FDI is returning to Egypt under President Sisi

FDI is returning to Egypt under President Sisi
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Foreign direct investment deals worth billions are flowing into Egypt, but the country’s stifling regulatory environment and persistent corruption risk choking off entrepreneurship, and may channel the gains to a politically-connected elite. Sound familiar?

Since the start of 2015, Egypt saw a burst of new foreign direct investment. The largest of these came at the Egypt Economic Development Conference held in the Sinai resort town of Sharm el-Sheikh from 13-15 March 2015.

President Abdel Fatah al-Sisi announced a $12 billion deal with British Petroleum (BP) to develop Mediterranean gas fields ,and he later signed a $9 billion deal with Germany’s Siemens to build gas and wind power plants. BP’s own announcement called the deal “a vote of confidence in Egypt’s investment climate and economic potential.”

Elected president over a year ago after leading a coup that ousted then-President Mohammed Morsi, Sisi appears to have succeeded in convincing investors that Egypt’s economy is stabilizing after years of turmoil following the 2011 revolution. But that stability came at a cost. A harsh crackdown on internal dissent, including outlawing the Muslim Brotherhood and declaring it a terrorist organization, ignited a low-level insurgency that so far has killed hundreds of police, soldiers, and civilians.

More fundamentally, there are two unfortunate realities about Egypt’s economy and political system that stand in the way of broad-based and sustainable economic growth. The first is Egypt’s regulatory environment, which makes it difficult for entrepreneurs to start businesses and create jobs. The second is Egypt’s culture of corruption, which could send any gains from economic growth to politically-connected elites.

The bureaucracy in Egypt is legendary. Najy Benhassine, a practice manager at the World Bank, argued at a June discussion panel in Washington, DC that Egypt’s regulatory environment is the primary barrier to entrepreneurship and job creation. The World Bank’s Doing Business 2015 indicators demonstrate why.

It takes 8 days to start a business in Egypt, about the same amount of time as in the US. But securing a construction permit in Egypt takes 179 days. It takes 392 hours to submit 29 required tax payments per year. And the time it takes to enforce a contract is 1,010 days, almost three years.

Egypt’s leaders took steps to make the country appear friendlier to investors after Morsi’s overthrow. Before Sisi’s election, Interim President Adly Mansour passed a law shielding public contracts from review and termination by administrative courts.

The Interim President amended another law making it possible for government officials to award contracts without competitive bidding. And ahead of the March 2015 conference, President Sisi approved an amended investment law that exempts executives for serving jail time in the event of conviction for legal breaches committed by their companies.

These changes could streamline deals and increase private investors’ confidence in the permanence of contracts signed with the Egyptian government. But they also minimize oversight of the executive branch and further concentrate power under President Sisi.

In their February 2015 report critical of the changes to investment laws, the Egyptian Center for Economic & Social Rights argued that “these laws have been designed to ensure that cases of corruption and theft cannot be exposed.”

This connects to the second obstacle holding back sustainable growth in Egypt: corruption. In their year-long investigation for Foreign Affairs, Nizar Manek and Jeremy Hodge concluded that corruption is still rampant under the new regime. The authors blame this on a lack of accountability over the government agencies tasked with fighting corruption—many of them implicated of or are being actively investigated for acts of corruption themselves—as well as state co-option or intimidation of potential non-state watchdogs like the media and civil society organizations.

Nor has the regime’s network of private sector allies fundamentally changed. Amr Adly, a scholar at the Carnegie Middle East Center, described how many key businessmen close to the Mubarak regime fled after the 2011 revolution or are now in prison, while the military greatly expanded its already extensive role in the economy.

But according to Adly, the shake-up under Sisi merely “reconfigured” Egypt’s network of cronyism, rather than eliminating it. A new class of politically-connected business elites is emerging.

Business-friendly reforms began under the regime of former President Mubarak, but previous injections of foreign direct investment did not result in broad-based economic growth and the gains largely went to a few key regime supporters.

In Egypt on the Brink, published shortly before the 2011 Revolution, Egyptian journalist Tarek Osman estimated that more than 40 percent of the country’s wealth was controlled by 5 percent of the population. At the same time, a quarter of Egypt’s people lived in poverty. So far there is little indication that the situation will be much different under President Sisi.

About Author

David Wille

David Wille works for a research center affiliated with George Mason University, where he is pursuing an MA in economics. Prior to graduate school, David was a retail banking research analyst at a Virginia-based consulting company and was a Fulbright Scholar in Egypt until 2011. He writes about the political economy of the Middle East.