Sunday,22 October, 2017
Current issue | Issue 1235, (26 February - 4 March 2015)
Sunday,22 October, 2017
Issue 1235, (26 February - 4 March 2015)

Ahram Weekly

‘An economic turnaround’

The government is going the extra mile to attract investors to Egypt, write Niveen Wahish and Sherine Abdel-Razek

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Al-Ahram Weekly

The economy took centre stage during President Abdel-Fattah Al-Sisi’s address to the nation earlier this week.

Al-Sisi boasted of improved economic indicators since his elected in mid-2014. Recently released indices supported his point. GDP rose in the first quarter of the current fiscal year to 6.8 per cent, compared to 1 per cent in the same period a year earlier. Unemployment has fallen for the first time since January 2011. It stood at 12.9 per cent for the last quarter of 2014, compared to 13.2 a year earlier.

Net foreign reserves increased by $97.2 million to reach $15.4 billion in January. The increase, which came after three successive drops in the last three months, is surprising given Egypt paid $700 million to the Paris Club at the beginning of the month.

“The growth in net foreign reserves is an indicator that sources of foreign currency — including tourism and foreign direct investments — are recovering,” says Eman Negm, an economist with investment bank Prime Securities.

An IMF statement released last week, following the annual Article IV consultations with the government, also sounded an optimistic economic note. “The measures implemented so far, along with some recovery in confidence, are starting to produce a turnaround in the economy,” the statement said.

Government measures to open up the economy and streamline its own finances may be taking place quietly but they are showing results.

The cabinet has approved legislation that will open up electricity production, transmission and distribution to the private sector. Liberalisation of the utilities sector has long been a central recommendation made by international financial institutions, including the World Bank.

“This is a very significant, forward-looking move,” says financial consultant Tarek Allouba. “It sends an important signal to international agencies and investors that the government is serious about liberalising key economic sectors.”

In an attempt to deal with the chronic budget deficit, the government is actively seeking new sources of revenue. Fscal year 2013-2014 saw the government running a budget deficit of 12.8 per cent of GDP.

The most recent Ministry of Finance figures show the deficit reached 5.7 per cent in the first half of fiscal year 2014-2015, up from 4.5 per cent in the same period last year. While the target budget deficit for 2014-2015 is 10 per cent, the IMF now expects fiscal consolidation to bring it down to below 8 per cent of GDP by 2018-2019.

The government is also planning a series of initial public offering (IPOs) to secure finance needed to upgrade companies in the petroleum and food sectors and diversify investment options in the local stock market.

In addition to offering stakes in ten state-owned petroleum and gas companies, plans are underway to float a yet unidentified stake in the Holding Company for Food Industries, which has 43 affiliates. It will be the first time a state-owned holding company is floated. The move is expected to bring LE3 billion to LE4 billion into the government’s coffers.

“These developments [privatizing electricity and pending IPOs] are encouraging. What Egypt needs is more private sector investment and a reduced role for the public sector in the economy,” says Jason Tuvey, Middle East economist at Capital Economics.

Tuvey warns, however, that any future offers need to be transparent to avoid the problems that threatened to scupper earlier privatization deals.

A number of disputes have marred the investment climate over the last four years. In recent months many of those disputes have been resolved and Al-Sisi has promised to address outstanding issues.

In another move to shore up the budget, the government this week announced an increase in the sales taxes on cigarettes for the second time in a year. The move increases the price of expensive brands by LE1.50 a pack and cheaper local alternatives by LE0.50. According to Hani Kadri at the Ministry of Finance, the price increases will raise LE5 billion in additional revenue.

On the other hand, the master plan of the much publicised Suez Canal Area Development Project (SCADP) is also receiving finishing touches. “SCADP will become one of the principal elements in the global supply chain,” says Yehia Zaki, managing director of Dar Al-Handasah Egypt, the company leading the consortium that six months ago won the bid to draw up a master plan for the area.

To ensure its success, an enabling legislative environment will be put in place through the application of a slightly modified 2002 law for special economic zones. The law establishes a sole economic authority that will have full economic power within the designated areas, says Hani Sarie El-Din, founder and chairman of Sarie El-Din and Partners, a member of the winning consortium. Investors in SCADP are to be offered a special tax rate of 10 per cent. This is compared to the current of 25 per cent on profits less than LE10 million per year, and 30 per cent on higher profits.

“The setup has to be right from day one, otherwise the project will face hiccups,” Sarie El-Din told AmCham members.

Attracting investment is essential given the government’s inability to finance the projects that are needed to kick-start the economy and create new jobs. Foreign direct investments for fiscal year 2013-2014 reached $6 billion, a figure that the government believes will increase significantly when a new investment law tackling longstanding investor concerns is issued early next week.

Since the removal of Mohamed Morsi, Egypt has relied heavily on generous Gulf aid. “Gulf countries’ support is the main reason Egypt was able to persevere against all of the challenges and difficulties,” Al-Sisi said in his speech.

The government now hopes to replace its dependence on Gulf aid with investments. The Egypt Economic Development Conference, to be held 13-15 March, lies at the centre of its plans. The conference will be used to showcase reforms and highlight investment opportunities.

The government has embarked on a series of aggressive reforms since the summer. Energy subsidises have been cut, the value of the pound allowed to slide and new taxes introduced to boost revenues.

Last year’s energy price hikes were a good first step, says Tuvey, though the government still has a long way to go on the path of subsidy reform.

“The recent plunge in oil prices should be seen as a window of opportunity. It is much easier to secure fair value for energy prices when the price of oil is at $60 per barrel than when it is at $110,” he said.

Tuvey believes there is room for more depreciation in the value of the Egyptian pound, “which probably needs to reach around LE8.25 to the dollar.”

According to the IMF, “As the authorities further flesh out and implement their policy initiatives, prospects for growth, employment and macroeconomic stability will improve.” It added that the consistent implementation of policy plans could see growth reach 5 per cent by 2018-2019.

 

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