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EGYPTIAN REFORMS COULD HERALD MORE FOREIGN INVESTMENT, SAYS UNCTAD
10 March 2005
Egyptian government reforms could pave the way towards increased foreign direct investment (FDI), according to a preliminary assessment by UNCTAD discussed in Geneva today. UNCTAD pinpoints the accelerated pace of reforms in such areas as FDI entry, Customs procedures, foreign exchange requirements and labour regulation. Many of these reforms are based on UNCTAD recommendations contained in an investment policy review (IPR) presented to the government in 1998.
UNCTAD undertakes these reviews at the request of the Member State concerned. The idea is to further economic and social development by creating an enabling environment for international investors.
The follow-up assessment of the IPR on Egypt concludes that if the current momentum for change is maintained, 80% of UNCTAD´s original recommendations will be implemented by year-end. Speaking at a meeting yesterday of UNCTAD´s Commission on Investment, Technology and Related Financial Issues, Minister of Industry Maohmoud Mohieldin outlined government initiatives to enhance the performance of the economy and absorb 600,000 new entrants into the labour force each year.
The newly created Ministry of Investment is "injecting additional dynamism" into investment-related policies and institutions, according to UNCTAD, and a progressive new management team has been appointed to the General Authority for Investment and Free Zones (GAFI). A checklist of initiatives shows a "strong" implementation record. The government is listening more to investor concerns and acting more quickly on them, UNCTAD finds. "A vision may be taking hold among legislators and policy makers", the assessment says, "of a fundamental change in the relationship between the public and private sectors -- one that its architects are confident will enable private investment to flourish and to benefit Egypt".
The UNCTAD assessment was conducted in mid-2004 at the government´s invitation. Among its key findings:
- On the investment framework, most UNCTAD policy recommendations have been implemented. Some formal restrictions on FDI entry have been eased, including abolishing the 49% ceiling on foreign ownership in commercial banking and insurance. Major international banks, such as CCF, HSBC, Credit Agricole and Barclays, have increased their presence, and Allianz has entered the insurance market. Business start-up has improved since 1998 in ways recommended by UNCTAD´s Investment Policy Review (IPR) of Egypt. The number of procedural steps has been reduced, the registration system has been computerized, and the average time taken to register a company has fallen to three days from the one-to-six months reported in 1998. "The changes are quite recent but should in short order dramatically reduce business start-up time", predicts UNCTAD.
- One landmark reform proposal would see a sharp reduction in tax holidays and a simultaneous lowering of uncompetitive general rates of corporate taxation, from 42% to 20%. However, the free zones will likely be exempted, with new investors offered lifetime tax holidays. "If this exception leads to others", warns UNCTAD, "it may in due course undermine the landmark nature of this reform".
- The IPR had reported problems with Customs administration. Since then, funding and administrative control have been centralized in a single agency, tariff rates have been reduced from a weighted average of 14% to 9% and the plethora of tariffs bands reduced to six, which will simplify Customs assessments. Unnecessary red tape has been removed, and most investors interviewed by UNCTAD last year reported a "noticeable improvement" in Customs clearance times.
- The requirement for exporters to surrender 75% of foreign currency proceeds was lifted in December 2004, and in January the Egyptian pound became fully convertible.
- Labour regulation was overhauled through the introduction of a unified Labour Law in 2003, and rules for non-citizens´ employment and residence have been eased. A new intellectual property protection law was also introduced in 2003.
- Egypt has also concluded a number of trade agreements. These include a partnership agreement with the European Union, its most important export market; the Agadir Agreement; the 1997 Greater Arab Free Trade Agreement (GAFTA); and the negotiation of a system of "Qualifying Industrial Zones" (QIZs) with the US. GAFTA, involving 17 Middle Eastern States, has been implemented ahead of time, at least in respect of tariff barriers. The QIZs will allow non-reciprocal duty and quota access to the US market from seven areas in Egypt, provided the products contain sufficient Egyptian and Israeli content - which will be especially attractive to the textiles and clothing sector, UNCTAD believes, and moreover makes a contribution to the Middle East peace process.
- On investment promotion, Egypt has adopted UNCTAD´s recommendation to transform GAFI from a regulator into an investment promoter and facilitator that now acts as a one-stop shop. The initial effort has been a "pragmatic and sensible" focus on improving investment facilitation and aftercare. An investment attraction strategy has been developed and will be the main focus this year. Incentives for free zones have raised occupancy to almost 80% in the two largest zones, Alexandria and Cairo, and close to 60% in the other five. Three new zones have been established and two more are being planned. Export manufacturing is the predominant activity.
- FDI performance has been "weak" since 1998, but the country´s FDI data may understate FDI inflows. Interest is picking up among both new and existing investors, and over the past eight months the FDI scene has become "more vibrant", with upstream oil and gas exploration and development involving petroleum majors, at least two major new gas liquification projects with foreign investors, considerable expansion of the foreign-owned hotel inventory and initiation of the massive Sokhana hub port and logistics complex.
- On improving the investment framework, UNCTAD rates the government´s track record as "impressive". Most of UNCTAD´s 1998 recommendations in this area have been fully or largely achieved. On the positive side, improvements in the investment framework are not piecemeal improvements but form part of a comprehensive Egyptian reform agenda. But UNCTAD cautions that the reforms involving administrative machinery are quite recent and will require an "enormous" programme of management reform and retraining of the civil service before they will be entrenched and sustainable.