ANALYSIS: Lack of economic policy deters local, foreign investment

DNE
DNE
11 Min Read

CAIRO: As Egypt’s transitional government struggles to define an economic policy that appeases demands for democracy and social justice and brings back investment to an economy edging on a recession, business officials say the country cannot withstand a longer transition period marred with uncertainty.

“We need clarity, and we are not getting that,” said Karim Helal, board member of Cairo-based firm CI Capital. “The biggest challenge this government has is creating productive jobs, otherwise we’re going to have a massive explosion.”

“We have 700,000 graduates … every year. If we don’t find jobs for them, we will have another revolt,” he added. “When you have a growing youth population in an emerging economy coupled with unemployment and inflation, you have a ticking time bomb.”

Eight months after the popular uprising that ousted former president Hosni Mubarak and demanded social equality, job creation, and an end to corruption, the transitional government continues to face pressure on the political and economic fronts.

In the midst of ongoing strikes by workers, teachers, doctors, and engineers, officials struggle to bring back business to a withering economy. However, time is running out.

“The actions and the developments since the revolution are very much in contradiction with the needs of the public,” said Magda Kandil, executive director of the Egyptian center for economic studies. “We can’t afford the luxury to delay the transition period any longer just because some parties are not prepared for elections.”

Last Friday, Minister of Finance Hazem El-Beblawi reached out to US investors at the American Chamber of Commerce, reportedly stating that this year, “foreign investments amounted to zero.”

"We need the support of everyone," the state news agency quoted him as telling the biggest business lobby, the US Chamber of Commerce. "Some of our friends, because of the uncertainty, they are taking an attitude of wait and see.”

But, at a time when courts are annulling business deals signed under the previous regime, promoting Egypt’s business climate to foreign investors becomes a daunting challenge.

“Foreign direct investment came on the heels of local investments. You need to encourage local investments first because no foreign investor is going to invest in a country where its own people are reluctant to invest,” Helal said. “To do that, you need to address the two main issue causing everyone to press the pause button; the political and economic identities.”

Helal added that the country is currently going through a political and economic identity “crisis” – a sentiment echoed in diplomatic circles.

Some local investors say they have lost their confidence in the market due to “mixed signals” that the interim government is relaying.

Last Thursday, the government repossessed three major companies, labeling them as “lost companies” who have now been returned to the state.

An administrative court ruling announced that the Shebeen Al-Koum Spinning Company, Nasr Steam Boilers Company and Tanta Flax & Oil Company are to be returned to the state because they had been “sold for less than their estimated value and because of sales irregularities since their privatization.”

Helal pointed out that foreign investors owned two of these companies.
“We’re saying Egypt is committed to a free market economy, but then look at the actions of the government. One day, there is a move to tax capital gain, then its revoked,” he said, noting that two of the three aforementioned companies, one owner was Indian, the other Saudi.

This throws a “shadow” over the credibility and sovereignty of the state because it shows investors that the government is not able to abide by contracts, said Helal.

This month, the cabinet of ministers revoked a decision to set new visa regulations, which would have forced all individual tourists and visitors to obtain visas prior to their arrival in Egypt, days after it was made. The decision was scrutinized by the public as well as the tourism ministry.

“Right now we are just shooting ourselves in the foot, not only with lack of clarity, but indecision,” said Helal. “You can not keep coming out with a decision and then revoke it two days later, that just shows that you did not consult the people or that you don’t know what you are talking about.”

Like the current government, many political parties have also failed to provide clear plans for reviving the economy. The lack of clear vision even in non-government circles has compounded the problem at a time when the country needs economic reform even more so than before.

“Most of the parties now don’t have a real economic agenda; we don’t see a plan to achieve the targets of the objectives that they are putting,” said Alaa Ezz, secretary general of the Egyptian Chambers. “You want to create more jobs? You want a better status for Egyptians? Then you have to address how you are going to do that. You have to have mechanism to apply these plans.”

While officials say they encourage investments and free trade, no plans on how they plan to facilitate the process for companies, especially local businesses, have been put in place.

At the recent Euro-Med Business alliance conference, which took place in the presence of over 400 Euro-Mediterranean businesses in Alexandria, Ahmed El Wakil, head of the Alexandria Chamber of Commerce, stressed that it is time for the government to take fast action towards economic recovery and “walk the talk”

“People need to know what kind of regime is going to be in place,” Helal stressed. “On the economic, identity, we are not doing ourselves any favors, we are sending mixed signals, issuing positive, encouraging, flowery statements, but our actions are quite contrary.”

Helping local businesses

El-Wakil, along with leaders from the Euro-Mediterranean business alliance, stressed the importance of boosting small and medium enterprises as well as enhancing the overall business environment to make the region’s diverse and high-yielding markets attractive to investors.
However, economists say the government is hindering the process for local businesses and SME’s by not addressing their problems, which they have been facing since before the revolution.

“We say we’re very keen to encourage foreign investment, but the economy is currently not able to flourish or home these investments, we still suffer from security vacuum, corruption, and sectarian protests,” said Kandil.

“Some of the measures that have been taken to fight corruption and appease the people are not rational,” she said. “For example, there have been court decisions to outlaw some existing private contracts that were perfectly legal at the time they were signed.”

This, she added, creates a “culture of anxiety” for investors and the private sector and scares them off.

Officials and economists say boosting local businesses and SME’s in the current phase will be the best way to revive the economy.

“I think it is too late for foreign investors; we have not managed to create a … culture of confidence for them since the revolution. These investors have a lot of ammunition; they can wait on the sidelines and they don’t have to take the risk,” said Kandil.

“Small investors are the ones who are desperate, the ones suffering since the revolution and before the revolution. These should be the government’s focus right now. They need someone to nurture them, to help provide a network of support.”

“Financing is not their only hurdle,” she added. “Providing these small businesses with a connection in the market, easing constraints, and easing their policies would help mobilize these companies. The government should actually invest in these businesses by providing them subsidies or tax cutbacks.”

According to Helal, the country’s GDP needs to grow by 7 or 8 percent, sustainably, in order to create jobs. The private sector and local businesses, he continued, would be key players in creating job opportunities and alleviating the current economic crisis.

“We need to increase our GDP by 7 or 8 percent and you can’t do that unless you have a free and civil democratic country,” he said. “The private sector has to take the lead. There has to be more attention to the social aspect because you can’t have political stability without social contentment, and the only way to achieve social content is to have clear, fair, economic policies.”

When it comes to private-led growth headed by Egyptian firms, Kandil shares similar concerns.

“Negativity has dominated the picture and the government is not helping,” she said.

“The positive and proactive approach is not in place; there is no vision in terms of mobilizing the economy, if you agree that it has to be private [sector]-led growth that will help the economy, then you have to mobilize clear economic policies that will attract local investors that are [now] scared.”

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