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Saturday, 23 September 2017

After the investment law

Ziad Bahaa-Eldin , Wednesday 7 Jun 2017
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Views: 2526

Although I’ve often expressed my reservations about the draft investment law over the past year, it was necessary that the law is enacted, as it was last Thursday, to end the long-standing uncertainty that has gravely damaged the investment climate. What’s important now is to close this chapter that has consumed too much time and effort and turn our attention to the real obstacles to investment, which are bound up with the general environment in which both Egyptian and foreign investors act. The following issues are especially worthy of attention.

First, is the need to resolve the ambiguity in the state’s economic direction: the official discourse favors and promotes private investment, but in reality the state’s military and civilian agencies have claimed a greater role in the economy, even in fields of no special strategic importance.

Second, the cost of financing—the interest rate— is so high it deters local investors from establishing new enterprises or expanding existing ones. It also leads depositors to put their money in savings vehicles that yield high, safe returns, instead of gambling on investment enterprises. While I understand that increasing interest rates are meant to combat inflation, spurring investment and employment should take priority. Moreover, many economists have expressed their concern that raising interest rates may not curb inflation, noting that bringing down prices requires structural reforms in competitive, productive, and distributional mechanisms, not increasing the financing costs.

Third, we should reconsider the policy of directing state resources to national megaprojects. Some of these have a clear, concrete impact, but others are of uncertain value and are not a priority. This increases stress on the public treasury and siphons off limited resources that could be directed to projects that bring sustainable socioeconomic development.

Fourth, the direct and indirect burden on the investment sector is growing, seen not only in the ever-increasing cost of production inputs, but also in unspecified, unofficial costs, like “encouragement” to donate to sovereign funds or vague fees levied on some economic activities. This harms the investment climate: though serious investors can adapt to high costs as long as they are known and have a legal base, they can’t acclimate to an ongoing drain on resources for ill-defined, undeclared fees.

Fifth, the legal status of various people subjected to asset freezes, travel bans, or other precautionary measures in financial crimes remains ambiguous even many years after the cases were first opened. This undermines investors’ confidence in the judicial system and its independence and gives the impression that the law is up for negotiation. Such cases must be closed—with either convictions or acquittals on fair legal grounds—and the page turned.

Sixth, there is an ever-widening gap between economic and fiscal reforms to which the state aspires and the declining political climate, seen in laws and regulations that curb freedom, whether in the media, civic, party, or other spheres. This stands in opposition to the law and constitution, as well as people’s aspirations for a free, fair society. Moreover, it is a genuine obstacle to investment and economic development because today’s investors, who find promising opportunities in every country in the world, look not only for cheap labor, natural resources, and tax breaks as they did decades ago; now they also care about political stability, social peace, and respect for the law and justice, seeing these as significant indicators of their ability to make economic returns and the state’s commitment to pursuing promised reforms.

These are not our only investment problems and they aren’t simple ones either, but we must recognize them in order to change the policies that produced them. This can’t be done solely through an investment law or other specific laws. It requires a holistic review of investment policies and a broad national conversation about the kind of economic growth we want to see.

***

The adoption of the investment law coincided with the appointment of a new chair of the General Authority for Investment (GAFI), and I’d like to take this opportunity to salute the outgoing chair, Mohamed Khodeir. Despite our differences of opinion, he expended great effort to advance GAFI and bring the new law to light. Congratulations are also due to my friend and former colleague, Mona Zawbaa, the new GAFI chair, the unknown soldier behind many regulatory reforms that helped improve Egypt’s ranking on global investment lists. I’m confident she will work to develop GAFI and its capacity to support investors.

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