CAIRO: In 2004, 99 countries, two thirds of those featured in the World Bank’s prominent Doing Business report measuring the relative ease or difficulty of doing business in countries, introduced 185 reforms to make doing business easier and Egypt was one of them.
The International Finance Corporation (IFC), the private arm of the World Bank Group and contributors to the Doing Business in Egypt 2006; Creating Jobs, held a press conference on Sunday. Simeon Djankov, the manager of the Doing Business project, and Frank Sader, chief strategist and senior operations manager at the IFC, discussed the reform policies enacted by the Egyptian government over the last two years to encourage business in the country, in addition to giving a sneak peak at the results and issues that Egypt currently faces, which will be featured in the 2006 Doing Business report in September.
“One of the hardest things a government in the Middle East has to do is decide what are the reforms needed and how to make them, says Sader. “The World Bank report shows what needs to be done, how my country is different than yours and we work with governments on individual reforms in order to make changes and create more jobs.
Egypt, which ranked sixth on a list of 12 top reformer countries from more than 150 studied in the 2004-2005 report, has witnessed extraordinary reforms within the last two years, thanks to a reform-oriented government that is open to the needs of private sector companies, according to Djankov.
In 2004-2005, the Egyptian government simplified many aspects of business regulations to make it easier for domestic businesses and foreign investors to establish businesses in the country. Starting a business now takes 34 days, property tax has been slashed by half, to 3 percent, customs have been reduced from 26 categories to five, registering a property has been reduced to seven categories and takes 193 days, and trading across borders (the cost and procedures involved in importing and exporting a standard shipment) takes 27 days and 11 signatures for exports and 29 days and eight signatures for imports.
Yet, despite the rapid pace of reforms, Egypt still lags behind reformed nations.
“While Egypt has witnessed a significant pick up in reforms, it’s still at a slow pace compared to other nations, says Djankov. “A country has to reform every year. Egypt has only been doing that for the last one and a half years. But what about the last 30 years? Hardly any reforms took place, and that factors into the performance of the country.
According to Djankov, the reforms made in Egypt, while praiseworthy, are not up to par with the rest of the developed nations, including some of the developing ones. It’s not enough for the ministers of finance, trade and investment to announce that reforms are necessary – the ministries of labor and justice need to get on the reform agenda too, he states.
While it now takes 34 days to start a business in Egypt, in Australia it takes 2 days, and in Morocco, 11.
“Out of the 155 countries featured in last year’s report, Egypt ranked number 141 in the ease of doing business in a country. That’s a very low ranking, making Egypt one of the worst countries in this regard, says Djankov.
In fact, according to the report’s 2005 findings, Egypt scored fairly low in most categories. With regard to registering property, Egypt was number 129. For dealing with licenses (the steps, time and cost of complying with licensing and permit requirements for operations in a country), Egypt ranked 146. In the getting credit category, Egypt ranked number 142. For enforcing contracts (the ease or difficulty of enforcing commercial contracts), Egypt came in 118.
“You have to understand that Egypt is starting from a low level, explains Djankov. “Compared to other reforming countries, Egypt has a 30 year lag against them.
Furthermore, the reform programs currently in place still leave a lot to be desired in terms of attracting more business.
For example, the one-stop-shop that the government has proudly launched to allow future potential business owners to file all the necessary documents under one roof, hasn’t lived up to its claims yet. It’s still a slow procedure, and not all in one place.
Creditor rights are also very low in Egypt because banks have no protection.
This situation gets worse with privatization. Private banks are only interested in profit and will only give money to those who will give it back to them. If business is to flourish in Egypt, the country needs to increase creditor rights.
In terms of business licensing, Egypt is one of the worst countries, according to Djankov. The country’s minimum capital requirement, how much a person has to pay the government up front in order to procure a license for a business, is still exuberantly high.
“In order to get a license, a person has to pay lots of money upfront, but they are going into business to make money because they do not have money, says Djankov. Currently, a person has to pay $8000, or LE 45,000 to start a business.
“How many small business owners have that kind of money? Not that many, says Djankov. “Developed countries don’t have that because there is no logic behind it.
According to Djankov, even developing countries in the region such as Lebanon, Tunisia, Iran, and Iraq, have a much smaller minimum capital requirement.
“If Egypt doesn’t reduce this, it will be the only country with the highest minimum capital requirement, which will force people into the informal sector, he says.
The growth of the informal sector is the roadblock to business development in a country, according to Sader. In Egypt, the informal sector is extraordinarily large, amounting to approximately 35 percent of the country’s GDP.
“When people go into the informal sector, the government loses out, because things like taxes are not being paid, says Sader. Companies are also affected because they cannot grow significantly in the informal sector.
“As a company in the informal sector, you stay small. You cannot get loans from commercial banks, you cannot engage in public sector contracts, you cannot get export licenses; all of which thwarts your opportunities, explains Sader. “So why do people go into the informal sector? Why do they not formalize? Because it’s either too costly or too burdensome.
In order to encourage companies to enter the formal economy, the government must simplify and streamline all the procedures, according to Sader.
“What the country needs is expectations management, creating an environment where investors take all the opportunities as entrepreneurs, says Sader. “For example, for the one-stop-shop, the IFC is working with GAFI and 19 other agencies to streamline the procedures so that they work for the good of the public as well as businesses. That takes time and hard work. But the point is, you have to start. Only then can you show the world that you, as an investment climate, are ready for business.
