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Foreign Direct Investment As a problem facing Egypt November 2010 Economic Development Prof Dr Ihab Nadim German University in Cairo Introduction The Government of Egypt has played a key role in terms of improving the outlook for Egyptian foreign investment since July 2004. A positive response to reform investment procedures has been achieved and reflected in the increase in the number of newly established companies as well as expansions of companies already in operation. Moreover, instigating and sustaining high levels of growth and employment creation.
The net FDI inflows have increased from USD 509. 4 million in 2000/01, to reach USD 13. 2 billion in 2007/08, USD 8. 1 billion in 2008/09 and USD 6. 8 billion during 2009/10. Figure below shows the increase of FDI inflows during 2004/05 – 2009/10. Source: Central Bank of Egypt According to the World Investment Report published in 2010 by the United Nations Conference on Trade and Development (UNCTAD); Egypt has become the largest market for foreign direct Investment (FDI) in North Africa and the second after South Africa in the African continent.
However, the indicators of attracting foreign investments during 2010 showed a significant decline in these investments affected by the global financial crisis and its consequences. In which it forces further plans for the government to attract investments in the coming period. Statement of Issue Foreign direct investment means; funds transferred from abroad, in type or in cash or both, with main aim of establishing firms and energizinggenerating profits. The transfer of profits and income generated in return for know-how, technology and resources provided by the same are the host country usually guarantees for these investments
FDI inflow is not restricted to equity only, it takes many other forms including, but not limited to, equipment, technology, know-how and skill. Direct investment takes various forms, i. e. joint ventures, the most common in developing countries, and wholly owned foreign investment. Experts in international organizations believe that FDI schemes are the most convenient for developing countries; provided by that the countries hosting foreign investments must furnish a friendly legislative and economic environment.
Most of the developing countries gave FDI the green light as an alternative for external borrowing to avoid the restrictions imposed. Furthermore, Courting foreign direct investments became a wide field for competition between both developed and developing countries due to tendencies, by most countries, to adopt free market economies to realize reform and economic development. Now it is worth to discuss that investment decision depends on two main points: First: The motives of the donor country for investment.
In addition to, the competitive edge of relevant projects besides the need to find access for new markets. Second: points of attraction of investments in hosting countries are embodied in economic development, market size, administrative, economic and political stability, hard and soft infrastructure, transparency, and finally legislations and laws concerning investment and the incentives embodied in the same. The importance of FDI to Egypt The importance of Foreign Direct Investments to Egypt is stemmed from: 1. The decline in domestic saving rates. 2.
The need for external financing as an alternative for loans, grants, aids, that are diminishing, from countries and international organizations. The need also aroused to provide more job opportunities for the unemployed population. 3. FDI is the main engine in the export process, since capital inflow is always associated with transferring management skills and state-of-the-art technology. This aspect will increase productivity in turn; support the competitive edges for the current industry and help in establishing new industries that will connect local producers with international markets.
Obstacles facing FDI’s inflow to Egypt Despite all efforts exerted since the mid seventies to pave the way for encouraging foreign investments, there are various factors that played a role in impeding the inflow of foreign investments to Egypt, even with the remarkable potentials of Egypt. The most prominent are: • The lack of necessary expertise to promote Foreign Direct Investment in Egypt in the light of the international competition to court the same. • The absence of an investment map for the promising geographical areas. The ineffective and inflexible policies applied in dealing with the investor. • Bureaucracy and obstacles that impede the investment process in general and particularly foreign investments. • Lacking the skilful and trained labor necessary for foreign investment projects. • Limiting FDI – generally – to certain sectors such as oil, gas and tourism, rather than other sectors. • The high costs of advanced European technology provided to developing countries, including Egypt, especially after the European unity. The economic changes that Eastern Europe undertakes associated with the geographical shift in investments directed towards developing countries and Egypt in particular. Relative importance of the problem The progress in FDI inflow to Egypt compared to North African countries and developing countries. FDI’s inflow to Egypt showed an unstable pattern during the period from end of nineties till 2003. The inflows course in 1998 by 34% and reached US$ 1. 1 bn. compared to US$ 0. 8 bn. (average investments’ inflow during the period from 1992 – 1997).
However, inflows experienced a severe setback in 2001 reaching 59% to stand at US$ 0. 5 bn. compared to 2000, whereas inflows witnessed another decline in 2003 by 63% to stand at US$ 0. 24 bn. compared to 2002. This decline was reflected in the retreat of Egypt’s stake in foreign investments’ inflow directed to North African countries and developing countries. The said rate reached 38% and 0. 6% respectively in 1998 and diminished to stand at 9. 3% and 0. 23% in 2001. The decline resumed to stand at 4. % and 0. 14% in 2003. (Source: NBE – Economic Bulletin – Vol. 57 No. 4) Possible Causes of the Problem The main FDI Challenges in Mena & Western Asia Regions While Egypt among other countries in the Western Asia region have experienced a remarkable improvement in the business climate over recent years and a subsequent flow in Foreign Direct Investment activities, yet there are several factors that continue to constrain FDI inflows. The relevance of those factors varies significantly from country to country.
The below details addresses some of the main challenges that most of developing countries are currently facing in the area of foreign direct investment, including relatively high and increasing rates of inflation, weak enforcement of legislation, excessive levels of bureaucracy and corruption, the dominance of Government sectors and slow implementation of privatization programs. 1. Inflation & Instability of Macroeconomics Sector: The favourable macroeconomic situation in Egypt has recently been clouded by the rise of inflation rates, which have resulted in an erosion of local purchasing power.
The strong rise in consumer prices is mainly driven by optimistic domestic demand, the global surge in food prices and the weakening of the US dollar, to which most Arabian Countries have pegged their currencies. According to latest official figures and estimates, inflation rates in all Arabian countries except Bahrain and the Syrian Arab Republic have surpassed the 10 per cent mark. Egypt, Lebanon, Qatar, the United Arab Emirates and Yemen have recorded the strongest price increases in the region in the 1st half of 2008.
Even though empirical evidence on the impact of inflation on FDI remains incomplete, it is likely that a further acceleration of price increases will negatively affect FDI flows to Arab countries. In Egypt and Jordan particularly, macroeconomic stability is a crucial factor that plays an important role in encouraging FDI inflows. The increase of inflation rates may shake the confidence of foreign investors. As uncertainty increases, both domestic and foreign firms may be reluctant to invest in new plants and equipment.
Export oriented sectors are likely to experience a particularly strong decrease in investment activities, since higher costs for input factors will reduce competitiveness in global markets. 2. Weak Enforcement of Legislation: The majority of Arab countries have undertaken economic reform programs to increase their attractiveness to foreign investors, mainly by introducing new tax and investment legislation. However, many of these countries suffer from a weak and conflicting enforcement of regulations.
The fact is, almost all countries have laws governing the activities of direct investment enterprises and regulating foreign companies, yet misconception of legislation on the one hand and slow, contradictory implementation of the laws on the other hand, continue to hinder FDI inflows. Today, almost all Arab countries have passed legislation to ensure the protection of intellectual property (IP) rights. However, several countries, including Egypt, Lebanon and the Syrian Arab Republic, have not yet been able to enforce these laws. 3. Bureaucracy, Corruption and Red Tape:
To various degrees, Arab countries face the challenge of excessive bureaucracy, corruption and red tape. Numerous and lengthy Government procedures, inconsistent interpretation of Government regulations and favoritism in decisions of Government officials often constitute an additional burden for foreign investors. According to the World Economic Forum, Egypt, Kuwait and the Syrian Arab Republic were ranked 73rd, 74th and 86th respectively out of 127 countries that suffer from high levels of bureaucracy and investors frequently report that Government regulations constitute a heavy burden.
Despite all the serious efforts undertaken by Governments to limit and mitigate corruption, resulting in some notable achievements, corruption remains present in many business activities in the Arab Region. 4. Dominance Of Government Sectors & Slow Implementation of Privatization Programs: Many Arab Countries still suffer from the dominance of the Government sector. Several countries have passed new laws and developed privatization programs; however, the implementation phase of these programs is frequently extremely slow and in certain countries faces resistance.
In fact, there is a perception that privatizing state-owned companies will harm the poor for the benefit of the rich and foreigners, and a negative cultural perception has therefore developed in some quarters. In Lebanon, privatization plans are dated back to more than a decade and have been part of the reform plans of every successive government. Telecommunications, electricity and transportation are the principal sectors to be privatized; however, strong opposition to these plans has delayed their implementation. Consequences of the problem
Economic and non economic in Egypt: Sorry I really couldn`t find anything about this section. Moreover I guess the consequences is included in other part so u may only combine the headings Conclusion and Policy Options Recently, the Egyptian government has adopted a policy to improve the investment climate and encourage foreign investments on ongoing bases. Respectively, the government endorses a number of laws and adopted different procedures and regulations to create a suitable environment to court investments in general and foreign ones in particular, among which: 1.
The issuance of Law No. 8/1997 concerning investment guarantees and incentives that was amended recently by Law No. 13/2004, which aimed at streamlining the investment procedures for all investors (Egyptians or foreigners) to foster investment and overcome any obstacles. 2. Introducing a new ministry for investments that encompasses the Holding Companies, General Authority for Investment & Free Zones that now serves a one-stop shop for investment, Egyptian Financial Supervisory Authority and the Holding Company for Insurance.
This Ministry is intended to focus on improving the investment climate, eliminating obstacles, enforcing the main role of the General Authority for Investment embodied in promoting activities for domestic and foreign investors and establishing a special unit to deal with investor’s problems. In the meanwhile, the ministry works on restoring confidence between the investor and the government and disengaging the relevant laws regulating the investment process to provide an attractive environment to achieve the expected inflow of foreign investments to Egypt. 3.
Reducing the time-consuming and burdensome procedures required to start a business and in decreasing the minimum required capital. 4. Introducing a new tax law (The Income Tax Law No. 91 of 2005), in which it helped to create a more effective overall tax system by providing both investors domestic and foreign a uniform tax treatment and a number of tax incentives. 5. Reducing customs` tariff and eliminating regulations imposed on imports with main aim to enhance the confidence in the Egyptian economy and improve the investment climate to encourage more local and foreign investments.
The new tariff took into consideration compromising between protection and economic efficiency. In addition, the establishment of the Model Customs and Tax Center (MCTC) helped in developing customs’ handling techniques. 6. Enforcing more economic contracts and arrangements, whereas the beginning of 2005 has witnessed enforcing the agreement of liberalizing trade among Arab countries, and the arrangements concerning Qualified Industrial Zones (Quiz). 7. Developing infrastructure projects and industrial zones whether free or normal ones. . Liberalizing Egyptian pound versus other foreign currencies, and adopting serious monetary policies along with an expanding financial policy without any intervention on the part of the government in market forces regarding wages and prices in addition to the expected tax amendments. Recommendations: In order for Egypt to improve the investment climate and increase FDI inflows, the following recommendations should be taken into consideration: 1. To continue working towards achieving a stable macroeconomic environment. 2.
To ensure that legislation has a clear and unique interpretation. 3. To speed up the implementation of new laws and amendments to existing legislation. 4. To improve the business climate. 5. To take measures to combat bureaucracy, corruption and red tape, including establishing a powerful, independent supervisory authority. 6. To encourage the participation of the private sector, increase the pace of implementation of privatization programs and work on changing negative cultural perceptions of privatization. (UN, 2008) Bibliography
Central Bank of Egypt http://www. investment. gov. eg/en/investment/pages/foreigninvestment. aspx NBE – Economic Bulletin – Vol. 57 No. 4 http://www. nbe. com. eg/pdf/english/chos6/B%206%20Domestic. pdf UN, 2008 – FOREIGN DIRECT INVESTMENT REPORT; ECONOMIC AND SOCIAL COMMISSION FOR WESTERN ASIA (ESCWA) http://www. escwa. un. org/information/publications/edit/upload/edgd-08-tech1-e. pdf Other Resources: • UNCTAD Report 1999 United Nations Conference on Trade and Development, Investment Policy Review-Egypt http://www. unctad. org/en/docs/iteiipmisc. 1_en. pdf • The Cabinet, Information and Decision Support Center, “Differences in Foreign Direct Investment’s data to Egypt and the ways to remedy such differences”, August 2003 • General Authority for Investment and Free Zones, Annual Statistical Report, various issues • Al Ahram Al Ektesady – Egyptian Stock Market Appendix– No. 1873 – 29/11/2004. [pic][pic] ———————– [pic] Foreign Direct Investment [pic] [pic] [pic] [pic] Foreign Direct Investment [pic] [pic] ———————– 2 FDI Paper – By :Waseem Hosny El-Metwally