New laws but no panacea
Economists are expressing their scepticism that the host of economic laws lined up for approval in parliament will provide a solution to Egypt's economic woes. Yasser Sobhi reports
The government has drafted four new laws to be introduced during the current parliamentary round. All the laws have one common objective -- to stimulate lacklustre investment rates. However, experts are questioning whether these proposed laws would be sufficient to achieve this goal, and if new legislation alone can substantially improve the business climate.
The new laws are the investment incentives law, the small and medium enterprises (SMEs) law, the competition and anti-trust law, and the taxation law. The proposed legislation is intended to simplify investment procedures and remove bureaucratic impediments, encouraging SMEs and alleviating the tax burden on firms, thus addressing a host of concerns shared by domestic and foreign investors alike.
In addition, a new draft law on customs duties will be discussed with the business community in order to be finalised and introduced sometime next year.
The government is also preparing a unified companies law that would take the place of the five existing laws regulating the establishment and activities of firms.
"The laws issued during the last three years lacked the mechanisms to make them efficient and to help make a difference in the economy. It seems that this is also the case with the newly prepared laws," said Laila El-Khawaga, member of the Shura Council and professor of economics at Cairo University.
"We are missing the economic framework, philosophy and solid preparation necessary to make these laws work. What we have are disparate reform measures, and in many cases confusing and inefficient legislation," El-Khawaga said.
She was referring to recently approved laws such as the special economic zones, mortgage, banking, export and labour laws, which are still awaiting implementation. Indeed, the special economic zones law, which offers several privileges to investors including simpler procedures and only 10 per cent taxes on all business activities (compared to 42 per cent on service activities and 32 per cent on manufacturing in the current tax law), does not have a regulatory board yet, and the zones themselves suffer from a shortage in the public utilities necessary to attract investment. The organisational structure of the labour law approved last year is incomplete, as several councils have not yet been formed and the emergency compensation fund's coffers are empty.
The same holds for the mortgage law, approved two years ago, where the preparation phase has been prolonged and the new system has not yet been enabled. The new banking law, issued last June, regulating the activities of the central bank, banks and foreign exchange bureaus, is also awaiting the necessary implementation regulations to be issued in its finalised preparation phase within the Central Bank of Egypt (CBE) and the establishment of the coordinating council in charge of conducting monetary policy.
As for the new draft laws, some economic experts, who attended the discussions held by the National Democratic Party (NDP), and requested anonymity, said that both the content and format are unsatisfactory. They say that the investment incentives law, focussing on simplifying procedures -- which should not require further legislation in the first place -- fails to link performance with incentives and also does not resolve the ambiguity in existing investment laws. Furthermore, the long-awaited tax law would offer the business community only a modest reduction of taxes to 30 per cent (from 32 per cent on manufacturing). There are concerns about whether the household sector would benefit. The competition law, fiercely resisted by business interests since 1995, raises implementation concerns also.
"It's not the problem of legislation, it's rather its simplicity and clarity, as well as the quality of its enforcement," says Ziad Bahaaeddin, a lawyer who has been involved in drafting several economic laws. Criticising the inefficiency of some economic laws, he observed: "It's not a lawmaker problem. Economists should first agree on what they want from the legislation and lawmakers are only translating that thinking into law." Bahaaeddin suggested that unrealistic expectations of laws are part of the problem.
Furthermore, the business community is asking for more than new legislation. More important goals include stability, consistency and the thorough implementation of reforms.
"Regaining investor confidence is indispensable for the return of their investments," said Mona El-Garf, assistant professor of economics at Cairo University. "It means the need for stable and consistent policies and the curtailment of sudden decisions affecting business activities. Moreover, after identifying the impediments in the business environment during the last few years, it's time to implement the necessary reforms, at a pace that take into consideration the past improvement of the business environment in Egypt's neighbouring countries," added El-Garf.
The rate of domestic investment is currently around 15 per cent, insufficient to generate fast economic growth. Foreign investment is also very weak, with Egypt receiving only 30 million dollars of foreign direct investment in the period July-September 2003, while net portfolio investments were a negative 200 million dollars.
"What the business environment needs most is profound civil service and procedural reform. These reforms don't require new laws, but a new incentive system that encourages government employees to provide efficient services for investors and implement reforms," says El-Khawaga.
She also suggested an open national dialogue between economists of opposing parties, labour activists and entrepreneurs, in order to come to a consensus on major economic issues. The dialogue would be similar in concept to the political dialogue initiated by the NDP lately with other political parties.
After more than four years of economic slowdown and sluggish growth, the Egyptian economy badly needs genuine reform to acquire investor confidence (both domestic and international) and regain the rapid growth it saw in the mid-1990s.
