Egypt is set to receive $5 billion of investments from the Saudi Public Investment Fund as part of the first phase of a broader investment plan. The announcement was made following meetings between Prime Minister Mustafa Madbouli, Saudi Crown Prince Mohamed bin Salman, and senior Saudi officials in Riyadh on Monday.

Bin Salman praised the Egyptian authorities’ efforts to settle commercial disputes brought by Saudi investors, saying it would encourage more investments in the country.

With a balance of payment deficit and a fragile foreign exchange regime, Egypt needs to attract investments to guarantee foreign currency inflows and a sustainable dollar exchange rate.

As part of its ongoing efforts to attract investors, last week the minister of finance announced a raft of measures intended to speed up tax procedures and make life easier for businesses such as small and micro enterprises, entrepreneurs, and freelancers that generate annual revenues below LE15 million. The initiative also seeks to encourage informal businesses to transition to the formal economy.

“From an investment community perspective this is extremely good news. One of the toughest things about doing business in Egypt is the unpredictability of the tax regime,” said economist Mohamed Fouad. In the past, he explained, Egypt’s tax system was plagued with sudden changes, random tax inspections and arbitrary assessments.

While praising the measures as a step in the right direction in terms of rebuilding trust between the government and business community, Maha Rashied, economist at Dcode for Economic and Financial Consulting, cautioned that given the constant pressures businesses have faced in recent years they will be wary of promises that are not accompanied by concrete action.

She pointed out that the measures announced mainly focus on implementing existing policies. The speed and effectiveness of implementation will determine whether the measures achieve the stated objectives.

The measures are being trailed as the first phase of a broad tax reform strategy that will be unveiled over the coming months. According to Rashied, the strategy will include rationalising VAT reductions and exemptions, including the removal of 19 categories from the exemptions list. Other expected tax reforms will aim at resolving tax disputes, facilitating trade, and formalising swathes of the black economy.

There will be no tax cuts, Fouad says, but the reforms will remove obstacles which could lead to the expansion of the tax base.

“The need to broaden the tax base and create more fiscal space is one of Egypt’s commitments to the International Monetary Fund as part of its $8 billion Extended Fund Facility,” he explained. There is a pressing need to generate more income from taxes to enable Egypt to meet its international obligations.

Under the terms of the augmented deal with the IMF, Egypt is committed to increasing tax revenues by three per cent of GDP over the programme period.

“It is also urgent for Egypt to attract investments to cover its financing gap without reverting to more debt,” Fouad said.

For the moment, added Fouad, the financing gap is largely covered by portfolio investments, receipts from Ras Al-Hekma, remittances, the IMF tranches, and smaller inflows.

Egypt is preparing to offer the Ras Binas region on the Red Sea to local and international investors, and there are reports that Saudi investors are interested in investing in Ras Gamila in southern Sinai. Both schemes appear similar to the UAE’s $35 billion Ras Al-Hekma development deal, considered the largest FDI agreement in Egypt’s history. While some observers have criticised such development schemes, Fouad believes they are better than reverting to debt or portfolio investments.

“While such deals are useful in reducing debt and building reserves in the short term, it is important to understand their limitations in the medium to long term,” says Rashied.

Such investments should be accompanied by structural reforms that create a more conducive environment for the private sector, she said. Increasing economic activity and enhancing Egypt’s competitiveness are central to addressing Egypt’s chronic balance of payments deficit and avoiding increased debt.

Foreign direct investments are also preferred over portfolio investments, though the latter maybe more forthcoming.

According to Fouad, Egypt has attracted $39 billion in portfolio investments since the devaluation of the pound in March. The devaluation, accompanied by a six per cent interest rate increase in one shot, has made investment in Egyptian treasuries very lucrative.

Charlie Robertson, head of macro strategy at FIM Partners, an investment company focusing on emerging and frontier markets, attributes this figure to the fact that foreign portfolio investors move fast by default.

“Portfolio investors make investment decisions in a matter of days. Foreign direct investors take years because their commitment is for much longer,” said Robertson.

Egypt has a history with portfolio investments. Early in 2022, an estimated $20 billion in hot money left the country within weeks of the eruption of the Russian-Ukrainian war, contributing to Egypt’s worst dollar crunch in a generation.

Recently published economic indicators on the macro and micro level are encouraging. S&P Global’s Egypt Purchasing Managers’ Index (PMI), a gauge of private sector perceptions of market activity based on monthly surveys, inched up for the first time in three years, rising from 49.7 in July to 50.4 in August.

“A breakdown of the survey suggests that while domestic demand is still struggling, the external sector is benefiting from the weaker pound which has improved Egypt’s competitiveness. The new export orders component hit its highest level since the survey began in 2011,” says economic research group Capital Economics.

It added that the only blot was a climb in input and output prices as firms begin to feel the pinch of fuel and electricity price hikes, though it expects headline inflation to fall further over the coming months on the back of slower food inflation.

Inflation rose in August on the back of electricity and fuel price hikes, bucking a five-month downward trend. The overall decline, says Capital Economics, will pave the way for the Central Bank of Egypt to cut interest rates early next year.

Meanwhile, the Federal Reserve was poised to meet on 18 September to decide US interest rates. Observers believe rate cuts are in order.

“Interest rate cuts in the US make Egypt even more attractive because of the wider rate differential between them,” notes Robertson. He added that Egypt’s interest rates are expected to fall by 13 per cent by the end of 2025, and settle around 14 per cent.

* A version of this article appears in print in the 19 September, 2024 edition of Al-Ahram Weekly