What new investment laws mean for foreign investment in Egypt

Egypt is working to establish itself as a leading destination for foreign direct investment (FDI). These efforts were spearheaded by the promulgation of a new investment law in 2017, which sought to significantly improve the legal framework for investors. While the impact of the legislation appeared to be muted, FDI inflows rebounded in both 2018 and 2019. While the government is currently focused on measures to offset the impact of the Covid-19 pandemic, efforts are also under way to streamline decision-making processes and provide greater transparency regarding the expanded role of the armed forces in the economy.

New Investment Law

In a move intended to improve the confidence of international investors in the Egyptian economy and stimulate private sector activity, the country passed a new investment law in 2017. The new law established a number of new guarantees for private companies, such as equal treatment for foreign and national investors, the granting of residence rights for the duration of projects, and protection against nationalisation or the seizure of funds without a court order, along with the right to transfer profits abroad. The new legislation also sought to address some of the difficulties in securing suitable local labour, allowing for a 10% quota of foreign workers, which can be increased to 20% in the absence of national labour with the necessary qualifications. Companies undertaking projects of strategic importance – such as public utilities, roads and ports – are now able to apply for a single approval to cover the establishment, operation, and management of their developments.

The General Authority for Investment and Free Zones (GAFI), meanwhile, has been granted the power to act as the single issuer of all licences for investors. In addition, GAFI has been granted the ability to establish private sector approval offices that can assist and represent investors before other government authorities. A range of incentives were also outlined under the new law, divided into three categories: general benefits for all projects not in free zones, including stamp duty exemptions on loans and a low Customs duty rate of 2% on machinery and equipment; specific incentives for some qualifying investment projects, which includes tax deductions of up to 50% on investment costs for certain developments such as those which are established in labour-intensive sectors or geographical areas in need of employment opportunities; and a number of additional incentives which can be applied on a more ad hoc basis, including the establishment of special Customs points for a project’s exports and imports, and financial assistance for the cost of technical training of employees.

Improving Performance

FDI inflows reached their highest level in the years leading up to the 2007-08 global financial crisis, when domestic economic reform coupled with high levels of global liquidity supported significant increases in capital investment in the country. According to the World Bank, FDI inflows peaked at $11.6bn in 2007 before falling precipitously through to 2011, when the upsurge in social unrest around the January 2011 Egyptian revolution led to significant capital flight, driving FDI into negative figures. As the country’s social and macroeconomic situation stabilised, however, foreign investment rapidly improved, rising each year to $8.1bn in 2016. Nevertheless, FDI levels remained below the pre-financial crisis peak.

The 2017 legislation was developed as a means to increase investor confidence and reinvigorate international investment in the country. The promulgation of the investment law coincided with the Central Bank of Egypt’s decision to allow the Egyptian pound to float freely against all foreign currencies. This currency flotation resulted in a significant depreciation of the currency which made the country a less expensive and more attractive prospect for international investors virtually overnight. However, despite the legislative overhaul and improved currency scenario, FDI flows initially contracted, falling by 8.6% from $8.1bn in 2016 to $7.4bn in 2017, according to the World Bank.

Nevertheless, comparisons of FDI data before and after the flotation of the Egyptian pound may be problematic, given that the value of the currency was reduced by around half, making FDI figures smaller in dollar terms. The Ministry of Investment and International Cooperation (MIIC) has sought to place Egypt’s FDI performance in a global context of constricted capital flows. While the level of FDI fell in absolute terms in 2017, its share of global FDI increased, from 0.35% in 2016 to 0.4% in 2017.

Following this initial drop in FDI inflows, foreign investment recovered in 2018, rising to $8.1bn, according to figures from the UN Conference on Trade and Development. This rose by a further 5% in 2019 to reach $8.5bn, making the country the largest recipient of FDI on the African continent. While FDI was still primarily driven by the Egyptian oil and gas sector in 2019, significant investments also went to the renewables, telecommunications, real estate and tourism industries.

Reshuffle

The government has recently demonstrated its determination to take further steps to improve FDI inflows. In a sign of the increasing importance of investment performance, the brief was moved from the MIIC to GAFI and the department was renamed the Ministry of International Cooperation in December 2019. This in turn was placed under the control of the Prime Minister Mostafa Madbouly. As a result of these changes, decisions regarding the promotion of the Egyptian investment environment are now being taken by the central government. The move followed a similar decision in late 2019 to bring the Micro, Small and Medium Enterprises Development Agency under the control of the Cabinet. The reshuffle is intended to reduce bureaucratic barriers to foreign investment and improve the efficiency of decision-making.

Improving Transparency

The government has also moved to address concern on the part of investors regarding the role of the military in the economy. The expansion of military-owned companies into an increasing number of sectors has seen it emerge as a competitor to private sector firms in industries as diverse as air-conditioning systems, fish farms, cement factories and baby formula production. While in some cases these ventures have come as a short-term response to supply shortages, some investors fear that the long-term presence of the military in these sectors could serve as a disincentive to private investment. This is due to the competitive advantages enjoyed by military companies in areas such as taxation and access to labour.

How much of the economy has been drawn into the military sphere is difficult to assess. In March 2018 President Abdel Fattah El Sisi announced that the army’s share of GDP was between 2% and 3%, or around $26bn. However, a lack of parliamentary or regulatory oversight of military finances has made it challenging to accurately estimate the military’s expanding role within the domestic economy. However, in November 2019 the government announced a plan for the Egyptian Army to issue public shares in a number of its companies on the Egyptian Exchange, a move that could increase transparency and open up these areas to private sector investment.

Looking Ahead

Global economic turbulence in the wake of the Covid-19 pandemic may make the government’s FDI ambitions more challenging to satisfy in the short term. Longer-term success will depend on the government’s ability to maintain its programme of economic reform and market liberalisation. Already, however, there are a number of green shoots in the FDI landscape. Egypt is rapidly emerging, for example, as the preferred investment destination for business services outsourced by European companies. In May 2020 a report from Poland’s Association of Business Service Leaders (ABSL) showed that Egypt had become the leading destination for businesses in the sector looking to invest outside Europe. According to the survey respondents, the nation’s appeal lies in its high education level, low operating costs and ongoing government efforts to support the private sector. The country is viewed as a particularly suitable location for the establishment of software development companies, customer services departments and ICT centres. Egypt is the first country outside the continent of Europe to appear in the report, a fact that reflects the country’s ability to compete with European competitors such as Ukraine, which received the same score in the 2020 ABSL survey. Within Egypt, the report showed that Cairo remains the centre of business services activity, with Alexandria and the North Coast region rapidly gaining ground.