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Foreign direct investment dries up

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Investors report that it can take several weeks for legitimate transfers to be executed

By Farah Atia

Egypt is seeing a mass exit of foreign direct investments (FDIs) amounting to around $140m from about 10 countries, according to a report by the General Authority for Investment and Free Zones.

“Delayed completion of an economic reform plan which places sealing the IMF deal on hold, coupled with the escalating conflict between judges and the ruling regime and the non-consensus cabinet reshuffle which put stability at risk is applying pressure on FDIs,” said Alia Mamdouh, economist at CI Capital.

According to a report by the United States Bureau of Economic and Business Affairs, FDI accounted for less than 25% of all investment in Egypt before the revolution and has fallen tremendously since as a result of significant impediments to investment.

After the revolution, Egypt put into place capital transfer restrictions that prevent foreign companies from sending more than $100,000 per year out of Egypt without a valid commercial purpose, original documentation, and approval by the Central Bank of Egypt. Daily withdrawals are limited to $30,000 for corporations.

Furthermore, in a bid to curb the flee of liquidity, Egypt also put in place capital controls last year that limited the amount of money that could be carried out of the country to $10,000 and instituted a new currency auction system.

Investors report that it can take several weeks for legitimate transfers to be executed. Labour rules prevent companies from hiring more than 10% non-Egyptians (25% in free zones), and foreigners are not allowed to operate sole proprietorships or simple partnerships. The lack of protection of intellectual property rights is also a major hurdle to direct investment in Egypt. The country’s trade regulations prohibit foreigners from acting as importers for trading purposes and allow them to act solely as commercial agents. If a foreign company wants to import for trading purposes, it must do so through an Egyptian importer.

Although Egypt is a party to international arbitration agreements, Egyptian courts do not always recognise foreign judgments. Resolution of any dispute takes a long time, three to five years on average. At times, the judicial system is subject to political influence, the American bureau stated.

Other obstacles to investment include excessive bureaucracy, a shortage of skilled labour, limited access to credit, slow and cumbersome customs procedures, and non-tariff trade barriers.

The highest proportion of market exits were British companies, which withdrew $49m from the industrial sector and $17.65m from the services and transportation sector.

The US, once a leading country pumping investment into Egypt, now came second to the United Kingdom in withdrawing investments. It withdrew about $47m from the financial sector during the first five months of the current year. Corruption is still common across all levels of Egyptian society, and US investors continue to report requests for bribes from government officials, though the government has taken steps to restructure capital markets and overcome years of stagnation in the banking system.

The government grants foreigners full access to capital markets and allows the establishment of foreign companies that provide underwriting of subscriptions, brokerage services, securities and mutual funds management, clearance and settlement of security transactions, and venture capital activities.

The law also authorises the issuance of corporate bonds and bearer shares and makes income from most stocks and bonds non-taxable (compared to 20% tax rate on interest from Egyptian treasury bills). The law provides means for arbitration and legal dispute resolution and bans unfair market practices.

Saudi Arabia had also withdrawn investments in the financial services sector worth $21m in the period from January to May.

“We expect FDI inflows of USD0.6bn in FY13. We believe that unless investor-friendly policies and reform efforts become a rule, investment inflow will not sustain,” Mamdouh said.

“Until security and stability return to the country and greater clarity is achieved in the political transition, Egypt is unlikely to see substantial investment inflows,” the US Bureau of Economic and Business Affairs stated.


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