After the UAE and IMF provided Egypt with economic salvation at the start of this year, Egypt’s then finance minister Mohamed Maait announced a new target. The country will support the private sector to send its share of GDP to 70% – up from 40% at present. “That's going to be a tough task,” says Pieter du Preez, senior economist for Oxford Economics Africa.
One of the most obvious ways Egypt can raise the private sector’s share of GDP is to rehabilitate its stalled privatisation programme – and this is exactly what the country is trying to do. In 2023, the government declared it would sell full or partial stakes in 32 state-owned firms, and at the end of that year announced it raised $5.6 billion from divesting from 14 of those firms. Several were firms that have been on the privatisation list for years – but better late than never.
Although the authorities deserve praise for breathing new life into the privatisation programme, the verdict from Egypt’s business sector is that – with a few exceptions – most of the assets sold thus far have been the less attractive, poorer performing ones. In a recent policy analysis, Ben Fishman, an analyst at the Washington Institute for Near East Policy, said that in theory the devaluation should have accelerated privatisation. After all, the assets cost far less in dollar terms than they did at the start of the year. Instead, says Fishman, “due-diligence concerns over the operations of state-owned companies slowed the pace of sales.”
Time to dismantle SOEs
The most valuable state-owned companies remain largely unsold. This includes banks and insurance firms. The Italian bank Intesa Sanpaolo appears to be in the advanced stages of purchasing the remaining 20% of Bank of Alexandria that it does not already own. But then there is Banque du Caire, which has been scheduled on and off for privatisation for more than a decade.
At the root of the due diligence problem is a lack of clarity around many of Egypt’s full and partially state-owned enterprises (SOEs). This includes the extent of government ownership and the financial position of those enterprises. “The IMF has said before that what Egypt needs is detailed reporting and full clarity on the actual extent to which the government is involved in different SOEs,” says du Preez.
The IMF has said before that what Egypt needs is detailed reporting and full clarity on the actual extent to which the government is involved in different SOEs
The IMF is not the only one calling for clarity. In a private sector diagnostic for Egypt, the IFC identified that “the multitude of governing laws and ownership frameworks under which they [SOEs] operate makes their identification difficult and complex.”
The kind of transparency that would allow identification and due diligence for SOEs is something that the government has said it plans to provide. But the timeline for this transparency remains unclear. International and domestic investors say they have a fair idea of which assets are performing and which are not. But there are many examples of other African states publishing a detailed breakdown of SOE enterprises that reveal some are doing far worse than anticipated. Investors will want to do far more than kick the tyres – they will need to see under the hood.
Breaking down bureaucracy
On the plus side, there are parts of the economy not dominated by either SOEs or the military that simply need the authorities to cut away red tape and break down bureaucracy. Nor is there any debate about the kinds of private sector-related reforms that Egypt needs to enact. The regulatory barriers to market entry are too onerous. It takes too long to obtain permits and the licensing regime is too complex.
OECD economist and policy analyst Ania Thiemann points out that the industrial sector is governed by seven different laws, 15 legislative amendments and several presidential decrees. There are at least three different ministries directly involved in granting industrial licences, and often even more.
Investors and business executives complain about long waits and paperwork at port and customs. They want to see the country’s competition policy framework enhanced. Labour markets, meanwhile, are too rigid. Labour taxation is too high and female participation too low. A new OECD study on Egypt published this year notes that female employment is less than 13%, and suggests expanding childcare facilities.
Once again, to the government’s credit, it is taking steps. For example, the National Strategy for Industrial Development that runs until 2026-27 is designed to move Egypt up the value chain by focusing on priority industrial sectors where the country has a manufacturing base and competitive advantages. A national single window, meanwhile, will improve customs procedures. The problem, as always in emerging markets, is that announcing strategies and frameworks is one thing. Ensuring their implementation has meaningful effects is quite another.
A level playing field
There is a factor that might help ensure this latest attempt at private sector support is more serious than its predecessors – outside pressure. The gulf states have long been key providers of financial support – but they now demand credible reforms in return. The UAE’s $35 billion deal would not have happened if the emirates did not believe that Egypt was serious about currency reform, macro stability and other policy changes. Similarly, for Egypt to attract foreign direct investment (FDI) from across the region, it needs to ensure there will be a level playing field.
Saudi Arabia has made it clear that it now prefers to support Egypt as an investor – not a donor. In the past, Saudi investors have not found Egypt’s playing field sufficiently smooth and this issue has appeared at the diplomatic level. In October, Saudi Crown Prince Mohammed bin Salman met Egypt’s President Abdel Fattah el-Sisi and signed an agreement to encourage mutual investments. Egypt is hoping for billions in investment from Saudi’s sovereign wealth fund, but has had to set up a unit dedicated to resolving complaints from previous Saudi investors in Egypt.
Egypt’s prime minister, Mostafa Madbouly, said recently that of the 90 or so “problems” facing Saudi investors in Egypt there were only 14 left to solve. It is possible that resolving these issues only benefits Saudi capital, but it seems more likely that it helps drive a cultural shift in how Egypt treats foreign investors.
For an economy slowed down by red tape and state ownership, Egypt’s potential is clearly still visible to the global investment community
Tourism remains the most attractive sector for FDI. The UAE has its Ras El Hekma project. Saudi Arabia is reportedly looking at investing in a smaller tourism project – Ras Gamila – on the Red Sea coast. But Egypt is more than just tourism. Even during the recent economic volatility, investment into Egypt’s energy sector rolled on. Danish and Norwegian firms are investing in Egyptian wind, Japanese and UAE firms in solar projects. A stable economic backdrop and streamlined permitting would only make the sector more attractive.
Egypt has a thriving pharmaceutical industry, growing rapidly thanks to government efforts to provide universal healthcare to a population of over 100 million. In September, AstraZeneca announced a $50 million investment to expand its production facilities in the country. American pharma producer Abbott said in June it was entering a strategic partnership with Egypt’s
Gypto Pharma to make painkillers. The healthcare sector as a whole is ripe for FDI, with rising incomes and medical tourism set to drive growth.
BMI analysts said the IT sector is primed for expansion built on “foundational investments that have flowed into submarine cables, domestic data networks, data centres and cloud regions” over the last few years. They point to Huawei’s launch in April this year of the first hyperscale public cloud platform with hosted services in Egypt. Media reports in November suggest that Chinese electric vehicle (EV) makers BAIC Group and Zeekr are planning to set up production in Egypt. This follows an announcement from Egypt’s GV Auto in May that it will partner with China’s FAW Group to produce EVs for the local market.
For an economy slowed down by red tape and state ownership, Egypt’s potential is clearly still visible to the global investment community. Imagine what could happen if real reform took root.