Growth Diagnostics For Egypt: Private investment Challenges – OpEd

Egypt adopted an economic reform program that firstly achieved acceptable outcomes of 5% as an average of annual economic growth till 2020. This growth was a direct result of the economic reform program adopted by the Egyptian government in 2014. The reform program aimed at increasing investments, achieving progress in the fields of energy, transportation, infrastructure, social housing, and agriculture, and decreasing the general budget deficit and debts. Also, in parallel with this program, the government announced its vision for 2023 toward sustainable development.

Through the time of the reform program, foreign direct investments increased to good levels like: 8.1 in 2016 billion dollars to have around 29% of total FDI flows to the MENA region, and 7.4 billion dollars in 2017, but FDI decreased severely in 2020 and 2021 due to COVID-19 and then Russian Ukrainian war, which resulted to outflow of investments, as some of these investments was hot money invested in Egyptian debt tools market regarding the high level of interest rate.

These global events uncovered the reality and strength of investments in the Egyptian market, it’s clear that the investment field in Egypt is suffering from many problems that the government recently worked to reform, despite policies and concessions made by the government over the last 30 years. These obstacles appeared in bureaucratic red tape, low level of transparency, the difficulty of accessing foreign currencies, labor being unskilled, hard customs procedures, public sector role in the economy, and the high price of credits.

Since the movement of the Egyptian economy from socialism to capitalism in the time of “Sadat”, the business climate has suffered from inefficient business regulations applied by the government. Although the 2017 Investment Law doesn’t make a difference among foreign and local businessmen, there are applied obstacles to foreign-controlled firms’ entry into the market. Also, the Egyptian government opened the market of transforming manufacturers to foreign investors, but some main services were banned for foreigners. At the same time, Investors and businessmen face many obstacles in extracting licenses caused by routinely time-consuming procedures.

Therefore, the Government recently implemented the so-called “one-window policy” in 2017 to facilitate investment procedures and the “National Single Window for Foreign Trade Facilitation” in 2021, to reduce longitudinal measures and corruption, but this system needs more improvement and to be pursued. 

Another barrier is the economy’s dependence on the public sector, leading to uncompetitive markets. The public sector held 70% of the economy market share in 2017 and is still bigger than the private sector share till 2023, which results in a lack of healthy competition in the Egyptian market. This is problematic, especially when considering that public institutions receive operating aids when compared to their private counterparts, which face growth problems and an increase in operation costs.  

Moreover, the instability of exchange rates represents a big problem for entrepreneurs, as the Egyptian pound has been going through a period of radical fluctuations since the beginning of the free-floating policy which was established in 2016, leading to a depreciation that exceeded 50% in 2022. This fluctuation coupled with increasing inflation pushed the central bank to increase interest rates many times, which raised the cost of finance in the country. 

The continuous devaluation of the Egyptian Pound puts high pressure on revenue value, especially for foreign investors, if we measure the net profit of the investment according to the amount of money invested. Also, foreign currency shortage hurts business in general, because it causes problems in importing materials or any other financial transactions among companies.

One more reason is limited access to credit, as 63% of MSMEs are not able to access formal financial loans or credit in the Egyptian market. This is due to increasing lending rates and difficult restrictions on lending. So, due to the high inflation rates in Egypt through the last period, going with the same global line of increasing inflation (reached 35.86% in Nov 2023), the Central Bank of Egypt increased interest rates many times since 2020 to reach 20.25% as a lending rate in Aug 2023. This increase in lending rates increases the financial burden for new and existent businesses, especially for local entrepreneurs and Micro, Small, and Medium Enterprises who need funds with the least cost.

The Central Bank of Egypt increased the lending share by the banking sector to MSMEs by 25% of total bank loans, facilitating procedures to get finance for 20 million maximum without financial statements for small enterprises. But, still high interest rates stand in the way of getting funding, so the monetary committee should find solutions about decreasing finance costs for investors like decreasing lending rates for MSMEs loans.

It can be deduced that Egypt suffers from two types of Growth Diagnostics problems: Low-value returns according to the global economic indexes because of the devalued pound, the large size of the public sector, and the low efficiency of government regulations. The second problem is the High cost of finance caused by the lack of access to loans and their high costs. 

So, the Egyptian government through the last years worked to provide incentives and solve investment challenges like targeting the increasing private sector role in the economy, working to finish customs trade policy challenges, edits in investment law regulations, tax decreases or exemptions in some cases, and applying financial inclusion policy. Finally, the road to free investment is hard and long, which requires more effort from the government to have a high percentage of FDI to push the country’s growth upward.