Is the world ready to invest in Egypt? After years of a stagnating economy and political uncertainty, the results from last month’s Egypt Economic Development Conference (EEDC) suggest that investors are taking a fresh look at what could be a new landscape for economic prosperity in the country. To better understand the results and impact of the EEDC, it is important to examine some of Egypt’s economic and legal reform measures over the past year, as well as some recent developments in its regional and global economic relations.
I. Egypt Economic Development Conference (March 13-15, 2015)
On March 13, 2015, Egypt commenced its three-day EEDC in resort town Sharm El-Sheikh. The turnout was impressive: Over 20 heads of states, numerous senior government officials, and 2,000 investors and business leaders. The list of attendees included U.S. Secretary of State John Kerry, Managing Director of the International Monetary Fund Christine Lagarde, senior officials from the World Bank, and CEOs of some of the world’s leading corporations. One of the organizers of the EEDC, Richard Attias, who also arranged the annual World Economic Forum in Davos in January 2015, noted that during his 25 years of experience, he had not witnessed “such a strong mobilization and enthusiasm.”
Investment Pledges and Projects
As the conferenced kicked off, the Kingdom of Saudi Arabia, the United Arab Emirates, and Kuwait announced a collective pledge of $12 billion to Egypt. In addition, Oman promised $500 million; the World Bank allocated $5 billion over the next four years; and the Islamic Development Bank signed loan agreements for approximately $3.8 billion.
By the end of the conference, Egypt had signed investment deals worth over $33 billion and MOUs for potential deals worth $92 billion. Energy deals dominated the EEDC, with British Petroleum (BP) signing a $12 billion agreement to invest in exploration and operation projects in the Nile Delta and Gulf Suez, and Siemens International inking MOUs worth $10.5 billion to raise the country’s energy production capacity by one-third. In addition to energy deals, the list of signed deals spans a range of sectors, including housing, transportation, logistics, food, and retail.
Egypt’s New Capital
Investors at the EEDC also got a glimpse of Egypt’s plans to build a new capital city, which itself may generate many infrastructure projects in the coming years. Aimed to alleviate congestion and overpopulation in Cairo, the as-yet-unnamed “smart city” will lie east of Cairo, closer to the Red Sea, and span over 250 square miles (roughly the size of Singapore). The new capital is expected to be home to approximately five million people and generate close to 1.75 million job opportunities. Egypt’s ministries, agencies, and Parliament, as well as embassies in Egypt, would all move to this new administrative capital. The new capital will also include an airport larger than London’s Heathrow, a park twice as big as New York’s Central Park, and a theme park four times the size of California’s Disney Land. The project’s first phase is scheduled to be completed within seven years and will cost an estimated $45 billion.
Suez Canal Zone
Also unveiled during the EEDC was the master plan for a development project centered around the excavation for the new Suez Canal lane. First announced in August 2014, the project is designed to turn the area around the Suez Canal into an international logistical and commercial hub. The master plan includes several seaports, an industrial zone, as well as a “technology valley.” The plans for the Suez Canal project and the new capital were showcased at the EEDC as part of a new national vision for Egypt.
II. Economic and Legal Reforms
The investment pledges and projects announced for Egypt arrive against the backdrop of several key economic and legal reforms taken by the government over the past year. In a February report on Egypt, the IMF welcomed the reform measures taken over the previous months and noted that “Egypt has chosen a path of adjustment and reform which, if followed resolutely, will lead to economic stability and growth.”
During the second half of 2014, Egypt overhauled its tax system through a series of reform measures which included introducing dividend and capital gains taxes, increasing taxes on higher income brackets, implementing excises on certain products (e.g., tobacco), and revamping the country’s property tax framework. Plans are also underway to convert Egypt’s current sales tax into a modern value-added tax (VAT) and to implement a simplified tax regime for small and medium-sized enterprises (SMEs).
In July 2014, Egypt also slashed spending on energy subsidies by nearly a quarter in its 2014-15 budget, raising prices for fuel products and electricity. The government plans to continue increasing fuel and electricity prices over the next five years to completely eliminate energy subsidies. This may be achieved even sooner given the current global oil prices.
Historically, energy subsidies have imposed a heavy burden on Egypt’s budget, swallowing over 6 percent of GDP in the last fiscal year. In addition, in recent years when international oil and natural gas prices exceeded budget projections and domestic demand surged, the government diverted more than its contracted share of production to satisfy the domestic market, resulting in over $5 billion in arrears to foreign energy companies. In turn, these companies significantly reduced their exploration activities and investments. The implementation of the subsidy reforms and the settlements of more than half of the arrears, however, have led to a resurgence in oil and gas exploration investments both prior to and during the EEDC.
After months of re-working its investment law, Egypt finally ratified on March 12 key amendments to the law which aim to reduce government inefficiencies, enhance investor protection, and provide targeted incentives. The new law also provides a one-stop shop that allows investors to obtain approvals and permits in certain sectors from a single window operated by the General Authority for Investment, cutting out dozens of governmental agencies from the process.
Additionally, under the amended law, power is vested in two existing committees to resolve disputes between investors and the Egyptian government. The first committee focuses on resolving disputes that involve licensing and implementation issues. The second committee, headed by the Prime Minister, resolves disputes concerning investment contracts between the government and investors. As of last month, more than half of the complaints brought before both committees have already been resolved. The amended law permits only those parties to a contract with the state to challenge such a contract, eliminating third-party suits. Since 2011, Egypt has encountered third-party challenges and several investment treaty arbitrations. While some have claimed this new amendment to the investment law will reassure investors, others have made the point that it may stifle legitimate challenges.
III. Regional and Global Economic Cooperation
In addition to the domestic reforms and enhanced stability, recent developments in Egypt’s regional and global economic relations seem encouraging.
On a global level, Egypt’s government has expanded cooperation with several key partners and revamped economic relationships that were impacted in the wake of political unrest. In December 2014, Egypt and China signed a “comprehensive strategic partnership” agreement boosting economic and other kinds of cooperation; trade levels between both countries have been steadily increasing. Egypt’s trade volume with Russia also soared in 2014, exceeding $4.5 billion (over 80 percent more than the previous year). Egypt’s economic trade with the EU is also rebounding, following the participation of eight European countries – including Germany, France and the United Kingdom – in the EEDC. As for the United States, last November it organized the largest ever American trade mission – comprised of executives from about 70 companies – to visit Egypt. And earlier this month, the U.S. formally ended the freeze on military aid to Egypt.
On a regional level, Egypt’s new government has been receiving overwhelming economic support, in the form of aid and long-term investments, from many of the Gulf Cooperation Council states. And just as Egypt has engaged its neighbors in the Arab Gulf, so too has it been engaging key African states. On March 23, setting aside its fears that the multi-billion dollar Grand Ethiopian Renaissance Dam project would diminish its water share of the Nile River, Egypt, along with Sudan, signed a Declaration of Principles with Ethiopia concerning the project. The Declaration paves the way for a binding agreement between the three nations and defuses the tension that sparked four years ago when Ethiopia initially announced its plans for the dam. The past several months have witnessed a breakthrough improvement in Egyptian-Ethiopian relations, with leaders of both states expressing their desire to increase economic cooperation. Egyptian Prime Minister Ibrahim Mehleb recently suggested establishing an Egyptian-Ethiopian committee headed by the states’ respective Ministers of Foreign Trade and Industry. South Africa also has agreed to “accelerate trade and investment” with Egypt, as announced by President Zuma following his visit to Egypt earlier this month.
IV. Looking Ahead
Egypt still faces a whole host of challenges when it comes to its investment climate, as illustrated in part by the World Bank’s 2015 Doing Business report ranking Egypt at 112 out of 189 for ease of doing business. Nevertheless, it appears that the measures taken by the government to restore the economy and revive investor appetite are working. These measures are part of a comprehensive policy approach and an ambitious economic vision, both of which have been lacking in Egypt’s recent history.
During the coming months, it will be crucial for Egypt to prove that its economy has finally turned around and that its recently announced mega projects are successfully implemented and actually producing positive economic results. The government must also follow through on its reform promises to continue to instill the confidence of investors worldwide.
As more investors eye Egypt in the years and decades to come, so too will Egypt need to continue enhancing its legal and economic frameworks in order to maximize returns both for global stakeholders and all Egyptians. In the meantime, the world will be watching.
This post can also be found on Cov Africa, the firm’s blog on legal, regulatory, political and economic developments in Africa.