Executive summary

Egypt is implementing ambitious reforms to stabilise its economy, attract investors, and spur durable economic growth. These efforts are having a positive effect. Since 2013, GDP growth has doubled, reaching 5.5% in 2019, the highest level in almost a decade. Foreign investment inflows have been steadily increasing since 2011, and despite more modest inflows over the past two years, in 2018 Egypt was the largest recipient of FDI in Africa and the second highest in the MENA region. Both the budget and current account deficit have narrowed in the past couple of years, and unemployment is decreasing. These positive gains will be tested in the near- to medium-term. Initial projections on the economic effects of the coronavirus pandemic portend declines in FDI in all economies for the coming year at least, along with disruptions to global value chains. A global recession appears likely. The steps the Egyptian government has taken to address its economic challenges, in recent years and in response to the pandemic, may help it weather some of the negative impacts of the current crisis. The new outlook makes continuing to advance Egypt’s reform agenda all the more imperative.

Macroeconomic reforms adopted under an IMF-supported agenda that began in 2016 demonstrate the government’s commitment to implementing meaningful, and at times difficult, measures. This includes the Central Bank's decision to allow the exchange rate to freely float, increasing competiveness of the long-overvalued Egyptian pound. The government has also implemented structural reforms to improve the business and investment climate and is moving forward with important regulatory reforms. The successive amendments of the Investment Law in 2015 and 2017 have sent strong signals that promoting and facilitating private investment is a government priority and essential to Egypt’s economic growth. The legislation introduces a new incentives regime to encourage investment in the less developed regions of the country and new one-stop-shops to support business processes. This, and a modernised corpus of business legislation, mark a milestone in the country’s efforts to provide a safer and more consistent regulatory environment for investors.

These recent reforms are important first steps. But advancing more inclusive and sustainable economic growth in Egypt will require strengthening these measures and implementing further near- and long-term reforms to improve the investment and business climate. These measures will be crucial to respond to the economic and social challenges caused by the coronavirus pandemic. Investment to emerging and developing economies is likely to be particularly affected, as disruptions to trade may prompt firms to reconsider their global supply chains. This could create opportunities. But depressed flows of capital and people risk exacerbating existing challenges. Among the greatest challenges Egypt’s leaders face is to support job creation on pace with the country’s growing population. Expanding the number – and crucially, the quality – of jobs will be central to economic growth, as well as to reduce inequality and support political stability. Inflation continues to be a burden on the cost of living, and unemployment, particularly among youth, women and the educated, remains high. Reforms could go further to support investment into activities with higher productivity potential, encourage SME growth and promote non-energy exports.

Despite liberalisation measures undertaken in the past decades, structural transformation of the economy has been limited in Egypt, impeding a sustained increase in labour productivity. Unnecessary restraints to competition caused by the presence of the state in the economy, excessive regulatory protection of incumbent firms, and complex administrative procedures are impediments to private sector development. Further reforms are required to provide clear and transparent regulatory and institutional frameworks.

Investment promotion activities in Egypt are sometimes hampered by a lack of common vision and of co-ordination across key public agencies and ministries. Indeed, co-ordination between government agencies in Egypt is a major challenge, aggravated by the country’s complex institutional framework. GAFI’s investment facilitation and regulating mandates are well developed but the agency could benefit from a clearer investment promotion strategy to better structure and monitor its activities, and to attract FDI in priority sectors.

Inconsistent and discretionary application of policies and regulations, particularly at the local level, also create confusion for investors. Authorities in Egypt have wide discretion to determine investment incentives, including land and tax subsidies, and beneficiaries. Minimising such discretion would reduce uncertainty for investors and limit the scope for corruption. The 2017 Investment Law includes many positive changes, including limiting the scope of corporate income tax holidays to free zone companies only. But levelling the playing field for investors in Egypt will also necessitate an examination of the benefits state-owned enterprises and well-connected firms receive.

Zone-based policies play an important role in the government’s strategy to attract investment that promotes wider economic development. Zones can help compensate for a difficult business climate by offering special treatment to investors, streamlined business procedures, or better infrastructure than outside zones. Nevertheless, they risk becoming a substitute for addressing wider structural challenges, and investors might exploit incentives without embedding in the local economy, limiting potential spill-over benefits. Egypt has significantly improved the quality of its trade and transport infrastructure both in and outside zones in recent years. However, the government could strengthen its planning capacity and coordination for infrastructure projects, which require greater levels of investment.

The Egyptian government has taken steps to promote responsible business conduct (RBC), and Egypt has been an adherent to the OECD RBC instruments since 2007. However, civil society, including labour unions, should be empowered to perform their complementary role in monitoring the enforcement of newly enacted laws and the respect of enterprises for those laws. Civil society can also help ensure that human rights are protected, workers’ rights are respected and that the environment is not degraded.

Based on the Policy Framework for Investment, this second OECD Investment Policy Review of Egypt was conducted together with GAFI and the former Ministry of Investment and International Cooperation (MIIC), in consultation with an inter-ministerial task force created for the Review under the leadership of MIIC. Assessing a broader range of policy areas in more depth than the first review, it takes stock of policy reforms, identifies several potential areas for reform, and provides policy recommendations for the government to consider. The Egyptian government has an opportunity to further strengthen its reform efforts in order to build a more sustainable and transparent investment environment, and in turn advance more inclusive growth.