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Egypt is attracting FDI. But is that enough for growth?

Egypt aims to attract $10 billion in foreign direct investments annually in the next four years. Experts weigh the impact of investments on the country’s economy.

Egypt is attracting FDI. But is that enough for growth?
[Source photo: Anvita Gupta/Fast Company Middle East]

There is no denying that foreign direct investments (FDIs) have been one of the driving forces behind the UAE’s boom in the last decade. But has there been a similar trend in other countries in the MENA region? 

Egypt, which has gained significant momentum in developing cleantech and renewable energy projects, digital transformation, and governance prior to hosting the COP27 summit in November, has been offering attractive incentives for foreign investors.

Net FDI in Egypt grew by 183% in the first quarter of 2022 to reach $4.1 billion, compared to $1.4 billion in the same period of 2021, according to the Central bank of Egypt (CBE).

Its economy has demonstrated great performance, resilience, and the capacity to absorb shocks, according to Dr. Mohamed Maait, Minister of Finance, who recently confirmed that Egypt has increased its FDI attractiveness and has a significant potential to draw new capital. 

According to Sherif Kamel, professor of Management and Dean of The School of Business at The American University in Cairo, Egypt’s most-valued asset is human capital. “FDI in Egypt has the best utilization in developing this asset, besides stimulating domestic investments and enhancing physical capital and infrastructure to improve the production and competitiveness of different products and services.” 

“FDIs fast-forward the transfer of innovative technologies across various sectors with their implications on development and growth,” adds Kamel.

While adopting the open-door policy laws, FDI levels saw an upward trend in Egypt, only to decline during the Gulf War in 1990-1991, when it established the economic reform and structural adjustment program (ERSAP) that brought increased investment. 

“FDI can be an essential driver of economic growth for any country. Egypt remains the top recipient of FDI for the fifth year in 2020-2021, receiving $5.9 billion, representing 53% of FDI into North Africa,” says Sebastian Turner, Senior Manager, Economics & Sustainability at PwC Middle East. 

To keep up this status quo, Egypt hopes to draw $10 billion in FDI annually over the next four years.

EXPANDING EMPLOYMENT AND REDUCING POVERTY

There are two positive impacts of FDI—the inward FDI enhances the stock of physical and human capital, elevating microeconomic efficiency, and increasing consumption and capital stock investments due to increased income per capita boost economic growth. FDI creates new job opportunities, thereby expanding employment and reducing poverty.

“The main problem of FDI is that there is no guarantee of continuing in the future. No guarantee that dividends will be invested in the country. There’s a chance of capital outflow instead of inflow. Moreover, if FDI is concentrated in the petroleum sector, the benefits are non-inclusive,” says Heba Ghoneim, associate professor of Economics at The German University in Cairo. 

Foreign direct investment is a composite bundle of capital stocks, know-how, and technology that can play an essential role in economic growth. But has FDI enhanced growth in Egypt?

FDI inflows in Egypt have risen about 50% due to expansions in the pharmaceuticals, telecommunications, and gas industries.

According to the data provided by the CBE, in the first nine months of the last financial year, 2021-2022, net FDI increased to $7.3 billion compared to $4.8 billion in the previous financial year, 2021-2020. 

Commenting on whether Egypt’s economy takes full benefits from FDIs, Turner says, “While Egypt continues to receive the highest level of FDI in Africa, at 1.6% GDP, it lags behind the Arab world. Saudi Arabia enjoyed as high as 8.5% even in 2009, and the UAE enjoyed 5.5% in 2020 even during the pandemic.”

Further, he adds, “While FDI will benefit most of the economy of Egypt, it is not as important for driving the Egyptian economy as it is for the UAE.” 

Exports in Egypt account for a quarter of GDP. The quantitative analysis proves that FDI has a positive and highly significant effect on exports in the long run— a 1% increase in FDI leads to an approximately 1% increase in exports.

Experts say attracting FDI and focusing on its macroeconomic benefits are equally important.

“The government needs to work on both—attracting FDI that creates inclusive growth is an important means of adding to production, increasing employment, saving the environment, assisting in the spillover of technology, and contributing to sustainable development,” says Ghoneim.

TECHNOLOGY INNOVATION AND DIGITAL TRANSFORMATION

The positive effects of FDI come primarily from technology transfer,  resulting in increased productivity and efficiency in resource allocation. 

For Egypt, digital transformation can play an invaluable part in development, says Kamel. It has the potential to transform businesses regardless of industry or size and contribute to economic growth, job creation, human capital development, poverty, and social inequality reduction. “As the pace of digitalization accelerates, policymakers and business owners need to constantly innovate, adjust, be dynamic, and project future scenarios, trends, and business models to remain relevant, competitive, and agile in a rapidly changing global environment,” adds Kamel. 

According to experts, Egypt’s domestic market is large enough to attract foreign investors, especially in technology and transferring skills. 

Explaining the importance of digital technology in Egypt’s FDI, Ghoneim says, “COVID-19 highlighted the importance of digital technology. It is becoming part of all economic sectors. The digital improvement would expand FDI as it would be part of cost-effectiveness. Egypt is working hard to expand the ICT sector, and they took massive digitalization steps in the financial sector.”

According to Turner, the percentage of FDI into the IT services sector more than tripled from 1.7% in 2003 to 5.3% in 2020.

Explaining the effects and importance of digital technology on FDI, Kamel says it can help unleash Egypt’s private sector’s potential and improve its competitiveness by developing the digital capacities of MSMEs. 

“FDIs can support MSMEs integration into the formal economy, assist resilient businesses and industries, stimulate creativity and innovation, and enhance productivity. It can also help improve efficiency, digitalize government and public services, and offer a platform for inclusive and sustainable development,” Kamel adds. 

The significant determinants of technological benefits reaped from FDI include the macroeconomic, regulatory, and host-country technical absorptive capacity, but does the acceleration of digital transformation provide an opportunity for Egypt?

“For Egypt, digital transformation has the potential to facilitate access to new markets, accelerate the development of new products and services and foster innovative business models in agriculture, manufacturing, healthcare, finance, trade, retail, transportation, and logistics,” says Kamel. 

However, experts warn that the acceleration of digitalization could exacerbate the societal divide unless an inclusive development approach is formulated and adequately implemented. 

“It is up to policymakers to shape the digital transformation journey so that the impact is effective, sustainable, and scalable. It should consequently help transform the economy, improve lives and livelihoods, and realize inclusive development rather than exacerbate existing divides that go way beyond digital equity,” adds Kamel.

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