CAIRO, 28 February 2005 — Early last year, Egypt’s economy continued to suffer from government red tape and a defunct currency float that deterred investment. While the world economy was recovering, Egypt missed out on foreign investment flows that are needed to prompt growth.
Today, the eight-month-old Cabinet is making breakthroughs and announcing significant reforms needed to attract foreign direct investment (FDI) to the Arab world’s most populous country. Both local and foreign investors, however, are blaming the modified Investment Guarantees and Incentives Law for putting off investment.
According to a report issued by the United Nations Conference on Trade and Development (UNCTAD), Egypt ranks a 123 in attracting FDI inflows. Egypt’s FDI declined from $0.6 billion in 2002 to $0.3 billion in 2003 and reached $400 million in 2004. Another recent report by the Central Bank of Egypt reveals that FDI declined to $50 million in the first quarter of the current fiscal year compared to $92 million in the first quarter of the last fiscal year.
The investment law, passed last March, had facilitated major bureaucratic obstacles that made it hard for investors to have successful business. For instance, the General Authority for Investment and Free Zones (GAFI) is now responsible for issuing licenses for new projects instead of the previous 37 authorities in the old law. Bureaucracy, however, does not seem to be the only obstacle deterring foreign investments.
Unlike other regional countries, Egypt does not grant investors tax exemption on imports of capital goods. “Imposing taxes on capital goods does not exist in other country across the universe especially that these goods are used to operate factories and start producing,” said Abdel Fattah Al Masri, deputy chairman of the Federation of Chambers of Commerce. “The highest taxes in the Arab world are in Lebanon, 10 percent, and Tunisia 20 percent, and here in Egypt we are talking about 30 to 40 percent which is too much for investors.”
Deputy of the Federation of Egyptian Industries, Shafiq Bughdadi said any investors would not come to a country unless it offers more incentives than its counterparts. “At least we should see our neighboring countries and see what they offer first and offer more lucrative incentives,” Bughdadi added.
The same viewpoint was expressed by the Chairman of the Egyptian Businessmen’s Association (EBA) Gamal Al Nazer who said that taxes on capital goods increase dramatically the production costs. “The issue is not about bureaucracy, it is the whole investment environment in Egypt. And we cannot blame investors if they run away because in other countries they tell them welcome, you will not pay more than 10 percent taxes.”
A managing director of a factory in Sixth of October City who asked not to be named told Arab News that many foreign and local investors are suffering now due to the debt incurred by taxes. “They had to pay huge taxes while they were still trying to establish their business,” he explained. Indeed, factories were reported to close down in several industries cities last year mainly because of the tax burdens on imports of capital goods.
The transaction costs in Egypt is also higher than other emerging countries. “You need 20 percent more money to start a business in Egypt,” said Joseph Ryan, USAID-Egypt’s associate mission director for policy and private sector at the second round of Egypt Invest conference. “The cost of exit is also very high. The higher this cost, the higher the economic risk... and in order to bring more investors to the country the government has to bring down these costs,” Ryan demanded.
Meanwhile, a Cairo-based analyst at the Egyptian International Group for investment told Arab News that the investment law gives foreign investors more privileges and make an unfair distinction between local and foreign businessmen. “Investors should be treated equally. Otherwise, even local investors will go find investment opportunities in other countries,” he concluded.
