Egypt’s business climate is on track to revive after years of turmoil, as the Arab world’s most populous country and the biggest economy in North Africa paved the way to attract more foreign direct investment through passing a new investment law, the London-based consultancy Capital Economics said in a research note.
“The new Investment Law is a positive step towards improving the dire business environment. But greater efforts, particularly in raising domestic savings, are needed if investment is to reach the levels that historically have supported strong and sustained growth in other emerging markets.”
In a bid to improve the business environment and encourage investment, earlier this month the Egyptian parliament passed a long-awaited new investment law.
Once approved by President Abdel Fattah Al-Sisi, the legislation will replace the previous 1997 law, to which widely criticised amendments were made in 2015.
But Capital Economics doesn’t think that the new investment law will go far enough.
“The establishment of certification offices merely masks the bloated bureaucracy, which investors are still likely to come up against. Meanwhile, the right to repatriate profits and establish private free zones merely reverses previous policy decisions that prevented these. And there are also concerns that the new law could foster corruption,” the research note explained.
Egypt’s new investment law sets new “certification offices” that will be set up to review applications and supporting documents for licences, allowing investors to side-step the slow bureaucracy.
The authorities have also granted investors the right to repatriate profits without restriction as the foreign currency crunch that hit the country after floating the pound last November came to an end.
“In particular, the ability of the authorities to allocate free plots of land for ‘strategic business activities’ is a worrying hark back to the land deals that—among other things—tainted the Mubarak regime,” the research said.
Capital Economics considers that low investment is a concern as it results in poor infrastructure, and this means the country is slow at adopting new technologies, all of which hinder productivity growth and increases in living standards.
“The poor business environment is one factor behind the country’s extremely low investment rate of just 15% of GDP.”
Egypt is one of the toughest places in the world to conduct business. The country ranked 122 out of 190 in the World Bank’s latest “Doing Business” survey.
The London-based consultancy also said that Egypt’s investment rate is constrained by the country’s extremely low domestic savings rate of around 10% of GDP.
“This matter limits the pool of resources available for investment, forcing the country to borrow from abroad to meet its investment needs, which has a counterpart in the current account deficit.”
“The new law may help attract more foreign capital inflows, but if Egypt’s overall investment rate is to rise to the levels of 25% of GDP that, historically, have supported sustained rises in living standards in other emerging markets, efforts to raise the domestic savings rate will be crucial.”