Unlocking Egypt's Potential: A Call for Private Sector Expansion

Updated 4/30/2024 8:00:00 AM

With its rich history and strategic location, Egypt possesses immense potential for economic growth. However, to fully harness this potential, a dynamic and efficient private sector is crucial.

Recognizing this, the government has embarked on a strategic endeavor to expand private sector participation in the economy. This initiative aims to unlock its full potential, fostering innovation, competition, and diversification.

Egypt's Roadmap for Private Sector Growth

In every program between the International Monetary Fund (IMF) and Egypt, the IMF has urged for comprehensive structural reforms to diminish the state's influence and enhance the participation of the private sector in the economy.

This is aimed at creating a fair competition environment between state-owned enterprises (SOEs) and private businesses, eliminating trade barriers, and improving transparency and governance within the public sector.

Accordingly, Egypt is working on increasing private sector contribution to the economy.

Over the past three years, private sector investments in Egypt increased from 27% to rise to 32% of the overall Egyptian economy. This figure is targeted to reach 36% by the end of the current year and then 48% for the next fiscal year (FY) 2024/2025.

These figures were highlighted by the Minister of Planning and Economic Development Hala Elsaid in a session entitled "Macroeconomic Trends in 2024" during the seminar organized by the London Stock Exchange Group (LSEG) in April.

Boosting private sector participation in the economy is expected to drive economic growth. Dina Samir ElWakkad, an instructor of economics and economic analyst, tells Arab Finance: "Egypt should focus on diversifying its economy by encouraging private sector investment in various sectors. This reduces dependency on specific industries and enhances resilience.”

“The government can identify sectors with growth potential, provide incentives for private investment, and promote entrepreneurship and innovation," ElWakkad added.

Although Egypt seeks to boost private sector participation in many sectors, the government needs to follow several measures to ensure success.

Ahmed Fawzy Hussein, a PhD holder and assistant professor of economics, explains that "when expanding the role of the private sector in Egypt, it is crucial to consider additional factors in light of the global economic outlook.”

He carries on and highlights that these factors include “maintaining regulatory stability and policy consistency, mitigating external risks and vulnerabilities, and fostering competitiveness and innovation."

Strategies for a Thriving Private Sector

Egypt is following strategies to boost private sector participation in the Egyptian economy through a multi-faceted approach aimed at fostering competitiveness and innovation and attracting investments.

With this regard, Hussein outlines two impactful measures the government can follow to improve the investment climate for private businesses.

One of these measures is "simplifying regulations and streamlining bureaucratic processes,” he elaborates, adding that “creating a more transparent and efficient regulatory environment will reduce barriers to entry and operation for businesses, thus, fostering a more attractive investment climate."

The other measure is "enhancing investor protection and legal certainty,” Hussein maintains, pointing out that “strengthening legal frameworks and ensuring the enforcement of contracts will provide investors with greater confidence and security in conducting business operations in Egypt."

Additionally, ElWakkad explains that maximizing the private sector in Egyptian economic growth can be achieved by several factors. The government should focus on creating a conducive business environment that fosters entrepreneurship, innovation, and investment.

This entails implementing regulatory reforms that promote competition, market liberalization, and fair regulations, thereby bolstering private sector growth. This also involves reviewing and updating laws and regulations to remove unnecessary barriers, streamline licensing processes, and encourage market entry and exit, he notes.

The country should also ensure infrastructure development, facilitate access to finance, invest in education and skill development, foster innovation and research and development (R&D), bolster export promotion and trade facilitation, and boost foreign direct investment (FDI) as well as collaboration and dialogue, according to ElWakkad.

Expanding Private Sector Participation: Beyond Traditional Methods

Another way to boost the contribution of the private sector to the Egyptian economy is through initial public offerings (IPOs).

The Egyptian government has implemented various methods to privatize SOEs, including divestiture, direct sale to investors, establishing joint ventures, leasing, concessions, or privatization via shares issues and public offerings.

The most favorable method has been through the stock markets and share issuing in Egypt, according to a paper, by Rania Ihab Naguib and Fangya Xu, entitled 'Economic Growth, Foreign Direct Investment, and Privatization in Egypt and China: Preliminary Results' published by Plymouth University.

The Egyptian market and EGX-listed companies offer promising IPO results. Hussein explains that “the market may be suitable for resuming the IPO program, particularly through offering additional shares from already EGX-listed companies.”

“This approach can deepen the market, enhance liquidity, and provide existing investors with opportunities to increase their holdings,” he adds, stating that “it is important to carefully monitor market dynamics, investor sentiment, and the readiness of the companies to go public to ensure a successful and sustainable IPO program.”

Encouraging public-private partnerships (PPPs) could drive infrastructure development, enhance service delivery, and promote private sector engagement in key projects.

Hussein notes that "utilizing PPPs for infrastructure development in Egypt offers several specific advantages compared to improving the investment climate in general."

Moreover, he points out that these advantages include access to additional sources of funding and expertise, risk-sharing and innovation, and timely project delivery.

He also debates that in order to incentivize PPPs, the government can consider a number of strategies, such as "establishing a transparent and predictable regulatory environment that clearly defines the rights, responsibilities, and obligations of private sector participants."

The government can also "provide financial incentives, such as tax breaks, grants, subsidies, or low-interest loans to encourage private sector participation in PPP projects," he says, adding that it ought to ensure "mitigating risks associated with low-profitability areas by sharing certain risks with the private sector.”

“This can be done through risk allocation mechanisms, such as providing guarantees against specific risks, sharing construction or operational risks, or providing insurance coverage," Hussein explains.

The government has the capacity to offer targeted support to specific sectors to stimulate private sector involvement. Moreover, raising awareness and visibility, as well as extending contract durations, can serve as incentives for private sector engagement in sectors with initially lower profitability, he says.

Extended contract terms offer stability and the chance to recover investments over a prolonged period, enhancing the appeal of projects to prospective investors, according to ElWakkad.

Egypt stands at a crossroads, with the potential for a dynamic and prosperous future fueled by a thriving private sector. The government's commitment to expanding private sector participation is a critical step in this direction.

With a concerted effort and a commitment to unleash the full potential of the private sector, Egypt can unlock a new era of economic growth and prosperity for its citizens.

By Sarah Samir