Recipe for success: The Egyptian formula

Published: 24 September 2009

Resources, work force and tax reform invigorate economy

Egypt's strategic location has made it an important market for thousands of years – and recent legislative changes have made it all the more interesting to potential investors. For a second consecutive year, Egypt was named one of the World Bank's top 10 reformers that are making it easier to do business.

Modern Egypt is not a country resting on its laurels. It is continuously in motion, geared to make the best of all its resources.

"The country has very good energy resources and offers cheap and relatively qualified labour," Mrs Nevine Taher, General Manager, HSBC Corporate Banking, Egypt, said.

"Different policies, monetary and economic, that have been set by the government towards large-scale liberalisation have improved the attractiveness of the area to foreign investors."

Egypt's growing population – an estimated 80 million – constitutes a considerable market in the region. Its economy is the fourth-largest economy in the Arab world after Saudi Arabia, the UAE and Algeria. About half of the country's Gross Domestic Product is accounted for by services, including public administration through the Suez Canal and tourism. Agriculture accounts for 14 per cent of GDP and manufacturing 19 per cent – including oil and gas.

Economic growth accelerating

After years of sluggish growth, Egypt's economy has been accelerating since mid-2004, when Dr Ahmed Nazif was appointed Prime Minister.

"He came to office with his reform-minded ministers and technocrats, with economic and financial portfolios," Mrs Taher said. "The reforms took different shapes, the implementation came in areas like taxation; reduction in taxes from 40 per cent to 20 per cent to enhance investment and business to come to Egypt."

The implementation of such sweeping tax reforms – said to have resulted in a 100 per cent increase in tax revenue – and the relaunch of the stalled privatisation programme triggered a recovery in business confidence and boosted investment, local and foreign.

Top reformer

All of this did not go unnoticed by the world at large: The International Monetary Fund labelled Egypt one of the Middle East's fastest-growing economies' and the World Bank's Doing Business 2009 report ranked it among the top 10 reformers in ease of doing business. This was the second consecutive year that the middle-eastern nation was judged a top reformer.

According to the 2008 report, Egypt improved in 5 of 10 areas when it came to conducting business in the country. It made starting a business easier by slashing the minimum capital requirement to EGP1,000 from EGP50,000 and halving start-up time and cost. Fees for registering property were reduced to a low fixed fee from 3 per cent of the property value. This resulted in less evasion and more properties being registered; and revenue from title registrations jumped by 39 per cent in the six months after the reform. New one-stop shops were launched for traders at the country's ports, which cut the time take to import by seven days and the time to export by five. A private credit bureau was also established and as a result, builders now face less bureaucracy in getting construction permits.

Note: Economies are ranked on the number and impact of reforms. First, Doing Business selects the economies that reformed in three or more of the Doing Business topics. Second, it ranks these economies on the increase in rank on the ease of doing business from the previous year. The larger the improvement, the higher the ranking as a reformer.
Source: Doing Business database

Due to the reforms and the ripple effect they generated, GDP growth rose to 6.8 per cent in the 2005/06 fiscal year (running from July to June) and just over 7 per cent in both 2006/07 and 2007/08, up from the average of about 4 per cent in the three previous years. This was double the sluggish rates posted in the early years of the decade.

With the sharp pick-up in both domestic and foreign investment the government is hoping to sustain growth at around 6-7 per cent but the global economic slowdown is expected to have an impact over the next couple of years.

"Of course the global economic slowdown had affected us, but we were proven more resilient than other economies," Mrs Taher said.

"First of all we were not exposed like the rest of the globe to toxic assets; we had strong political stability and well-controlled economic rules and regulations in place. And mainly, the economy itself is self-sustainable in terms of production, consumption and the like."

Domestic demand resilient

Domestic demand looks set to remain fairly resilient, with the government having announced an EGP15billion fiscal stimulus package that includes infrastructure spending and more tax exemptions and tariff reductions.

Things are beginning to look brighter for Egypt on other fronts too: while more developed economies continue to look for ways to buffer the economic meltdown, other emerging markets are rising to match Egypt's consumption and production needs. There is the booming market in China – a market ready and waiting to absorb all Egypt can offer.

"As such a large economy grows, so does its demand for oil and gas, and food items," Mrs Taher said. "Egypt's proven natural gas reserves rose to around 77.2 trillion cubic feet, up 1.2 trillion cubic feet from the 2008 reported figure. The country's reserves of crude oil and composites rose 222 million barrels to 4.4 billion barrels in the fiscal year which ended 30 June."

"So Egypt is a major natural gas exporter and this could be directed to China. Also in the food sector, Egypt exports food and agriculture products; with the growing consumption in China, this could be another opportunity."

Egypt is also a key exporter of building materials, mainly cement and steel, which Mrs Taher said is another channel for future growth as China has growing real estate and industrial development sectors.