International Business Environment
Over the past years, Egypt’s policies have always been associated with its geo-strategic determinants, influenced by geographical and historical facts. Until recently, it was characterised by the relative social political stability. For instance, the geographical location of Egypt has damned the nation into relying almost entirely on the River Nile for water.
This over dependence prompts the country to establish stable and positive relationships with countries, from which Nile originates and passes. History teaches that a majority of invaders, traders, came to Egypt through the northeast and, thus, often proceeded further to the East to carry on with their occupation. Economically, Egypt has been striving towards the opening of its business environment to international trade and investment. However, just like most of its Arabian neighbours, their non-tariff related barriers have increasingly blocked the freedom of international trade. Though the investment sector has shown considerable amounts of stability, the flows have intriguingly taken a dip, following challenging political and economic issues. Additionally, the Egyptian central bank has shown its dominance through occasional imposition of policy controls on capital investment and transfers.
Indeed, the state dominant financial system has undergone strenuous episodes with undesirable outcomes from the current global financial shocks, exacerbated through domestic turbulence. The paper’s main objective is to analyse Egypt’s past, present and future international business environment. It, therefore, conducts an intensive exploration of the country, using three broad areas: overview, key future trends, and trend related scenarios. Egypt, formally known as the A.R.E, is an Arabic country that straddles across two continents: the majorly within Northern Africa with the Sinai Peninsula bridging Southern Asia.
The country covers a physical area of approximately 1,010,000 km2 or 390,000 Miles2. Egypt borders on Sudan to the South, the Mediterranean Sea to the North, Libya to the West, the Red Sea towards the East, and Israel to the North East. The country is not only Africa’s most populous country, but also ranks as world’s number 15 in the heavily populated economies. This considerable percentage of Egypt’s population, over 80 million, resides along the banks of the River Nile. This area covers approximately 40,000 km2 that mainly comprises of agricultural farmlands (ADB, 2009). The rest of the Sahara region, mainly covered by the Saharan Desert, remains under sparse inhabitation.
Close to half of the country’s total population can be found in urban areas. These are majorly spread across the country’s Nile Delta in major towns and cities, such as Cairo, Alexandria among others. It is important to note that the country carries it as one of the oldest historical features than any given modern nation. This follows the fact that Egypt has been continuously under human activity as early as 10,000BCE. For instance, the men, responsible for some of the historical features, such as the great sphinx and Giza pyramids, displayed great ancient architectural techniques (ADB, 2009).
Such traces of ancient civilisation reveal just how technologically advanced the Egyptians of past periods had been. Other old ruins and archaeological sites, such as those in Memphis, Kanak, Thebes, and the Valley of Kings on the outskirts of Luxor present the significant areas of concentration for historical studies and popular cultures. Indeed, the country’s rich endowment in other cultural sceneries, such as the historically magnificent Red Sea, has made the tourism sector an important part of the Egyptian Economy. Currently, the sector employs close to 12 percent of the country’s total workforce (Kheir-El-Din, 2008). The Egyptian economical situation stands out as one of the Middle East most diversified cases. Indeed, the presence of major sectors, such as manufacturing and services industries, agriculture, tourism and mining, offer an almost equal production situation.
Egypt, with a current GDP of 229 billion USD, has the status of a middle-income economy. This follows its significantly sound cultural, military and political influence in the Arab and Muslim word. The key drivers of the Egyptian economy lie in agriculture, oil, and natural gas exports, and tourism and media industries (Kheir-El-Din, 2008). The country also happens to enjoy financial remittances from over 3 million Egyptians abroad. Countries and regions preferred include the Persian Gulf, Saudi Arabia, and Europe among others.
Furthermore, the presence of the manmade Aswan high dam and, thus, LakeNasser turned the River Nile into being more useful in terms of agriculture and ecology. Indeed, the rapid group of population, following the creation of arable land, has lead to the overdependent resource.. Presently, the country is on the brink of facing the dangers of an overly exploited natural resource (water), which might stress the emerging economy (Reed & Kern, 2012). The tourism sector happens to be one of the major revenue earners of the Egyptian economy.
However, the sector is currently facing a lot of vulnerability, following a number of manmade and natural shocks as follows. First, the country is highly vulnerable to foreign terrorist attacks, such as the 9/11 Luxor attacks. Secondly, the country is located near a highly radical and volatile Middle Eastern environment, such as the Gaza, Libya, Iraq, and Egyptian unrest. Lastly, the persistent effects of the current global economic crunch happen to trickle down to the weakest part of the economy (ADB, 2009). The above factors are just some of the reasons that explain the uncertainty that blankets Egypt as an exemplary tourist destination.
Thus, for instance, the end of the historical rift between Israel and Palestine would result from the sector to the greater income generation. Following drops in local and international terrorism activities and the Gulf War, the sector has begun to pick up and is currently experiencing a constant amount of increased income. Key to note is the fact that the ’05-’08 period, where the number of individuals arriving in the country as tourists increased by over four million (Sharp, 2011). The amount of revenue, collected from tourist activities during the same period also increased from 6 to over 11 billion US dollars. Arguably, the Egyptian tourism sector is dominantly run by the private sector. The government, on its part, generously invests in the improvement of both physical and communications infrastructure in a bid to attract more revenue collection.
Thus, the country has been one of the major beneficiaries of the US foreign aid since the late 70’s. With an average annual fund disbursement of over 2 billion US dollars, Egypt stands out as America’s third donor recipient, following the US Gulf War against Iraq (GF, 2012). Its major revenue channels, however, continues to flow from foreign tourism and taxation from the Marine traffic that uses the Suez Canal. Approximately 3 million Egyptians that stay and work abroad have also had their share of contribution to the economy. They do so through occasional and active financial remittances to their families and friends, back at home.
Thus, they are responsible for the annual revenue of over USD 7billion in terms of foreign to domestic remittances. They also represent the amount of government’s export and distribution of human capital and investmnt (Natsios, 2012). Egypt as a country enjoys a further endowment of activities in mining and energy sector. This follows the presence of heavy natural gas, oil, and coal, and hydroelectric power production capacities. Indeed, the country has, within its physical boundaries, enviable amounts of fuel deposits. Coal in the North East of Sinai, for instance, is mined at quantities over 600,000 tonnes per year.
Oil and natural gas, on the other hand, are found in the Western regions of the Saharan Desert, Nile Delta, and the SuezGulf region. The Egyptian gas deposits, estimated as being over 1,900 cubic kilometres, are exported to many foreign trade partners (Baroud, June, 2012). The economic situations that define Foreign Direct Investment (FDI), thus, have begun to improve along with trend. This follows a long period of stagnation before taking off from the government’s adoption of liberal and modern economic policies. The above can also be attributed to increased revenue streams from tourism and the existence of an effective Egyptian stock market.
Evidently, the IMF, in its most recent global annual report, ranked the nation as one of the notable, among many, countries, to have effectively undertaken tremendous advances in economic reforms. Some of the major reforms that the new government structure has undertaken, for instance, include the significant slash on trade tariffs, and custom duties on imported goods (Barkho, 2007). Furthermore, the newly implemented 2005 tax laws significantly reduced the cost of doing business in Egypt to a half of what had prevailed. This resulted in a hundred percent increase in government tax returns in the following year. Additionally, foreign direct investment into the country has risen significantly over the past decade.
This reveals a USD6 billion worth of increased investments in 2006. The then investment minister, Mahmud Mohieddin, has headed this desirable change, using privatisation and liberalisation measures. Though the country’s private industry investments represented only 47 percent of the total ventures in the period 03/04, they had promptly increased them to approximately 65 percent in 07/08 (Fahmy, 2012). This move reflects the Egyptian government’s commitment towards the facilitation of private industry participation in local business and entrepreneurship. Current individual business entrepreneurship and government-private business partnership also act as some of the Egyptian governments top most priorities.
This is because the government has taken up the role of encouraging private companies into investing in non-traditional and untried areas. The traditionally alien investment areas include financial institutions and infrastructural development. Until recently, foreign firms, investing in Egypt, concentrated only in a few economic areas. They include agricultural, oil mining, and gas processing (Economist, 2013). The last decade, however, witnessed an influx of foreign players into Egypt’s manufacturing sector. Furthermore, the government has let private industries own most of the previously owned state companies for better management.
As the foreign direct investments increase, the government acquires an increased level of confidence by the international business community, regarding Egypt’s business environment. The government’s data sources show an improvement in FDIs from USD 407 million in ‘03/‘04 to whooping USD 13 billion, worth of investment in ‘07/‘08. Additionally, investments of European countries had registered a record high over USD 5 billion during the same period (Sharp, 2011). While studies show that the previous global financial crisis adversely affected FDI, Egypt’s general outlook remains hopeful towards future growth. This implies that both the economy and financial service industry remain stubborn to the effects of the global financial meltdown.
The Egyptian fiscal policy has, over the past decade, concentrated towards the support of private sector growth and development. This is because the private sector has proven to become the permanent creator of jobs for the ever-increasing human capital. Such a move shows the government that is committed to solving the problem of unemployment, existing within its jurisdiction. It achieves this through the removal of notable constraints that haunt the entrepreneurial spirit of the private sector (Kheir-El-Din, 2008). Additionally, the government has been providing both direct and indirect incentives to domestic and foreign investors. This facilitates the increment and expansion of investment in the country, thus, stimulating areas, viewed as social-political priorities.
However, one of the major obstacles that Egyptian economy still encounters is the element of effective distribution of wealth and resources to the lower social classes. Indeed, a majority of Egyptians criticise the top leadership for the inflated prices of necessities. This continues to happen, regardless of their purchasing power parities, remaining relatively constant along with trend (Hassan, 2010). Similarly, the Egyptians cite corruption within government institutions as the other major obstacle to a robust growth in growth and development. Despite all these criticism, the government continues to invest in major infrastructural investments in an attempt to excite sustainable growth. For instance, it has made major steps by deciding to invest in the refurbishing of the economy’s physical infrastructure, using the funds it got from Etisalat, then a new entrant in the Egyptian telecommunications industry (Fahmy, 2012).
Finally, the information technology and communications industry have rapidly expanded over the last decade. Thus, Egypt serves as home to a number of start-up companies that outsource their services to notable European and American technology giants. Renowned western companies, in this category, include the likes of Oracle, Google, and Microsoft among others. Some of the local outsource companies are Raya, Exceed, C3, and E Group Contact Centres.
The ICT sector has undergone a considerable amount of stimulation under the guidance of relevant government departments. Egypt’s standout multinational corporations (MNCs), in this sector, include Raya Contact Centre and the Orascom Group Ltd (BMI, 2012). The Egyptian military outfit ousted former president Mubarak in early 2011, after intensive and prolonged protects and violent police-civilian confrontation, destabilised his regime. President Hosni Mubarak had been Egypt’s president for almost 30 years since 1981. Upon his ouster, the Supreme Council (represented by the armed forces) took over the state with the promise of future free and fair elections for the Egyptians. Indeed, the following year would witness parliamentary elections held. However, the Council later dissolved the entire parliament under the argument that almost a third of the parliamentarians had rigged their way into the government (Economist, 2013). During mid of 2012, Muhammad Morsi, a Freedom and Justice Party presidential candidate, won the hotly contested presidential election. However, the Supreme Council decided to limit his ability to exercise an authoritarian rule over Egypt. Both the presence of a new form of government and constitution, however, would calm the current state of social-political affairs.
This implies that the rampant domestic instability, and increased socio-political uncertainty, would further depress FDIs and tourism revenue streams. Notably, the two are Egypt’s top most foreign exchange earners, as discussed above (Economist, 20122). Though experimenting on a number of efforts that focus on the making of a market-oriented economy, the government continues to face anti- reform elements from former Mubarak socialist ideologies. Additionally, the government has taken up the initiative of placing heavy subsidies on basic commodities, such as water, food, shelter, clothing, and fuel in a bid to quell the mass protests. Many people argue that the current government needs to show quantifiable economic progress to acquire the needed popular vote for legitimacy. This will, in turn, result in the movement towards a sustainable economic and political stability (Baroud, June, 2012).
Therefore, the mass protests and government transitions provide enough evidence to the notion that whatever is happening is the key to determining Egypt’s future course. Economic expert Ottaway explored the country’s current social political situation and the role of the international community in assisting Egypt to meet its development goals as follows: Ottaway strongly disapproves the argument that the state of affairs in Egypt is considered as key to the success of the entire Arab Spring. She hints that whatever considerable amounts of influence Egypt possessed over her neighbours is long gone. This follows the assumption that every transition and mass protest in the Arab world has its personal consequences. Thus, Egypt’s failure to form a stable government would not directly affect the transitional struggles in Libya.
She, therefore, calls for the west’s withdrawal from Egypt’s transitional process (Fahmy, 2012). Indeed, the country has the ability and capability of solving its own economical puzzles. Secondly, Ottaway explores the notable differences between personal experiences and the basic indicators of macroeconomics. She suggests that the only macroeconomic measures with the ability of adversely affecting both the short-term lives of individuals and transitional politics stand out as populist in nature. Thus, their full implementation would result in undesirable consequences in Egypt’s economic goals and objectives (Owen, 2012).
The last point shows Ottaway’s view of foreign aid as a tool of strengthening of international relationships. Indeed, she asserted that any financial aid from advanced economies has a desirable effect on bilateral trade. This effect, however, would overpower the country’s struggles for domestic political transitions. She points out the fact that while a receiving country had the right of turning down a financial aid, the donating country would attract a bad image for not offering it in the first place (Martini, 2011). The petroleum and gas industry makes up a major percentage of Egypt’s resource endowment. This represents over a half of the country’s total exports and over 20 percent of the GDP.
The sector has become one of the major foreign exchange earners for the country. It, additionally, rose to become one of the hotly contested sectors of Egypt’s foreign exchange in the past decades. More presently, investment over the past years in the manufacturing sector, which consisted of about a quarter of the gas and oil sectors, has increased along with trend. This provides enough evidence to the diversified nature of the Egyptian economy. Indeed, Egypt is one of the Africa’s net oil exporters.
However, there exist fears that forecast on the drop of Egypt from the net exporting to net importing (Bradley, 2011).Nevertheless, with the recent discovery of additional numbers of gas mines, the Egyptian has taken a u-turn into becoming a gas exporter. The country has its oil reserves, mainly located in the western desert, the eastern desert, the Suez gulf, and Sinai Peninsula. The government, through the Petroleum Ministry, controls the entire oil and natural gas industry through four major corporations. They include The Egyptian General Petroleum Corporation, National Gas Holding Company, Petrochemicals Holding Company, and Genoa El Wagdi Petroleum Holdings (Barkho, 2007). The government and the concerned international corporations, thus, share the proceeds from oil production and sales, according to contract agreements.
Egypt’s present production of crude oil (‘07/ ’08) reached the record highs of approximately 700,000 barrels per day. This is, comparable to the previous period’s lower daily production, of 594,000 barrels. While the Egyptian refinery is the second largest in Africa, after its Southern Africa counterpart, it is not yet flexible enough to meet the rise in demand. On the other hand, natural gas mining continues to witness a global and domestic boom over the years. (BMI, 2012) Natural gas rose into becoming the Egyptian’ mining sector growth driver, following subsequent deposit discoveries.
Both foreign and domestic companies are increasingly active in the entire exploration process. The government has increasingly been offering attractive investment packages to foreign explorers as an incentive for new discoveries and increased production. The mining and processing zones include the western delta, the Mediterranean Sea, and the Gulf of Suez. Gas production and consumption continues to present a hopeful future for the Egyptian economy. For instance, 2006 saw the country produce approximately 2tcf of natural gas, out of which it consumed 1.3tcf (BMI, 2012).
As a public corporation, the Egyptian Natural Gas (EGAS) has since been in charge to managing the manufacture and distribution of Egypt’s natural gas resources. Economically viable gas reserves currently stands at 58.5tcf. These reserves represent approximately one percent of the world’s total natural gas reserves. Egypt first became a natural gas net exporter in 2004, following the Jordan gas sale upon the completion of the Egyptian gas pipeline. Gas exports, however, require major infrastructural investments in areas, such as pipeline construction, liquefaction processors and coastal storage, and transportation facilities (ADB, 2009).
The total domestic demand for petroleum commodities and natural gas during the ‘10/ ’11 period topped an all time high of approximately 63 million tons. This represents an increase of close to 7% for the fiscal year ended ‘09/ ’10. Of this 7%, natural gas accounts for almost a half of the total consumption, following an increase for its demand in most sectors. In addition to mining, production and exporting its own petroleum products, Egypt has become a transit centre for Persian producers and western transporters, thanks to the Suez Canal Ports Authority operated Sumed Pipeline LTD (Martini, 2011). The pipeline service offers an alternative route to the Suez Canal oil transporters from the region into the Mediterranean Sea. It is a vast 200-mile pipeline with a transport capacity of over 2.
5 million barrels of oil per day. The pipeline is a joint ownership of the Egyptian, Saudi Arabia, Kuwait, UAE, and Qatar government with the level of ownership, shown in the pie chart below. A vital change, which has prompted the industry’s growth and development into new heights, has been its internationalization. Indeed, the government has deregulated the production and distribution of natural gas in a bid to meet an increasing domestic and global demand. Presently, the private sector owns and operates over 80% of Egypt’s oil and gas industry.
Additionally, Multinational Corporations (MNCs) have acquired the government’s permission to conduct 90% of oil and gas exploration activities (Zubaida, Dec 2012).