Egypt Pulse

Is Egypt's new bankruptcy bill enough to lure back investors?

Article Summary
The Egyptian government submitted to the parliament a new legislation to regulate cases of bankruptcy to ensure a safe exit for struggling investors in a bid to improve the business environment amid a lingering economic crisis.

CAIRO — On March 4, the Egyptian government submitted to the parliament a draft law on bankruptcy and the restructuring of the business sector, in an attempt by the state to deal with the struggling private and public sector companies and insolvent investors, so as to keep the wheels of the Egyptian market turning and remedy bankruptcy-ensuing problems.

The economic measures announced by the Egyptian government in November 2016 to liberalize the Egyptian pound exchange rate have troubled the Egyptian market, which mainly depends on foreign currency in securing imports of food commodities and raw materials for local production, estimated by the Central Bank at $13.93 billion in the first quarter of the current fiscal year.

This reflected negatively on a wide range of investors, businessmen and factory owners, as their US dollar denominated debts increased and they became unable to repay their bank dues and fulfill their obligations in the market.

Since December, a number of investor associations have resorted to local media outlets to sound the alarm in Egypt, saying that the huge loss of capital will force many of them to declare bankruptcy soon.

In a Jan. 4 statement, the Egyptian government noted that the issuance of a bankruptcy law is part of the establishment of a legislative system aimed to create an investment-friendly environment, protect investment projects and raise investors' confidence in the Egyptian market. In case of its promulgation, such a law would regulate traders and companies’ insolvency and mitigate the effects of bankruptcy on the Egyptian economy.

Minister for Investment and International Cooperation Sahar Nasr told Al-Monitor, “Creating a suitable business environment requires setting forth a legislative system that ensures a safe easy way out for struggling investors in the market. The government is keen on drafting investment-related laws as a top priority item of the legislative agenda in order to boost the business environment. This is one of the most urgent priorities on the agenda of the economic reform program.”

Nasr explained that the draft law is in line with the international standards and the legal and social specificity of Egypt since it guarantees the rights of all parties, even those working in the bankrupt companies.

“The draft law regulates the financial and administrative restructuring of struggling or stalled companies in an attempt to reintroduce them into the market or govern their exit from the market. It also simplifies post-bankruptcy procedures,” she said.

Judge Khaled al-Nashar, the assistant to the minister of justice for parliamentary and media affairs, told Egyptian newspaper Al-Youm Al-Sabeh Jan. 13 that bankruptcy is important since it is one of the 10 indicators relied upon by the World Bank in its project performance assessment reports, and since the promulgation of such a law would raise Egypt’s financial indicators and improve its World Bank’s 2018 ranking.

Indeed, Egypt climbed up four places in the 2017 Doing Businesses index, compared to the 2016 report where Egypt ranked 122nd out of 190 countries.

Ibrahim Ashmawy, an economic expert and adviser to the Ministry of Investment, told Al-Monitor that enacting a bankruptcy law is only natural and that it is important to implement such legislation in Egypt. Yet he noted that this would not be sufficient to reassure foreign and local investors about the existence of safe means to settle their potential disputes arising in case of financial distress in the Egyptian market.

“Any laws approved by the state will not be enough to encourage investors and ensure the stability of the investment situation; the government must give incentives and take measures to encourage investors to engage in the business environment in Egypt,” he said.

Ashmawy stressed the paramount importance of the stability of the state’s economic policies, which must be explicitly disclosed to investors to be able to regularize their situation.

He added, “Volatile policies will not give laws a chance to stabilize Egypt’s investments market, whether local or foreign investments,” stressing the importance of developing a mechanism of settlement of investment disputes that ensures reconciliation between all parties and boosts the state’s credibility in ensuring reconciliation with investors and businessmen.

Despite the government’s intensified political propaganda on the activation of the mechanisms and incentives to encourage investors in the Egyptian market, to overcome obstacles warding off Egyptian, Arab and foreign investors and to support small and medium enterprises, businessmen in Egypt are still waiting for a substantial improvement of the business environment through efficient governmental measures, not limited to appealing legislation that is often not implemented on the ground.

Alaa al-Sakti, the head of the Young Businessmen of Industrial Cities of Small- and Medium-Sized Industries Association, told Al-Monitor, “The state still lacks a clearly defined investment plan. The bankruptcy law would only provide for a safe exit out of the market for the insolvent or bankrupt investors, but it does not solve investors' problems with the state administrative apparatus or problems ensuing from sudden changes to the market, such as what happened after the floating of the Egyptian pound in the Egyptian market that led to the hike in raw material prices and volatility in economic indicators.”

The sectors of construction, housing and industry are the most affected by the volatility of the economic situation in Egypt and the swift rise in prices ensuing from the liberalization of the Egyptian pound exchange rate.

The Egyptian Federation Construction and Building Contractors had announced on Nov. 22, 2016, in an online statement the insolvency of a number of real estate companies as a result of the increase in prices of construction materials and the application of the value added tax, which caused contractors to violate their contracts with the government for the implementation of the social housing program.

Minister of Housing, Utilities and Urban Development Mustafa Madbouly told Al-Monitor, “The Council of Ministers came up with a draft law under which contractors who concluded agreements on public projects in urban and infrastructure fields with the state would receive due compensation from the state in case of bankruptcy. The law would also entitle these contractors to receive from the State Treasury the price differences they incurred resulting from the exchange rate hike to prevent the bankruptcy of companies in financial distress and allow them to fulfill their contractual obligations.”

He added, “There is no specific compensation amount that the state would incur, but we are considering setting the amount of compensation in accordance with the change that affected the prices of raw materials. We will also discuss how to integrate this amount in the state’s general budget and make allocations to deal with such problems in the next phase.”

In parallel with the legislative process to promulgate a bankruptcy law, the government has also initiated several measures to protect the industry sector and find means to resolve the legal disputes of struggling factories as a result of the accumulation of debts, especially after the rise in raw materials and increase in imports. Indeed, the government is financing and promoting local production in the local market and has even imposed taxes on imports.

Egyptian Minister of Trade and Industry Tarek Kabil told Al-Monitor, “We received declarations of bankruptcy and insolvency from 871 factories. Feasibility studies were conducted, and we were able to bring 135 factories of them back into the market."

Kabil said that a 150 million pound (around $8.3 million) fund has been established by the Central Bank and the government to guarantee investors against risks and to support the reoperation of the troubled factories.

The Egyptian government’s economic ministries group still faces a daunting task, as it must deal with the obstacles crippling the business sector and investors and threatening a wide range of companies and enterprises with bankruptcy.

A mere legislative procedure may not be enough, as clear restructuring decisions and actions are needed. Supporting investments has become the last resort for the government to boost the economy in light of growing external and internal debt rates, inflation and recession.

Found in: exchange rates, legislation, debt, bankruptcy, economic crisis, investments, central bank, egyptian economy

Ayah Aman is an Egyptian journalist for Al-Shorouk specializing in Africa and the Nile Basin, Turkey and Iran and Egyptian social issues. On Twitter: @ayahaman


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