of a previous attempted cut in the 1970s that prompted mass protests and led to a quick retraction of the decision.

But the government has launched new measures to ensure food subsidies reach the people who truly need them. A new smart card scheme for food subsidies such as bread, food oil, sugar and rice began in 2014. It grants Egyptians points to claim against food products.

With one more year in power, Sisi now needs to put a plan in place which will show Egyptians there is an end in sight to the ongoing economic hardhsips they have suffered and a brighter future lays ahead.

© Zawya 2017