Same old, same old
Egyptian industrialists complain that problems they faced two decades ago have yet to be solved. Niveen Wahish listens in
The Ministry of Industry is formulating a "white paper" on Egypt's industrial strategy. The paper will present a series of policies, as well as specific programmes and mechanisms aimed at revamping Egypt's industrial sector. In the lead up to the paper's June 2004 release, the Industrial Modernisation Centre held a two-day conference last week, focusing on the current business environment and export development. The conference -- "Towards an Egyptian Industrial Policy: The Horizontal Dimension" -- was organised in cooperation with the Centre for European Studies of Cairo University and the Konrad Adenauer Foundation.
There seemed to be a consensus among conference participants that the industrial sector's problems have not changed over the past twenty years. And although solutions have been found, they have yet to be implemented. A study prepared by the Economic Research Forum's Heba Handoussa and other researchers articulated some problems facing the industrial sector. "Various solutions have been proposed but the government response has been extremely inadequate, especially in implementing structural and institutional reform," said the study, entitled "Creating an Enabling Business Environment in Egypt".
According to Handoussa, the business environment suffers from a lack of faith in economic policy management, particularly in light of the prolonged downturn in economic activity coupled with recent exchange rate developments. "Investors perceive the economic policy framework as inconsistent, non-transparent and unpredictable. Investors are concerned about the credibility of government commitment to market-based reform and there is also concern about the lack of enforceability of some new laws and decrees."
The study highlighted, among others, the current tax policy as a trouble spot. It lamented the high rates -- as much as 32 per cent -- charged on corporate profits. According to Magda Assad, professor of economics at the Modern Science and Arts University, corporate tax in other countries is lower than in Egypt: 15 per cent in Chile, and 25 per cent in Turkey, Brazil, Ecuador and El Salvador respectively.
Handoussa's study also dubbed the customs administration as "inefficient" and "bureaucratic" and was blamed for long delays in clearing goods. Moreover, decrees aimed at simplifying customs procedures are not enforced.
In the meantime, high tariffs on imported intermediate products create an anti-export bias. "Tariffs on raw materials and production requirements are sometimes higher than the tariff on the final product, which raises production costs of local products and reduces their competitiveness," the report said.
Such factors have affected Egypt's competitiveness. As cited by Handoussa, Egypt ranked 62nd out of 101 countries in the latest Global Competitiveness Report.
Egypt has not done very well regionally either. Compared with other Middle East and North African countries with competitive business environments -- such as Tunisia, Jordan and Turkey -- contract enforcement procedures are lengthy and cost almost twice the regional average.
Handoussa's study recommends reforming the legislative and institutional framework governing the industrial manufacturing sector. She lamented that the legislative and institutional framework has been characterised by "inconsistency with market-based orientation, ambiguity of regulatory scope and the responsibilities of various government agencies and overlap in their scope of work, in addition to a lack of transparency".
The study suggests making the General Authority for Investment (GAFI) the only office with which investors have direct contact. This would entail increasing the representation of all relevant agencies at GAFI, as well as authorising representatives to finalise procedures and requirements.
Besides logistical problems, Magda Assad examined the affect of the foreign exchange system. According to Assad, the unavailability of adequate foreign exchange to finance exporters' needs for imported inputs is currently constituting a major barrier for exporters. This disadvantage is compounded by the most recent prime ministerial decree No.506, which stipulates that the exporter must pay 75 per cent of the value of the export transaction within 90 days of completing the export deal. Assad noted that the remaining 25 per cent is insufficient to cover production and other costs.
Export financing was also cited as a concern. Assad claimed that banks tend to decline financing for long-term export contracts. "Interest rates are relatively high and guarantees required by banks constitute another problem area, particularly for small and medium-size enterprises," she said.
