In need of investment
Participants at a recent conference agreed that a host of new economic reforms are needed to encourage much-needed investments. Sherine Nasr listened in
Last week, Cairo hosted Egypt's first International Investment and Trade Summit. Attended by delegations from the World Bank (WB), the United Nations Conference on Trade and Development (UNCTAD), the European Union (EU), foreign embassies, public figures as well as private sector representatives, the summit convened to discuss means to accelerate economic growth in Egypt, new government policies to encourage investment and ways to increase exports and international trade.
"Economic growth is our priority, followed by promotion of investment. These are the two main targets of our economic policy," said Mahmoud Mohieddin, chairman of the Economic Committee of the National Democratic Party.
Mohieddin explained that although the government lately has been busy trying to deal with the increases in the prices of locally made as well as imported goods, "the government's fiscal policy is designed to achieve these two goals, namely, economic growth and promotion of investment," he said.
In fact, the government has no other choice. The target of three to four per cent growth, which was supposed to be achieved a few years ago, is now failing to meet the need to create some 600,000 new jobs every year.
"At present, a six per cent annual growth rate is the minimum required. Therefore, we have to seek a better quality implementation of new policies and we have to take the right decision at the right time," Mohieddin said.
In order to accelerate economic growth, the government has ratified laws concerned with foreign investment in Egypt, taxation and customs, labour and work permits and the establishment of free zones and industrial areas. Incentives and guarantees for foreign investors are fully declared in Law 8 issued in 1997.
The total foreign direct investments of companies registered with the General Authority for Investment (GAFI) amounted to LE30.3 billion in June 2002. Of this, 80 per cent (LE24.4 billion) was directed to inland investments, while the remaining 20 per cent (LE5.9 billion) was directed to off-shore/free zone investments. Industrial activities rank highest in attracting foreign investment, with a share of 33 per cent followed by free zones, finance and tourism which account for 19, 18 and 17 per cent respectively.
Meanwhile, the Taxation Law was overhauled, reducing the rate of taxation from 42 per cent to 30 per cent. Revisions also included penalties, grace periods and tax administration in an attempt to minimise unnecessary procedures.
Egypt now hosts seven public free zones which have been strategically located in Alexandria, Port Said, Suez, Ismailia and Damietta, among other areas. Free zones, whether public or private, enjoy remarkable incentives including complete exemption from all Egyptian income tax, general sales tax and other indirect taxes. There are no restrictions on investment activities, and no custom duties or charges are levied on imports or exports from intermediate and end products.
Companies in the private and public free zones are only subject to a 1 per cent duty on the value of goods entering a free zone warehouse.
New policies have also been adopted to improve the monetary system. Early this year, the government announced the floatation of the Egyptian pound which led to some mixed results.
According to NDP's Mohieddin, among the negative implications of the decision is that the US dollar is sold at three different: the official rate of around LE6.15, the black market rate of LE7 and a third rate set by the government for imported commodities which is around LE5.50.
"A free float was announced earlier this year, but this hasn't happened so far," said Mohieddin. Mohieddin noted that it took developing countries such as South Africa and Latin America at least three years to adopt a full free float.
"We are searching for a market clearing price which will be declared in a few weeks," he said. However, further adjustments have to be introduced to monetary policy in Egypt. "We are very concerned about the budget deficit which is progressively increasing," commented Mohieddin.
Still, fundamental changes have to be introduced to the banking system in Egypt so that it may gain foreign investor's confidence. According to Elizabeth Moore, managing director of Moody's Investors Services, foreign investors would like to see better quality service from Egyptian banks. "Companies and investors still report some delays in cash transfer; and the black market continues to exist. Transparency is lacking and there is no guarantee that businesses can meet their foreign currency requirements," said Moore.
The devaluation of the Egyptian pound is having a very negative impact, Moore believes. "It takes ages to transmit funds. Not only do banks need to be fully computerised, but the staff also needs to be properly trained. Modern technology is useless, otherwise," she said.
