EGYPT Investment Climate at a glance

1. EGYPT Investment Climate at a glance OECD. Ania Thiemann. 15/07/2010

2. Presentation: Egyptian Investment • Economic Profile of Egypt • BCDS – Methodology explained • Achievements and Remaining Challenges

3. Global Economic Outlook • Key Recent Developments • Recent recovery rates in Japan and the US have led to upward revisions of world growth: • EIU estimates 3.2% world growth in 2010 (real GDP), compared to -2.2% in 2008 • World trade is expected to increase at 7%, from a -11.2% fall in 2009 • The E.U rescue packages have failed to disperse fears about public finances in the euro area. The concern is that necessary fiscal consolidation, by undermining GDP growth, will hit tax revenue so that deficits will remain excessive. • Emerging economies will continue to perform well, with an expected aggregate real GDP growth of 6.6% in 2010, compared to 2.5% for OECD countries • BUT: the OECD’s composite leading indicator points to a mild softening of growth in the developed world after a period of rapid rebound from the depth of the earlier global economic crisis • After recording the strongest regional growth in 2009 (1.4% real GDP growth), The Middle East and North Africa region (MENA) will once again be at the forefront of economic development with an expected growth rates of 4.5%. I. Economic Profile

4. Egypt: MENA’s second biggest market 2009 Real GDP share in MENA • Key 2008/09 Egypt facts and figures: • Population: 77 Millions • GDP per Capita: 2’480 USD • GDP growth: 4.7% • Unemployment rate: 8.8% • Inflation: 11.8% (2009) • Fiscal Deficit: -6.9% of GDP • Gross Public Dept: 79% of GDP I. Economic Profile Note: 2009 projections are based on IMF (WEO) reported growth rates and exclude Iraq and PNA Source: IMF(WEO) Note: Figures are given for the Egyptian fiscal year, which runs from July to June inclusive Source: Egypt Central Bank and Ministry of Finance

5. A growth that has outperformed the rest of the region… Real GDP growth and projected growth across regions Egypt GDP growth has been resilient to Economic crisis and has surpassed regional levels of growth • The reform agenda implemented since 2004 has resulted in high levels of growth, averaging 7% between 2005 and 2008 • During recession. Egypt real GDP growth slowed to below 5%, a near high for the region • By opening up the economy and facilitating investment, domestic demand remained buoyant • Although the capitalisation of Egyptian stock market’s main index, EGX 30, fell by 42% in 2008/09, Egypt has been relatively well sheltered from financial contagion thanks in part to reforms in the banking sector Egypt MENA Oil Imp. MENA OECD I. Economic Profile Note: 2009 and 2010 projections are based on EIU and IMF (WEO) projected growth rates Source: IMF(WEO)

6. Owing in part to responsible Macroeconomic Policy… Fiscal deficit has been reduced, leading to a decrease in the relative size of the public debt Fiscal Deficit Total external and domestic debt I. Economic Profile Note: Egyptian fiscal year runs from July to June. Source: Central Bank of Egypt and Ministry of Finance

7. …and Increased Trade Real Growth in Trade • Egypt has considerably liberalized its trading system • From 2004, the average weighted tariff rates fell from 14.6% to 5.5% in 2009 • Egypt’s has accelerated its integration into the global market, through active WTO participation and ratification of preferential trade arrangements (GAFTA, Agadir, and FTA with Turkey) • The export competitiveness of Egyptian businesses has greatly benefited from reforms: • From 2005 to 2008, the GAGR of exports (real growth) was 19% I. Economic Profile Note: Trade is calculated as the sum of imports and exports. 2010 and 2011 are estimated Source: Economist Intelligence Unit

8. BUT the trade balance deficit persists… Exports fell by 14% in FY 2009 (current USD) Trade Position • Despite strong export growth in recent years, Egypt operates a structural deficit on its merchandise trade account • High dependency on imported wheat and other food stuffs hampers balance. • Egypt also has a heavy deficit on trade in capital equipment and vehicles (20% of merchandise imports in 2008‑9). • The trade deficit narrowed slightly to USD 18.5 billion from USD 19.5 billion in 2008/09, however, the improvement was caused by a dual fall in export receipts and import payments. I. Macro-Economic Profile Note: Egyptian fiscal year runs from July to June. Source: Egypt Ministry of Finance and Central Bank of Egypt

9. …and Investment levels have fallen sharply… FDI Inflows fell by 39% in FY 2009, hampering aggregate investment levels (FDI represents 25% of total investment) FDI inflows Consumption vs. Investment, year-on-year real growth rate I. Macro-Economic Profile Note: Egyptian fiscal year runs from July to June. Source: Egypt Ministry of Finance and Central Bank of Egypt

10. …while other major challenges remain (I) • Egypt’s labour market remains a structural weakness • Egypt’s labour market has to absorb between 700 000 new entrants per year • The official rate of unemployment has increased again • The WEF(Global Competitiveness Report) ranked Egypt last in a global evaluation of 134 labour markets due to labor rigidities and human capital I. Macro-Economic Profile • 2.Fiscal policy is still a very vulnerable part of the Egyptian economy • The public sector employs ¼ country’s workforce • Egypt’s economy relies on government subsidies for food and fuel (2% and 5% of GDP in 2008‑9) • The sum of wages, interest payments and subsidies  account for over 70% of Egypt’s budget  there is little room for additional spending  Note: Egyptian fiscal year runs from July to June. Source: Egypt Ministry of Finance and Central Bank of Egypt

11. …while other major challenges remain (II) • 3. Inflation could pose a renewed challenge • Recurring spikes, along with high volatility, have temporarily dashed hopes for a permanently lower trend rate. • Money supply grew 20% annually between 2002 and 2007 and inflationary expectations have long driven price/wage spirals. • If government carries out its  announced policy of reducing energy subsidies for industrial users there is a risk of inflation I. Macro-Economic Profile • 4. 20% of the population lives below the WB poverty level • This makes it difficult for the government to scrap subsidies on key items and could potentially undermine the government’s message of greater liberalisation and a more open, market-driven economy Note: Egyptian fiscal year runs from July to June. Source: Egypt Ministry of Finance and Central Bank of Egypt

12. Presentation: Egyptian Investment • Economic Profile of Egypt • BCDS – Methodology explained • Achievements and Remaining Challenges

13. BCDS: Target and Approach Cairo workshops 8-10 March 2010 Cairo Meeting 12 October 2009 II. BCDS Methodology explained Phase 2: Set Priorities Phase 3: Implement Phase 1: Policy Review Synthesis of existing and new evaluations using OECD methodology for policy evaluation Stock-taking of existing business climate reform projects Define time-bound strategic priorities with government leaders, international organizations and private sector stakeholders Support the design and implementation of improved policy at national and regional level • The Business Climate Development Strategy (BCDS) is a process that defines where and howa country should reform to improve the business climate and country competitiveness. • It is targeted at improving the business environment to increase investment and competitiveness, thereby contributing to growth and employment • It is a co-operative andsystematic approach following three steps

14. BCDS : Comprehensive Assessment Framework for Egypt II. BCDS Methodology explained Covering all policy areas that can support investment and business climate reforms

15. Methodology for BCDS Phase 2: Attractiveness vs. Reform Test Two Assessment criteria for priority definition: Attractiveness of Reform for Business Climate Development Feasibility of Reform under Given Circumstances Optimal Score Yield II. BCDS Methodology explained Attractiveness Feasibility Darker color represents higher aggregate score (attractiveness + feasibility)

16. Methodology for BCDS Phase 2: attractiveness and feasibility dimension Assessment variables for Attractiveness Attracting foreign investment Creating sustainable growth Creating jobs – to what extent can the recommendation spur new jobs? II. BCDS Methodology explained Assessment variables for Feasibility Political climate – does the local political climate facilitate the project? Availability of resources and skills of government to implement reform Risk Test that project doesn’t work for other reasons than those listed All scores are estimated on a 1-5 scale, 5 being the highest

17. Presentation: Egyptian Investment • Economic Profile of Egypt • BCDS – Methodology explained • Achievements and Remaining Challenges

18. BCDS: Overall Scores III. Achievements and Challenges Weighted average *excludes Tax Policy, Human Capital and Corporate Governance

19. Investment Policy and Promotion: Achievements IPP: Achievements and Milestones • Investment policy in Egypt increasingly conforms to international standards • Investor protection in Egypt is strengthened through the negotiation of 111 bilateral investment treaties (BITs), including 25 with OECD countries • The RRI for Egypt was 0.191 in 2006 and 0.104 in 2010 • Egypt has signed the OECD’s Declaration on Investment • In 2007, Egypt became the first Arab country to sign the OECD Declaration on International Investment and Multinational Enterprises (followed in late 2009 by Morocco). • Egypt is a member of the WTO and several regional trade agreements: COMESA, Agadir Agreement on Free Trade, GAFTA, etc. • Approval and screening procedures are generally clear and transparent • There are no restrictions on capital transfers • Egypt has signed Article VIII of the IMF Articles of Agreement, thereby accepting full conversion of capital accounts. Foreign investors can freely repatriate profits and dividends • FDI incentive schemes are clear and transparent • The 2005 tax law caps the income and corporation tax rates at a rate of 20% for both nationals and foreigners. • Egypt has a well-functioning investment promotion agency and one-stop shop III. Achievements and Challenges

20. Investment Policy and Promotion: Challenges and Recommendations IPP: Remaining challenges and obstacles • Rules for the employment of foreign nationals and for company ownership act as an impediment to investment in some sectors • Egypt’s trade regime is not entirely transparent with regards to content requirements • Access to land remains a general problem for investors • Dispute Settlements can take several years • Protection of intellectual property rights remains weak • Coordination and communication problems still exist with regard to investment promotion III. Achievements and Challenges IPP: Proposed recommendations • National Treatment : review and lifting of remaining restrictions to national treatment • Registering property: speeding up the process and ease of registering property • Investment policy strategy: enhancing the effectiveness of Egypt’s investment policy strategy • Ensuring genuine separation of powers within GAFI (general authority for foreign investment ) and making it a top IPA • Create FDI-SMI linkages and clusters (including the Investment zones) • Undertake modification of FEZ (free economic zones ) and IZ (industrial zones) based on OECD recommendations

21. Trade Policy and Facilitation: Achievements TPF: Achievements and Milestones • Top-level political commitment drives co-ordination with regard to trade policies • Ministerial committees, like the Ministerial Economic Policies Committee, have been formed to co‑ordinate trade policy formulation, while others co‑ordinate implementation by area of trade, e.g. the Sanitary and Phytosanitary Sub-Committee • Establishing a more formal private-public consultation has prompted valuable reform input from the business community • Public‑privateconsultations have been further formalised with channels put in place to receive private-sector feedback. has led to many important private sector contributions in areas like the Egyptian Regulatory Reform Activity (ERRADA) and in recent amendments to tariff rates • Foreign trade has increased relative to GDP as tariffs have been lowered • Foreign trade has increased from just over 30% of GDP in 2003‑4 to 57% in 2008‑9. • The signing of regional trade agreements has led to rising trade with neighbouring Arab countries in the last decade. Indeed, in 2008‑9, Arab countries represented an 11.4% share of Egypt’s total trade, up from 8.9% in 2003‑4 and 5.3% in 2000‑1. • Cited by the World Bank as a top reformer in dismantling non-tariff barriers • Phytosanitary measures have strongly improved • An export promotion agency is in place, while a wide range of programmes addresses critical aspects of export promotion • Egypt has set up a national export promotion agency, the Egyptian Export Promotion Center, and increased the number of export promotion programmes III. Achievements and Challenges

22. Trade Policy and Facilitation: Challenges and Recommendations TPF: Remaining challenges and obstacles • Public/private consultations - Egypt still lacks a broader mechanism of public/private dialogue that would include academia, think tanks, private sector associations, NGOs, etc. • Monitoring and evaluation - available institutional capacity is currently insufficient and there is no mechanism to systematically monitor and evaluate trade policy impacts on all sectors • Custom duties on capital goods - custom duties vary and the average MFN tariff remains high • Sanitary and phytosanitary measures continue to experience teething troubles • Pro-active trade policy - current institutional setup is quite fragmented and there are too many export promotion players III. Achievements and Challenges TPF: Proposed recommendations • Public Private Consultation: Enhance the effectiveness of the trade policy public/private consultation by reinforcing current export councils with a broader advisory body • Monitoring and Evaluation (M&E): Improve and strengthen M&E technical capacity and widen its coverage • Help desk information: Establish a help desk for all stakeholders for information dissemination • Trade Net Electronic: Support and expedite the full adoption of MTI TradeNet electronic mechanisms (Electronic Single Window) • SPS and TBT Agreements: Improve capacity for implementation • Export Promotion Agency (EPA): Empower the role of the EPA as a coordinating agency

23. Better Business Regulation: Achievements BBR: Achievements and Milestones • A programme has been created to streamline and reduce excessive legislation and regulation • Since 2007 the government has given priority to reform and has laid the foundations for regulatory reform through its Egyptian Regulatory Reform and Development Activity (ERRADA) • Business start-up procedures have been simplified • According to Doing Business, the survey published by the International Finance Corporation and the World Bank, Egypt improved its performance from the world’s worst business environment reformer in 2005 to the best in 2007. • In the World Bank’s 2008 and 2009 reports, Egypt was also ranked among one of the world’s top ten performers for starting businesses after implementing reforms which have considerably reduced the time, number of steps, and costs related to the overall process of company registration • Minimal capital requirements have been scrapped III. Achievements and Challenges

24. Better Business Regulation : Challenges and Recommendations BBR: Remaining challenges and obstacles • Slow approval procedures still dog the business climate • Heavy uncertainty and costs related to business start-ups and new investments • The World Bank’s 2008‑9 Investment Climate Assessment (ICA) of Egypt indicates that senior management spend up to 16% of their time dealing with regulations • Private sector also reports that businesses face difficulties in registering due to uninformed civil servants who manage the registration process • Several regulatory obstacles to starting a business remain • Obstacles to starting a business include: poor land provision; lengthy procedures for obtaining licenses and work, land, and building permits; access to infrastructure, the legal environment; etc III. Achievements and Challenges BBR : Proposed recommendations • Cooperation of Egyptian government and business associations • Keep reform on track – set targets for simplification and elimination of regulations • Set targets and timelines and use reforms in other countries as benchmark • Co-ordinate reforms with public administration and the business community • Institutionalize the general review unit • Implementation of regulatory impact analysis (RIA), which is targeted and simplified • Improve performance of establishing businesses (industrial licences and registration • Use IT Platforms to improve efficiency – electronic company registration

25. Access to Finance: Achievements AF: Achievements and Milestones • A broadly successful financial sector reform programme • Significant steps to transform the financial sector in Egypt have been taken since 2004 under the first phase of the Financial Services Reform Programme • Concentration has been greatly reduced with the largest three banks (all state-owned) currently controlling around 45% of assets, compared with 60% in 2006 • Consolidation of the sector - the number of banks being reduced from 57 in 2004 to 39 at end‑2009. • A new centralised authority now oversees all non-banking financial services: • The creation of the new Egyptian Financial Services Authority (EFSA) in July 2009 should improve the regulatory environment and oversight. EFSA will support the development of a well-regulated capital market, and support the creation of a more conducive regulatory framework • The stock market has been thoroughly overhauled • The merger of the Cairo and Alexandria Stock Exchanges into one single entity (EGX) in 2008 has improved liquidity and efficiency • The risk capital environment is beginning to develop • The usage of credit guarantee schemes has increased • There have been important credit information improvements • Egypt’s first credit bureau was launched in 2005 and has been fully functional since 2007 • Steps have been taken to set up a new cadastre • Improvements in Egypt Post has helped small savers III. Achievements and Challenges

26. Access to Finance: Challenges and Recommendations AF: Remaining challenges and obstacles • Bank lending remains skewed towards the public sector: At end‑March 2010, lending to the public sector by domestic banks represented 47.6% of total bank lending • Significant issues remain regarding collateral • Banking reform still has some way to go to improve competitiveness: Large spreads over the CBE’s discount rates and among banks’ lending rates indicate that bank services are not fully driven by competition • EFSA has been slow to gather speed and needs more capacity: With staff of around 800 persons, many of whom deal with internal issues, there is a strong need for more capacity building inside the authority • The corporate bond market remains underdeveloped and venture capital may not always be used for its intended purpose • Financial literacy remains a key issue for borrowers and lenders alike III. Achievements and Challenges AF: Proposed recommendations • A single Universally Applicable law for collateral • Updating and modernising Egypt’s bankruptcy laws • Increase competition in banking sector • Outreach in banking sector should be enhanced • Amplify and accelerate capacity building inside EFSA • Promote risk capital through publicity • Broaden the coverage of guarantees • Develop a national framework for improvement of financial literacy

27. Infrastructure: Achievements Infrastructure: Achievements and Milestones • Widely available provision • Fixed telephone line density is higher than in most North African countries • Rural road accessibility is also much higher than average • The 40% modal split of passenger rail travel is higher than in most OECD countries. • Electricity and water are also very widely available, covering respectively 99% and 98% of the population. • Very competitive cost • International benchmarks on domestic telecommunications prices, road tolls, railway tickets, shipping, electricity and water prices invariably show Egyptian prices to be much lower (often by a factor of two, three, or more) than regional averages III. Achievements and Challenges

28. Infrastructure: Challenges and Recommendations Infrastructure: Remaining challenges and obstacles • Alarming situation of disrepair leading to safety problems: Egypt’s infrastructure suffers of chronic underinvestment which is mostly due to socially motivated pricing which does not offer a sustainable financial basis for correct maintenance and even less for new investment • Unfinished reforms: sectoral reform have been carried out only to a partial extent • Private sector participation is restricted to new builds and BOOTs. There is little experience with outsourcing management contracts or operating concessions to the private sector • New connections are excessively slow: new connection to infrastructure is excessively slow. This is a serious inhibitor for Greenfield investment III. Achievements and Challenges Infrastructure: Proposed recommendations • Adjust pricing to market levels: adjusting all infrastructure user fees to market levels, while distributing cash subsidies to the poor to offset any hike in • Expend scope of private sector participation: . Management contracts or operating and maintenance concessions can bring beneficial private sector know how • Continue restructuring towards a three-tier governance structure and enforce independent regulation: Reforms should be continued to ensure full unbundling of the three tiers: policymaking at the Ministry level, independent regulatory agency and corporatized operating company, with a possible private participation and opening to competition

29. Anti-corruption: Achievements AC: Achievements and Milestones • Officialdom acknowledges the urgent need to fight corruption • Cabinet Resolution No. 24 of 1 (2007) put the fight against corruption high on the government’s agenda • Egypt ratified the United Nations Convention against Corruption (UNCAC) in early 2005. Ratification binds it to implementing a wide range of legal and institutional anti-corruption provisions • Egypt has strengthened its institutional anti-corruption arsenal • The Minister of State for Administrative Development set up the Transparency and Integrity Committee to study and recommend means enhancing the fight against corruption • The Ministry of Investment established a Transparency Unit. Its task is to improve the investment climate through amendments that strengthen freedom of information and transparency, raise public awareness and stakeholder engagement, and build capacity and knowledge management • The Ministry of Investment put in place a National Contact Point (NCP) after Egypt signed up to the OECD Declaration on International Investment and Multinational Enterprises. The NCP’s mandate is to implement the declaration’s Guidelines for Multinational Enterprises • Key government departments have cut red tape • Government departments have undertaken reforms to reduce red tape and enhance service performance. • One key move has been the introduction of one-stop shops to streamline company registration procedures • Egypt has joined in international action to fight corruption • MENA-OECD Task Force on Anti-Bribery, OECD Good Governance for Development in Arab Countries Initiative, the Arab Anti-Corruption and Integrity Network (ACINET), and the UNDP-POGAR project to support the Ministry of Investment in the fight against corruption III. Achievements and Challenges

30. Anti-corruption: Challenges and Recommendations AC: Remaining challenges and obstacles • No sign of nationwide strategy to fight corruption • The Penal code is ill equipped for the full range of bribery-related offences: Penalties focus on passive bribery, while the prosecution of active bribery and related corruption offences is fraught with difficulty. The Penal Code, for example, provides for very long prison terms and very low fines • Anti –corruption provisions are enforced only irregularly: unclear regulatory environment that is ill-defined in scope, does not deter, and takes second place to discretionary decisions by the prosecuting authorities • The authorities have not really sought to raise awareness • The government does not appear to consider the private sector as anti-corruption partner: The Egyptian government has barely engaged in any dialogue with non-government stakeholders III. Achievements and Challenges AC: Proposed recommendations • Anti-corruption agencies should be revitalized and empowered • Establish a culture of integrity: Public awareness of corruption and long-term strategies to educate and inform people about the importance of integrity should be a shared responsibility between government and non-governmental actors • A comprehensive national strategy involving all echelons of government • Improve and increase dialogue with business, civil society, and media stakeholders • Review Egypt’s legal framework against international standards • Identify the areas of public administration most prone to corruption

31. Ania Thiemann Economist and Project ManagerBusiness Climate Development Strategy Egypt Coordinator MENA-OECD Business Council MENA-OECD Investment ProgrammePrivate Sector Development DivisionOECD  - Directorate for Financial and Enterprise Affairs (DAF) Tel: 00331 4524 9887 (office), 00336 2601 1190 (mobile), Email: Ania.Thiemann@oecd.org Website: www.oecd.org/MENA Contacts