Foreign direct or indirect investments.

Foreign Direct Investment in Egypt Most developing countries encounter numerous economic problems, the most salient of which is the deterioration in development rates related, to a great extent, to low income levels thus exerting a passive impact on savings and consequently on investments rates. The lack of essential financing potentials aggravates the problem of enhancing investment and exportation. At this point, these countries began to search for alternative sources of finance: External borrowing. Most countries turn to that option to bridge the gab of financing, however, these countries are faced with the so-called crises of external indebtedness, especially as this problem aggravates in the form of interest and installments. Creditor countries, hence, became the key beneficiary from the fruits of development rather than developing countries itself, the matter that adversely affect the economic development of the said countries. Foreign direct or indirect investments. Foreign direct investment means funds transferred from abroad, in kind or in cash or both, with the aim of establishing firms and realizing profits. The host country usually guarantees for these investments the transfer of profits and income generated in return for know how, technology and resources provided by the same. Experts in international organizations believe that Foreign Direct Investments are the most convenient for developing countries under the condition that the countries courting foreign 90

investments must furnish a friendly legislative and economic environment. As for foreign indirect investment, it means the dealings of foreign investors in the capital market that encompass two main markets, issue market i.e. Primary Market, and dealing market i.e. Secondary market. Both markets witnessed a boom in foreign investments inflow after the promulgation of Law No. 95/1992. Under this Law, foreign investors were permitted to invest in shares and bonds. Under the above definition, the difference between loans and foreign investments (direct and indirect) is crystal clear, whereas supervision on the latter is exercised via securities market through which investors sell and purchase shares and securities. Foreign direct investments 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. The last two decades witnessed a remarkable progress in foreign investment s flow worldwide. Multinational companies are considered the most common form of these investments and the main engine for world global investment; consequently, their activities represent one of the main characteristics of the current era embodied in IT & Communications, the tendency to grouping and markets globalization. At the beginning of the eighties of the last century, the crisis of external indebtedness for developing countries aggravated, with its adverse implications that resulted in the events of default, the 91

mistrust of international countries in some developing countries, the increase of external borrowing s costs (regarding interest rates, grace periods, loan s term and the necessary guarantees), besides the pressure exercised by international financing organizations on most of the countries (IMF and World Bank). Most countries gave Foreign Direct Investment the green light as an alternative for external borrowing to avoid the restrictions imposed on the same. Courting foreign direct investments became a wide field for competition between both developed and developing countries due to the tendency, by most countries, to adopt free market economies to realize reform and economic development. It is worth mentioning that investment decision depends on two main points: First: The motives of the donor country for investment and the competitive edge of relevant projects besides the need to find access for new markets. Second: The points of attraction for investing 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. First: development of foreign direct investment (FDI) worldwide. Table 1 indicates that foreign direct investment worldwide recorded a remarkable unprecedented growth during the period from 1998 2000, where investments inflow reached US$ 690.9 bn. in 1998. These inflows witnessed a boom during the years 1999 92

and 2000 to record US$ 1,086.8 and 1,388 bn. with an annual growth rate 57.3% and 28% respectively. Outflows reached US$ 687.2 bn. in 1998, to realize a sharp increase during the years 1999 and 2000 recording US$ 1,092.3 and 1,186.8 bn. with an annual growth rate 60% and 8.8% respectively. However, both inflows and outflows witnessed a severe decline by the advent of 2001 till 2003. Moreover, inflows deteriorated in 2001 to record US$ 817.6 bn. and resumed deterioration to record US$ 560 bn. only in 2003 with a decline rate of 41% and 17.5% respectively. Outflows retreated to record US$ 721.5 and 612 bn. in 2001 and 2003 with an annual decline rate of 40% and 18% respectively. Data reveals that developed countries monopolize the largest stake of investments flow compared to developing countries. Investments inflow to developed countries reached US$ 472.5 bn. in 1998, representing 68% of the total, and US$ 366.6 bn. in 2003 representing 65.5% of the same. As for developing countries, inflows in 1998 reached US$194 bn. representing 28% of the total and US$ 172 bn. in 2003 representing 31% of the same. Investments outflows from developed countries recorded US$ 631.5 bn. in 1998, representing 92% of the total and US$ 570 bn. in 2003, representing 93% of the same. Outflows from developing countries reached US$ 53.4 bn. in 1998, representing 7.8% of the total, and US$ 35.6 bn. in 2003, representing 5.8% of the same. In the light of the aforementioned, it is clear that developed countries are the host and primer source for Foreign Direct Investment s inflow due to some factors that enhance courting investment in the same rather than developing countries. The most salient of these factors are: political, economic and legislative stability, in addition to a reliable infrastructure, trained manpower, and state-of-the-art technology. 93

Second: The importance of FDI to Egypt. The importance of Foreign Direct Investments to Egypt is stemmed from the decline in domestic saving rates. The need for external finance aroused as an alternative for loans, grants, aids, that are diminishing, from countries and international organizations. It also aroused from the need to provide more job opportunities for the unemployed. Foreign direct investment is the main engine in the export process, as capital inflow is always associated with transferring management skills and state-of-the-art technology. This in turn will increase productivity; support the competitive edges for the current industry and help in establishing new industries that will connect local producers with international markets. A. The progress in foreign direct investments (FDI) inflow to Egypt compared to North African countries and developing countries. Table 2 reveals that FDI s inflow to Egypt showed an unstable pattern during the period from the end of the nineties 1 till 2003. The inflows surge in 1998 by 34% to reach US$ 1.1 bn. compared to US$ 0.8 bn. (average investments inflow during the period from 1992 1997). However, inflows experienced a severe set back as from 2001 by 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. 1 This is related to various reasons among which the amendments introduced to the investment laws, the deterioration in economic conditions in the Middle East due to political instability, the events of September 11 th and outbreak of the Anglo American war in Iraq. 94

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 4.2% and 0.14% in 2003. B. The progress in the balance of FDI s inflow and outflow to Egypt. It is obvious from table 3 that the balance of foreign investment s inflow to Egypt increased while its growth rate diminished during the nineties where it recorded US$ 21 bn. in 2003 with a growth rate of 7.1% against US$ 19.6 bn. in 2000, while in the mid nineties inflows recorded about US$ 14.7 bn. in 1995 with a growth rate of 34% compared to 1990. As for the balance of investment s outflow, it also shows a trend for increase as it reached in 2003 US$ 72 mn. with an increase rate of 9.1% against US$ 66 mn. in 2000. Outflows more than doubled in the mid nineties to reach US$ 35 mn. in 1995 with an increase of 119% compared to 1990. C. The relative importance of FDI in Egypt compared to total investments 2 and GDP. Table 4 indicates that albeit the increase in absolute figures of FDI during the period under study, the ratio of FDI to total investments was unstable. In 1997/98 this ratio reached 27%, then it gradually decreased in the following years to stand at 24.6%, 23.2% and 22.8%. It reached its lowest value in 2001/2002 (22.5%), then it surged again in 2002/2003 and 2003/2004 to reach 24.4% and 24.6% respectively. 2 The aggregate participations of Egyptians, Arab and foreigners in the companies issued capital. 95

The ratio of FDI to GDP (at fixed prices) indicates that it was stable at 9% during the three years period from 1997/98 till 1999/2000, and then it changed its pattern to reach 9.5% in 2000/2001. The ratio retreated to stand at 8.5% in 2001/2002, and then it resumed its ascending trend to reach 10.2% during the years 2002/03 and 2003/04. This unstable pattern in FDI s ratios is related to the fact that the growth rates of investments and GDP are greater than that of FDI during certain years. D. FDI s distribution in Egypt according to various economic sectors. It is clear from table (5) that FDI s inflow to Egypt enjoyed a sustainable increase during the period from 1997/98 till 2003/04 to reach L.E. 41.6 bn. with an increase rate of 66.4% compared to 1997/98 in which foreign investments reached L.E. 25 bn. It is worth mentioning that the industry sector ranks first among other sectors in terms of attracting foreign investments (1/3 of direct investments inflow) during almost all years. In the second place come free zones that attracted between 18% and 28% of the same in 2001/2002 and 1997/98 respectively. Finance and service sectors follow in ranks. E. Distributing FDI among Arabs and foreigners. In table 6, it is clear that foreign countries dominate the major portion of investments inflow to Egypt during the period from (1997/98 2003/04) compared to participations from Arab countries. The year 2000/01 witnessed the widest gap between foreign and Arab investments (8%), where foreign investments, in the same year, reached about L.E. 54 bn. against L.E. 46 bn. for Arab investments. On the contrary, the year 1998/99 witnessed the 96

narrowest gap between the same, where foreign investments reached L.E 51 bn. against L.E. 49 bn. for Arab investments. Third: The obstacles facing FDI s inflow to Egypt. Notwithstanding the efforts exerted since the mid seventies of the last century to pave the way for courting foreign investments, there are some factors that played a role in impeding the inflow of foreign investments to Egypt, despite the remarkable potentials of Egypt, the most salient of which: Lacking the 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 and 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 Foreign Direct Investment in general 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, after the European unity. 97

The economic changes that Eastern Europe undergoes concomitant with the geographical shift in investments directed towards developing countries and Egypt in particular. Fourth: The salient regulations adopted by the Egyptian government to improve the investment climate. Recently, the government adopted a policy that aims at courting foreign investments on ongoing bases. To that end, the government enacted a number of laws and adopted different procedures to create a suitable environment to court investments in general and foreign ones in particular, among which: The promulgation of Law No. 13/2004 concerning the amendment of investment guarantees and incentives, whereas the legal framework is one of the main aspects for a suitable investment environment. A number of laws were issued in that respect among which: Law No. 65/1971 concerning Arab capital investment and free zones, followed by Law No. 43/1974 that was amended by Law No. 32/1977, then it was followed by Law No. 159/1981, Law No. 230/1989 and Law No. 8/1997 concerning investment guarantees and incentives that was amended recently by Law No. 13/2004. The said amendment aimed at streamlining the investment procedures for all investors (Egyptians or foreigners) to foster investment and overcome any obstacles. Introducing a new ministry for investments that encompasses the sectors that use to follow the Ministry of Public Enterprise, General Authority for Investment & Free Zones, Capital Market Authority, Higher Council for 98

Insurance, Egyptian Insurance Supervisory Authority and General Authority for Real Estate Finance Control. 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 will work 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. Reducing custom s tariff and eliminating regulations imposed on imports with the aim of enhancing confidence in the Egyptian economy and improving the investment climate to court more local and foreign investments. This reduction will boost various economic sectors and open the door before all investors foreign investors in particular to import all production needs i.e. capital goods, equipment, tools and intermediate goods with lower costs. This resolution dealt with the huge deformities of customs tariff that resulted in a number of bureaucratic acts. The new tariff took into consideration compromising between protection and economic efficiency (whereas the Egyptian economy and the productive sector are in need, during the current phase, for prudent rather that absolute protection). In addition, the establishment of the Model Customs and Tax Center (MCTC) helped in developing customs handling techniques. Enforcing more economic contracts and arrangements, whereas the advent of 2005 will witness enforcing the 99

agreement of liberalizing trade among Arab countries, and the arrangements concerning Qualified Industrial Zones (Quiz). Developing infrastructure projects, and industrial zones whether free or normal ones. Liberalizing Egyptian pound versus other foreign currencies, and adopting serious monetary polices 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. Table 1 The progress in Foreign Direct Investment Worldwide (US$ bn.) 1998 1999 2000 2001 2002 2003 Inflows worldwide encompass: 690.9 1,086.8 1,388 817.6 678.8 560 The group of developed countries 472.5 828.4 1,108 571.5 490 366.6 The group of developing countries 194.1 231.9 252.5 219.7 157.6 172 Outflows worldwide encompass: 687.2 1,092.3 1,186.8 721.5 596.5 612.2 The group of developed countries 631.5 1,014.3 1,083.9 658.1 547.6 569.6 The group of developing countries 53.4 75.5 98.9 60 44 35.6 Source: UNCTADE, World Investment Report, New York, (2004) 100

Table 2 The progress of foreign direct investment s (FDI) inflow to Egypt compared to North African countries and developing countries. (US$ bn.) Egypt North Developing Egypt s % to Egypt s % to Africa countries North Africa Developing countries 0.82 1.9 118.6 43 0.7 1992 1997 (Average) 1998 1.1 2.9 194.1 38 0.6 1999 1.1 3.0 231.9 37 0.5 2000 1.24 2.9 252.5 43 0.5 2001 0.51 5.5 219.7 9.3 0.23 2002 0.65 3.6 157.6 18 0.4 2003 0.24 5.7 172 4.2 0.14 Source: Ibid. Table 3 The progress in the balance of FDI s inflow and outflow to Egypt during the period from 1990 2003 (US$ bn.) 1990 1995 2000 2002 2003 The balance of direct 11 14.7 19.6 20.7 21 investment s inflow * The balance of direct 0.16 0.35 0.66 0.7 0.72 investment s outflow * * The accumulated balance for Foreign Direct Investment was calculated since 1970. Source: Ibid. 101

Table 4 The relative importance of FDI to Egypt compared to total investments and GDP during the period from 1997/1998 till 2003/2004 (L.E. bn.) Year 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 Foreign Direct 25 26.2 27.6 30.3 32 40 41.7 Investments Total investments* 92.8 106.3 119 133.1 142 164.2 169.4 FDI to Total 27 24.6 23.2 22.8 22.5 24.4 24.6 investments (%) GDP with fixed 277 294 309 320 379 391 408 prices FDI to GDP (%) 9 9 9 9.5 8.5 10.2 10.2 * Total Egyptians, Arab and foreigners participations in companies issued capital Source: 1- General Authority for Investment and Free Zones Information Systems and Decision Support Department annual statistical statement, Annual Report for years 2000/2001 2001/2002. 2- Ministry of Foreign Trade and Industry monthly economic bulletin October 2004. 102

Table 5 Distributing FDI in Egypt according to various economic sectors (L.E. bn.) Sectors Industry Agriculture Construction Tourism Services Financing Free Total* Years Zones 1997/98 7.9 0.7 1.3 3.4 0.7 4 7 25 % 31.6 2.8 5.2 13.6 2.8 16 28 100 1998/99 7.3 0.6 2 4.3 0.8 4.6 6.6 26.2 % 28 2.3 7.6 16.4 3 17.6 25.1 100 1999/2000 8.4 0.7 2.1 4.7 0.86 5.2 5.6 27.6 % 30.4 2.6 7.7 17.2 3 18.8 20.3 100 2000/01 10 0.8 2 5 1 5.6 5.9 30.3 % 33 3 7 17 3 18 19 100 2001/02 10.6 0.9 2.3 5 7.5** 5.7 32 % 33 3 7 16 23 18 100 2002/03 12.3 0.9 2.4 5.7 1.2 7.3 10.3 40 % 31 2.2 6 14.3 3 18 25.5 100 2003/04 13.6 1.02 2.4 8.4 9.7** 9.07 41.6 % 32.8 2.4 5.8 14 23.2 21.8 100 * Cumulative balances. ** Figures of Foreign Direct Investments were merged in services and financing sectors during the years 2001/2002 and 2003/2004. Source: Ibid Table 6 Distributing FDI among Arab and Foreign Funds (L.E. bn.) 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 Arab 12 12.9 13.4 14 16 18.7 19.6 % 48 49 48.5 46 49.7 46.7 47 Foreigners 13 13.3 14.2 16.3 16.2 21.3 22 % 52 51 51.5 54 50.3 53.3 53 Total* 25 26.2 27.6 30.3 32 40 41.6 * Cumulative balances. Source: Ibid. 103

Source: 1. 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. 2. General Authority for Investment and Free Zones, Annual Statistical Report, various issues. 3. General Authority for Investment and Free Zones, Annual Report, various issues. 4. Unctade, World Investment Report, New York, (2004) 5. Ministry of Foreign Trade and Industry Monthly Economic Bulletin October 2004. 6. National Bank of Egypt, Research paper, Securities Division. 7. Al Ahram Al Ektesady Egyptian Stock Market Appendix No. 1873 29/11/2004. 104