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Thursday, 14 December 2017

Investment law: A final comment

Ziad Bahaa-Eldin , Wednesday 10 May 2017
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Views: 4344

I didn’t intend to speak of the investment law again, having already written about it several times, first to criticize the changes made in March 2015, on the eve of the Sharm al-Sheikh conference, and later to express reservations about the draft law approved last week by parliament. But I’m compelled to comment, not only because of the content of the revised law, but because the chaotic debate about it in recent weeks exposes a severe confusion in economic policy decisions.

First, the content. Without delving too far into details, four aspects of the law give me pause. One, it reinstates the system of tax breaks that we discarded in 2005 because it opens the door to manipulation and corruption, introduces market distortions, and denies the country tax revenues that we desperately need to face development challenges.

Two, it further complicates the system of investment licensing and land allocation due to overlapping authorities between various ministries and agencies.

Three, it turns the General Authority for Investment (GAFI) into a regulatory agency subordinate to the Ministry of Investment, where before it was an independent agency dedicated solely to promoting and facilitating investment. Four, the major impediments to investment flows into Egypt are not the kind that can be addressed by the investment law. They concern other laws and policies, primarily the state’s opaque economic program, a sluggish court system, and excessive intervention by state civilian and military agencies in the economy that crowds out the private sector in matters unrelated to national security.

Based on press coverage, the law approved by parliament a few days ago does not address any of these issues. In fact, it introduces additional complications to the tax status of various economic fields and geographic areas, the future of the special free zones, and the conditions for employing foreign workers.

So while I believe the new tax incentives may bring in more foreign investment in the short term, I fear this will come at the expense of public resources and tax justice.

Nevertheless, differences of opinion are normal, in fact necessary, and theoretically ought to be resolved by the majority vote of parliament—provided the debate is conducted transparently and its terms are clearly defined. Herein lies the rub, for discussion in recent weeks has been anything but transparent and clear.

GAFI should be commended for putting the draft law up for public discussion several months ago and soliciting observations from concerned bodies. But as the date of the final parliamentary debate approached, the waters were muddied by conflicting interventions from various parties, exposing confusion at the highest levels of economic decision-making circles. The disarray reached its peak when, according to media reports, five ministries objected to the final draft law submitted to parliament, claiming they hadn’t seen or approved it.

This is extremely worrying, demonstrating the absence of a unifying economic vision to facilitate coordination among ministries and ensure collaboration and complementarity. While internal conflicts are normal, they should be resolved within the Cabinet or its sub-ministerial economic group. What is not typical is for them to surface at this late date and send ministers racing to the parliament to salvage what they could and make last-minute tweaks. This raises serious concerns about the country’s overall economic policy.

In any case, the law has been issued and its executive regulations will soon follow. I hope I’m wrong in my skepticism about its longer term effect. More importantly, events of recent weeks and the confusion that surrounded the parliamentary discussions of the law offer a chance to reconsider economic decision making in Egypt. The episode should encourage the state, its agencies, and ministries to adopt a coordinated, uniform policy, whether in investment or in other matters.

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