Building bridges
Just one week after the People's Assembly ratified the EU Partnership Agreement, economists are already pondering how it might help Egypt attract European direct investment. Mona El-Fiqi writes
In spite of the government's efforts over the last decade to improve the investment climate and remove trade barriers through the application of an economic reform programme, Egypt's share of foreign direct investment (FDI) remains modest. According to figures reported by the Central Bank of Egypt (CBE), FDI was reduced from $509 million in fiscal year (FY) 2000/2001 to $428 million in FY 2001/2002.
Since the European Union is one of the largest inward investors, particularly in the information technology, marketing and management sectors, EU direct investments to Egypt could lead to improvements in productivity, the competitiveness of industry and boost exports.
Within the framework of the European Partnership Agreement, recently approved by the People's Assembly, Egypt is trying to compete with other regional players to attract FDI from the EU.
Indeed, a study recently prepared by Omniya Helmy, professor of economics at Cairo University, has recommended that Egypt change its FDI policy in order to attract greater EU investment.
"The total value of EU investments in Egypt was 2.5 billion euros in 1999, representing 17 per cent of EU investments in the Mediterranean countries. The UK, Germany and France top the list of EU countries investing in Egypt," Helmy said in a recent seminar organised by the Centre for European Studies at Cairo University.
However, in addition to a number of internal problems, political instability in the region is one of the main obstacles hindering the flow of FDI to Egypt.
Many problems face European investors upon investing in Egypt. According to Helmy, these include bureaucratic procedures and the high cost of establishing a company.
"An investor has to go through 17 procedures, which might take months and cost a lot of money, in order to establish a company in Egypt. Problems associated with these procedures have led investors to establish new companies and caused them to prefer the acquisition of already- established Egyptian companies," Helmy added.
EU investors also prefer to produce for local markets rather than export goods. In light of this, experts have recommended that the government should direct EU investments to exporting activities, helping to raise the balance of trade.
Ahmed Galal, executive director of the Egyptian Centre for Economic Studies, said European investors are more inclined to sell to the local market because of the higher profit margin that it affords. According to experts, producers can achieve a 40 per cent profit margin when they sell their goods, compared with just six per cent if they export them.
Moreover, Helmy's study recommended that in order to attract EU investments, the government should continue to remove these bureaucratic obstacles, facilitate customs reform and proceed with its privatisation programme.
Heba Handousa, executive director of the Economic Research Forum, said that nearly 90 per cent of the world's FDI is in the hands of multinational companies. To attract such investment, the government should try to fulfil the needs of multinationals operating in the Egyptian market.
Helmy said that Egypt should take advantage of the privileges provided by the EU Partnership Agreement to increase its exports and increase EU FDI.
The Partnership Agreement provides technical and financial assistance during a transitional phase to develop and restructure the Egyptian industry so that it will be better equipped to compete with European products.
It also provides for a gradual reduction of customs duties imposed on imports of European raw materials and inputs used in manufacturing, which represents more than 50 per cent of Egyptian imports from EU countries. This can help increase Egyptian exports, which represented 0.8 per cent of the world's total exports in 1999.
As soon as the EU agreement is ratified and implemented by EU states, the quota system imposed on Egyptian exports of textiles and ready-made garments to EU countries will be cancelled. Moreover, the EU agreement provides a partially liberalised system for Egyptian agricultural products and gives Egypt the opportunity to negotiate to increase quotas every three years.
However, according to Helmy, Egypt will not be able to reap the benefits of these privileges unless a package of internal economic procedures to restructure and modernise the industry sector is applied. Unifying the rules of "certificate of origin" among Arab Mediterranean countries and developing human resources and technological capabilities to help them to produce high-quality products would also attract EU investment.
