Egypt’s investment rules need to be clearer, analysts warn

October 3, 2023, 3:49 AM

Egypt economy election — People walk past a banner showing President Abdel Fattah Al Sisi in Cairo. Al-Sisi is expected to cruise to a third term

Foreign currency shortage intensifies
Contract drafting needs to improve
Lack of transparency deters investors

Egypt has long struggled to attract foreign investors, in large part because of concerns about its investment rules.

The need to allay potential investors’ fears is becoming ever urgent, as the country’s foreign currency shortage intensifies. Net foreign assets hit a record deficit of EGP837.3 billion ($27.09 billion) in June.

Last month, rating agency Capital Intelligence downgraded Egypt’s long-term sovereign debt rating from B+ to B. It said the delays in implementing structural reforms, as set out by the IMF, are stymying foreign direct investment (FDI).

There are opportunities available. In May, the prime minister Mostafa Madbouly outlined a plan to sell a raft of state assets to private investors in a bid to attract $40 billion over the next four years.

Egypt’s General Authority for Investment and Free Zones (Gafi) also has more than 1,200 investment opportunities.

Despite this, experts warn that foreign investor sentiment remains lukewarm. Even Cairo’s Gulf neighbours have been slow to follow through on the billions of dollars they have pledged in investments.

“It remains imperative to prioritise the swift enforcement of improved regulations to further enhance the investment climate,” Ali Metwally, a Mena economist based in London, told AGBI.

PM Mostafa Madbouly, seen at the Africa Climate Summit 2023, hopes to raise $40bn from private investors

“Egypt’s cumbersome bureaucratic processes, excessive red tape and delays in obtaining permits and licences can all discourage investment and hinder business operations.”

Metwally also pointed to inconsistencies in policy enforcement across different regions and government entities.

“One area of concern relates to taxation, where the interpretation of tax laws and regulations can vary among different authorities,” he said.

“This variability creates uncertainty among investors regarding their tax obligations, making financial planning and decision-making more complex.

“Another critical issue is the inconsistent application of customs and import/export regulations, which can disrupt supply chains and logistics for businesses, resulting in delays and increased costs.”

Strengthening its institutions would help Egypt to ensure consistent policy application, according to Metwally.

Disputes with government and ‘contract abuses’

Legal experts told AGBI that investor-state disputes – largely owing to the unilateral termination of contracts by public sector entities – remain a key challenge.

Hussam Mujally, a partner in the Berlin and Cairo offices of law firm Amereller, said there had been a surge in investment and commercial arbitral proceedings initiated against the Egyptian government or Egyptian companies.

Mujally added that structural changes were needed in drafting and managing contracts with foreign investors to prevent disputes in the first place.

“The prevailing reliance on the concept of administrative contracts can create a misguided perception within the government, fostering the belief that they wield greater authority and power in such agreements,” he said.

“While in fact they are on the same level as the contractor.”

He added: “This misconception can lead to instances of contract abuse or unilateral terminations, often neglecting due consideration for compensation, which happened frequently in the past.”

Mazin Ezzeldin, an Egypt specialist who also works in the Berlin office of Amereller, added that poor initial contract drafting was partly to blame.

“However, efforts are being made to address this,” said Ezzeldin.

“Significant progress has been made in some areas, such as renewable energies, but other areas of government contracting still lag behind.”

Foreign investors seek transparency

Ezzeldin added that contract drafting is not the primary impediment to foreign investors, however.

“What foreign investors are predominantly seeking is enhanced transparency, streamlined procedures and the effective enforcement of existing laws,” he said.

In July, Egypt amended its 2017 investment law, seeking to boost the incentives granted to foreign investors, develop the distribution of investments across the country and expand the range of companies eligible to operate in Egypt.

One notable step forward is Gafi’s digital portal, which was launched last month. Companies can now be fully established online and more than 30 businesses have been set up so far.

Digitalisation is a “significant step in reducing bureaucracy and enhancing transparency,” said Metwally.