Arab Republic of Egypt Business Guide
Introduction
Egypt , officially the Arab Republic of Egypt, is a country in North Africa that includes the Sinai Peninsula, a land bridge to Asia. Covering an area of about 1,001,450 square kilometers (386,560 square miles). Occupying the northeast corner of the African continent, Egypt is bisected by the highly fertile Nile valley, where most economic activity takes place. In the last 30 years, the government has reformed the highly centralized economy it inherited from President NASSER. In 2005, Prime Minister Ahmed NAZIF reduced personal and corporate tax rates, reduced energy subsidies, and privatized several enterprises. The stock market boomed, and GDP grew about 5% per year in 2005-06. Despite these achievements, the government has failed to raise living standards for the average Egyptian, and has had to continue providing subsidies for basic necessities. The subsidies have contributed to a growing budget deficit - more than 10% of GDP each year - and represent a significant drain on the economy.
Economy
Egypt's economy depends mainly on agriculture, media, petroleum exports, and tourism; there are also more than three million Egyptians working abroad, mainly in Saudi Arabia, the Persian Gulf and Europe. The completion of the Aswan High Dam in 1971 and the resultant Lake Nasser have altered the time-honored place of the Nile River in the agriculture and ecology of Egypt. A rapidly-growing population, limited arable land, and dependence on the Nile all continue to overtax resources and stress the economy.
The government has struggled to prepare the economy for the new millennium through economic reform and massive investments in communications and physical infrastructure. Egypt has been receiving U.S. foreign aid (since 1979, an average of $2.2 billion per year) and is the third-largest recipient of such funds from the United States following the Iraq war. Its main revenues however come from tourism as well as traffic that goes through the Suez Canal.
Egypt has a developed energy market based on coal, oil, natural gas, and hydro power. Substantial coal deposits are in the north-east Sinai, and are mined at the rate of about 600,000t per year. Oil and gas are produced in the western desert regions, the Gulf of Suez, and the Nile Delta. Egypt has huge reserves of gas, estimated at over 1.1 million cubic meters in the 1990's, and LNG is exported to many countries.
Economic conditions have started to improve considerably after a period of stagnation from the adoption of more liberal economic policies by the government, as well as increased revenues from tourism and a booming stock market. In its annual report, the IMF has rated Egypt as one of the top countries in the world undertaking economic reforms. Some of the major steps concerning economic reforms taken by the new government since 2003 include a dramatic slashing of customs and tariffs, a new taxation law implemented in 2005 that decreases corporate taxes from 40% to the current 20%, resulted to the stated 100% increase in tax revenue by the year 2006.
FDI (Foreign Direct Investment) into Egypt has increased considerably in the past few years due to the recent economic liberalization measures taken by minister of investment Mahmoud Mohieddin, exceeding $6 billion in 2006. Egypt is slated to overcome South Africa as the highest earner of FDI on the African continent in 2007.
Although one of the main obstacles still facing the Egyptian economy is the trickle down of the wealth to the average population, many Egyptians criticize their government for higher prices of basic goods while their standards of living or purchasing power remains relatively stagnant. Often corruption is blamed by Egyptians as the major impediment of not feeling the benefits of the newly attained wealth. Although major reconstruction of the infrastructure in the country is promised by the government, with a large portion of the sum paid for the newly acquired 3rd mobile license ($3billion) by Etisalat, slated to be pumped into the country's railroad system after public outrage against the government for recent disasters that took place in 2006 claimed more than 100 lives.
The most well known examples of Egyptian companies that have expanded regionally and globally are the Orascom Group and Raya. The IT sector has been expanding rapidly in the past few years, with many new start-ups conducting outsourcing business to North America and Europe, operating with companies such as Microsoft, Oracle and other major corporations, as well as numerous SME's. Some of these companies are the Xceed Contact Center, Raya Contact Center, E Group Connections and C3 along with other start ups in that country. The sector has been stimulated by new Egyptian entrepreneurs trying to capitalize on their country's huge potential in the sector, as well as constant government encouragement.
Market Overview
At 78.8 million, Egypt is by far the largest Arab country by population. It sits in the heart of the Middle East and has a reasonably well-educated labor force. Egypt’s economy, traditionally associated with agriculture and particularly cotton, has become much more diversified than in the past. Its unmatched ancient monuments and spectacular coral reefs have made tourism its single largest foreign exchange earner. It is also a major oil and gas producer, with natural gas production increasing rapidly. The clothing and textile sector is the largest industrial employer and also a major foreign exchange earner. Other major industries include steel, cement, chemicals, pharmaceuticals, and light consumer goods. Agriculture, although shrinking as a percentage of GDP, still employs almost 30% of the population.
The U.S. is Egypt’s largest bilateral trading partner. Egypt is a significant importer of American agricultural commodities, machinery, and equipment. The U.S. is also the second largest investor in Egypt. , Roughly two-thirds of total U.S. investment is in the oil and gas sector, but also includes investment in areas such as consumer goods, pharmaceuticals, automobile production, and financial services. Given its strategic position in the region, Egypt continues to benefit from strong donor support. The U.S. Government has worked closely with Egypt on its economic reform program, and is its largest bilateral aid donor. U.S. non-military economic assistance to Egypt in FY 2006 was more than $490 million.
Since 2005 – due mainly to a new reformist government that was appointed in the summer of 2004 – the economy has improved considerably. The reformers have successfully floated the Egyptian pound, eliminated the foreign exchange shortages along with the black market, reduced tariffs and simplified the tariff structure by cutting the number of rates and categories, moved to reform the financial sector, introduced measures in Parliament to simplify the tax structure while lowering rates, reduced the amount of red tape necessary to conduct business, etc. The economy is now growing at a 6% rate and the new measures have inspired a wave of enthusiasm in the business community.
The reforming spirit has been supported by other, tangible economic considerations. Tourism revenues are on the rise and Egypt began significant natural gas exports in 2005 and is expected to eventually reach the level of the sixth largest gas exporter worldwide. Suez Canal revenues are also up smartly and various trade agreements with the European Union and regional countries such as the Free Trade Agreement with Turkey and the establishment of Qualified Industrial Zones (QIZs) allowing duty-free exports to the United States augur well for strong export growth.
Market Challenges
Although the reformers have developed considerable momentum, red tape remains a business impediment in Egypt, including a multiplicity of regulations and regulatory agencies, delays in clearing goods through customs, arbitrary decision-making, high market entry transaction costs, and a generally unresponsive commercial court system.
Market Opportunities
U.S. firms have competed successfully for major infrastructure projects in Egypt. More projects are on the way, some of which have regional impact, such as airports, telecommunications, TV broadcasting, and port projects. The petroleum, power generation and transmission, and telecommunications/information-technology sectors represent the most promising sectors in Egypt. Tourism, as the largest earner of foreign exchange and employer of more than 10% of Egyptian workers, also offers strong possibilities. Expansions in the Red Sea resorts provide increasing opportunities for exporters of hotel equipment and environmental management services. Airports and other infrastructure being built to serve the new resorts also represent additional opportunities for U.S. exports and investment. Tourism along the Red Sea coast continues to be a big draw and the government is pushing development along the Mediterranean coast as well. These opportunities are attracting U.S. project management expertise and quality U.S. building systems and equipment.
