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Accelerating Development: Maximizing the Role of the Private Sector

Egypt has been pursuing an economic reform program since 2016, which includes a special focus on structural reforms, along with a focus on public finances, monetary policy, and the social dimension. Additionally, the theme of structural reform aimed to create a more competitive investment environment and promote private investment, after the state assumed the greatest role in the economic environment during the period after the political and security turmoils between 2011 and 2013, which resulted in several economic imbalances, prompting private investment to be cautious and anticipative. 

Before the private sector could’ve regained its role in the economic environment, a series of global crises and shocks unfolded. Elaborating, the first of these was the coronavirus pandemic and its recovery shocks, which overshadowed the local economy. The state had no choice but to continue making public investments and implementing several national projects. This was done with the aim of maintaining economic growth and operating rates during that period, creating an investment climate that will become attractive to local and foreign private capital, and completing the requirements of creating a business environment to once again attract the private sector to play its part in the process of economic growth and development, thus enabling the move out of economic sectors successively, avoiding the impact of crowding.

The current period is witnessing the implementation of the second phase of the structural reform program amid unfavorable global economic conditions resulting from the consequences of the crisis in Ukraine. Adding further, the state announced a plan to deal with the economic crisis that enables it to achieve its development objectives, as well as have a degree of flexibility so that it can cope with local and global developments. The most important move announced by the state during the current period is the strengthening of the role of the private sector in economic activity. From this point, the article will address the performance indicators of the private sector in Egypt, as well as the state’s plan to strengthen its role in economic activity in the coming period. 

Private Sector Performance Indicators in Egypt      

The private sector is of great importance to the Egyptian economy, comprising about 3.741 million enterprises, 99.96 percent of the total number of enterprises. Furthermore, it employs around 12.583 million workers, 93.5 percent of the total number of employees, paying wages of about EGP 266.1 million at 74.2 percent, according to the data from the latest economic census in 2017/2018.

The Contribution of the Private Sector to the Gross Domestic Product (GDP)

According to data from the Ministry of Planning and Economic Development, the contribution of the private sector to the GDP has increased from 2016/2017 to 2020/2021, reaching 73.3 percent in 2020/2021, in comparison to 60 percent in China, 51 percent in Saudi Arabia, and 41.3 percent in Turkey. 

Figure (1): Evolution of the Private Sector’s Contribution to GDP

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This increase can be attributed to the success of the economic reform program, which in 2016, started to encourage the private sector in increasing their contribution to the state’s GDP. Moreover, this was done through monetary reforms aimed at containing inflation rates and increasing the efficiency of the performance of the foreign monetary exchange, improving the competitiveness of the Egyptian economy, and increasing the flow of foreign exchange from exports, tourism, and foreign direct investment. Alongside the monetary reforms, structural reforms came through the promulgation of Investment Law 72 of 2017, the automation of services of the public investment authority, the electronic activation of some services, the launch of an investment map, working to overcome the obstacles faced by the investors, and resolving investment disputes through the Ministerial Committee for Settling Investment Disputes. Additionally, many investor services centers were opened in governorates, reaching a total number of 12 investor services centers In Cairo (headquarters), 10 Ramadan, 6 October, Alexandria, Gamasa, Port Said, Sharm El-Sheikh, Qena, Sohag, Assiut, Minya, and Ismailia. This is all in addition to the development of free zones, which reached 9 public free zones; work began in Alexandria, Nasr City, Port Said, Ismailia, Damietta, Suez, Shebeen Al-Kom in Monoufiya, Qift in Qena, and the media area in 6 October. The state also adopted an integrated plan to repair infrastructure and build roads and facilities, attracting and facilitating investments. 

Since the coronavirus pandemic invaded the world during the second half of 2019/2020, the state continued its efforts in economic reform and creating a business environment. This was done by the Central Bank of Egypt adopting an expanding monetary policy that decreases interest, to decrease investment costs. Adding to this, the bank delayed credit receivables for individuals or small or medium enterprises for a period of 6 months. Elaborating, it’s without applying delayed repayment fines to provide liquidity for enterprises, ensure continuity of operation, decreasing chances of investment faltering, in addition to the Central Bank’s initiatives to support most affected sectors like tourism, industry, agriculture, and contracting. The small, medium, and micro-enterprises development act also includes tax advantages and incentives. 

Size of Private Investment

The relationship between the public and private sectors has witnessed a number of different stages. Explaining further, during the early stages of the new millennium, the investment levels of both sectors converged, then the investment rates of the private sector gradually increased to lead economic activity from 2005/2006 till 2015/2016. With the state adopting the economic reform program, it has poured more public investment into infrastructure projects as well as a number of major national projects promoting sustainable economic development. Thus, public investments increased in comparison to private ones during the years 2016/2017 and 2017/2018, yet private investment significantly rose again in  2018/2019, then declined again as a result of the coronavirus pandemic. As a result, the state intervened and increased public investments again to combat the crisis and compensate for the decline in private investments. 

Figure (2): Stages of Evolution of the Relationship between Public and Private Sector Investment in 20 Years

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Regarding the sectoral distribution of private investments carried out during 2020/2021, they were concentrated on promising, rapid-growing activities that are capable of adapting to successive external economic conflicts. The private sector contributed the largest share to investments in the wholesale and retail sector by 95 percent versus 5 percent of public investment, followed by the hotel and restaurant sector by 93 percent of total investments, then the natural gas sector, and the real estate sector. In this context, it can be noticed that these sectors are linked to the development projects implemented by the state. Elaborating, as the state tends to direct its efforts towards projects related to infrastructure, roads, bridges, ports, building new cities, expanding natural gas exploration, and Egypt’s endeavor to become a regional energy hub, private investments were thus concentrated in the wholesale and retail sector, restaurants and hotels, natural gas, and the real estate sector. 

Figure (3): Share of Public and Private Investments in Total Investments 2020/2021

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Number of New Companies Established

Data from the General Authority for Investments Main Office indicates that there’s an increasing trend in the number of new companies established since 2013/2014 and until 2020/2021, except for 2010/2019, which was affected by the partial interruption of economic activity due to the coronavirus pandemic. The number of new companies reached 28,500 companies with capital of up to EGP 84 billion in 2020/2021.

Figure (4): New Companies Established 

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Work and Employment Opportunities 

Labor market data in general indicate an increase in unemployment rates during periods of partial closure as a result of the coronavirus pandemic in the second quarter of 2020, and then the rate tended to decline and stabilize as economic activity restarted.

Figure (5): Unemployment rate

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According to 2017/2018 economic census data, the proportion of private sector employees is estimated at about 93.4 percent compared to 6.6 percent in the public sector and the public business sector. Wholesale and retail trade accounts for 39.6 percent of private sector workers, followed by manufacturing at 24.1 percent.

According to the Barometer Business Index, which is based on a sample of 121 companies from the private sector, the employment rate in big companies was majorly affected during the coronavirus pandemic in the second quarter of 2021, significantly more than in small or medium enterprises. As for small or medium enterprises, employment rates were steep and continuous, reflecting the reduced resilience to external shocks. The Barometer benchmark measures a simple average of sample companies’ conditions and takes larger, lower, or equal values to the neutral level (50 points). The following figure shows how much the employment index has changed by points for large, small, and medium-sized companies.

Figure (6): Amount of Change in the Employment Index of Large, Small, and Medium Enterprises

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Obstacles Facing the Private Sector and Dealing With Them

The successive global crises have reflected on the local economic conditions, which resulted in the private sector facing several challenges that represented an obstacle to strengthening their role in the national economy, these included the fiscal and monetary challenges resulting from the coronavirus pandemic. During that period, the state adopted a number of incentive monetary and fiscal policies to support the private sector. At the monetary policy level, the Central Bank took many actions to encourage production sectors, including reducing return prices to 8 percent decreasing Central Bank initiatives, delaying all credit receivables for clients from medium or small-sized companies or enterprises and individuals, providing necessary financing for importing strategic goods and production supplies, as well as other supportive measures. At the level of fiscal policies, the prices of gas and electricity for the industrial sector were reduced, while also extending the deadline for the delivery of tax returns. Additionally, the state will implement a national project for modernizing and mechanizing the tax administration system aiming to simplify, mechanize, and standardize tax procedures. This aids in facilitating financiers, increasing tax earnings, achieving tax justice, and integrating the informal economy with the formal one. Moreover, the state is also working on mechanizing and developing the Egyptian customs system, reducing customs clearance time. To achieve this, a new customs act has been promulgated, the technological infrastructure was developed, and the Single Window project was circulated, which it launched in March 2019 in Cairo Airport, in May 2019 in the West Port Said Port, in June 2020 in Ain Al-Sokhna Port, in July 2020 in East Port Said Port, and its plot operation in Alexandria Port began in November 2020. This was reflected in the reduction in the customs clearance time in all Egyptian ports to around 5.2 days on average in November 2020, in comparison to an average of 6.5 days in January 2020, and around 28 days in 2018. The development of the customs system facilitates procedures for customers, as well as increasing oversight, which is reflected in the facilitation of the legal trade movement, the attraction of more investments, increasing the state’s public treasury, and protecting the local economy from harmful practices. 

On the other hand, the Central Bank of Egypt’s decision to discontinue the handling of collection documents in the execution of all import operations and to only work with documentary approvals, starting March 2022, was among the challenges faced by the private sector. Adding further, this decision was taken aiming to governorate the import process as well as activate the pre-registration system for shipments. However, this decision led to the objection of the business community and the demand that it be canceled due to its negative impact on local production, especially in light of the turmoil in the foreign exchange market. In response to those demands, President Abdel-Fattah Al-Sisi issued a directive that excludes production supplies and raw materials from the procedures that were recently applied to the import process by returning the old system through collection documents. 

On another level, as the role of the public sector in economic activity expanded, especially during the period of internal turmoil in 2011/2013 and what followed it during the period of rebuilding the country’s infrastructure and the period of the coronavirus pandemic and its economic repercussions, the private sector suffered from the impact of the crowding with the public sector. The state thus realized the importance of partial or full withdrawal from a large number of economic sectors after they paved the way for the private sector to play its natural role in the productive process. Therefore, the state announced the State Ownership Policy and the Initial Offering Program, which have been announced since 2018, and about 4.5 percent of the Eastern Company’s shares were released in March 2019. Then the program witnessed a relative calm for about two years due to the economy being affected by the coronavirus pandemic. With the start of the recovery phase and the economic life returning, the state announced a strong return to work in the Initial Public Offering Program, where the E-Finance company, the Abu Qir Fertilizer Company, and the Ghazl Al-Mahalla SC Company were offered. 

The Future Plan to Strengthen the Role of the Private Sector

During the current phase, the state aims to strengthen the role of the national private sector in economic activity, so that its contribution can reach 65 percent of the total investments made in three years, and so that it also can be able to create more job opportunities, increase economic growth rate, participate in the establishment of infrastructure, and international competition. The state’s steps in this regard can be represented in three main themes, improving the business climate, launching a variety of incentives, and opening direct communication channels with the private sector. 

Improving the Business Climate

As a part of the state’s efforts to improve the business climate, the State Ownership Policy was announced. Elaborating, the state entirely exits the economic activities identified within it. It also identifies the sectors that are experiencing a decrease or stabilization in the government investments directed to them and the sectors in which the state will remain alongside the private sector throughout the next 10 years, with a periodic review of the sectors in which the state is involved. 

It has also been announced that the private sector may participate in a number of the state’s assets, with around $10 billion a year for four years in a number of promising sectors such as new and renewable energy projects, real estate assets in new cities, telecommunications sector, education, and desalination. Efforts to improve the business climate also include the development of the land acquisition system for industrial enterprises through switching to the usufruct system for industrial lands and pricing the land according to the value of facilities. This is in addition to formulating an integrated national intellectual property strategy, improving the competitive climate, facilitating licensing and approving procedures, automating tax and licensing procedures, and developing Egypt’s investment map.

Launching a Variety of Incentives

As for the variety of incentives announced to strengthen the contribution of the local and foreign private sector, it includes the incentives regarding the investment act, including 50 percent off investment costs for the sector (A), which includes the geographical areas most in need of development, and 30 percent off investment costs for the sector (B), which includes the rest of the Republic. Moreover, there are also green incentives for green hydrogen projects, investment incentives in the health sector, incentives in new cities, and the gold license known as the “one-time approval” that is granted as a single approval for establishing, operating, and managing a project in some leading fields, such as green hydrogen, electrical vehicle industry, and infrastructure. 

Opening Channels of Direct Communication with the Private Sector

With regard to opening channels of direct communication with the private sector, it includes the establishment of a unit to solve investors’ problems in the Council of Ministers, which is responsible for finishing approvals from ministries and other parties involved in investment projects as well as finishing various licenses, and for quickly resolving investor problems.

Last but not least, it’s clear that the role of the private sector in the economic climate varied across different periods, affected by local and global conditions. It’s also clear that the state has paid great attention to strengthening the role and contribution of the private sector across different periods. Explaining further, a focus on structural reforms was singled out for the economic reform program in 2016, and the state also supported the hardest-hit sectors during the coronavirus pandemic. The State’s plan to deal with the conflict crisis in Ukraine included a special focus on strengthening the role of the private sector. Additionally, The Platform for National Dialogue also included representatives of the private sector to include them in national action priorities and contribute to presenting ideas and perspectives for the future. The state’s policies are expected to bear fruit in the coming period in enhancing the role and contribution of the private sector, with emphasis on the full flexibility of declared policies to adapt to local and global developments and align with emerging demands arising from implementation challenges.

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