The main index of the Egyptian stock exchange saw its sharpest rise in two years on Monday, driven by domestic institutions' purchases after the government suspended a capital gains tax.

The benchmark EGX30 index climbed 6.5 percent to 8,798 points, up from its year low of 8,260 points earlier in the month. Daily stock turnover on Monday reached LE785.6 million.

“The suspension of the capital gains tax puts Egypt’s market back in competition with regional markets,” Wael Enaba, board member at the Egyptian Association for Securities, told Ahram Online.

In July 2014, the government imposed a bourse tax on investors as part of its efforts to overhaul an economy battered by years of political turmoil.

The tax comprised of a capital gains component and a stock dividend duty.

Last month the executive regulations implementing the taxes were issued, causing an immediate drop in stock turnover and value. Egyptian investors also launched a legal challenge to the capital gains tax.

Egyptian stocks suffered a further blow last week when Morgan Stanley removed Telecom Egypt from the MSCI index, jeopardising the survival of the Egyptian bourse in the international index.

On Monday, the cabinet decided to postpone the implementation of the capital gains tax for two years, and as a result the market was buoyant.

Monday's session saw domestic institutions contribute half of all trading, despite the usual dominance of Egyptian individuals.

Domestic institutions were net buyers to the tune of LE74 million.

The Egyptian market is in competition with regional markets for international investors who contributed 70 percent of trades to the country’s bourse five years ago, Enaba said.

Foreign investors currently contribute around a quarter of all trading.

Enaba added that the decision to suspend the tax would serve to lure back foreign investors and raise the country’s foreign reserves, which stood at $20.5 billion in April.

The suspension also comes at a cost; the loss in state revenue could amount to between LE400 and LE500 million, according to Enaba.

According to Enaba, the government had already levied LE333 million in revenues from the tax from July, when it was introduced, until December.

Officials from the Ministry of Finance were unable to confirm the fate of the collected taxes.

The introduction of the capital gains tax is part of a government plan to reform the state budget and trim a ballooning deficit.

To this end, the government cut fuel subsidies and introduced a new tax on properties, while a value added tax is planned in the next fiscal year due this July.