Long-awaited bankruptcy law sparks optimism in Egypt

The Egyptian parliament passed a new bankruptcy law to regulate the restructuring of viable but troubled companies, in a move experts say will boost the economy.

al-monitor A general view of an Egyptian parliament session, the first after the revolution that ousted former President Hosni Mubarak, Cairo, Egypt, Jan. 23, 2012.  Photo by REUTERS/Asmaa Waguih.

Feb 20, 2018

CAIRO — Egypt's parliament recently passed a bill designed to recharge the drained economy by streamlining the bankruptcy process, allowing viable companies to return to business more quickly.

On Jan. 29, parliament approved legislation to regulate debt restructuring, preventive composition (out-of-court settlement) and bankruptcy. The move created a wave of optimism in government and economic circles that this will boost the economy and improve the investment environment in Egypt.

The law includes 262 articles and regulates the financial and administrative restructuring of troubled but viable companies. It reduces the steps investors need to go through to enter bankruptcy and includes a mediation system between investors and their creditors designed to reduce litigation, which can damage their reputation.

As declaring bankruptcy can take years in Egyptian economic courts, the new law eliminates some provisions of Egyptian Trade Law on bankruptcy and composition, which caused many problems for investors.

The law also eliminates prison terms for insolvent investors, except in cases of fraudulent bankruptcy.

Since Egypt signed an agreement in November 2016 with the International Monetary Fund (IMF) for a $12 billion loan over three years, the government has been implementing economic reforms that included introducing a 13% value-added tax (VAT) to replace the 10% sales tax, then raising the VAT rate to 14%, and amending investment laws. The government floated the Egyptian pound and increased fuel prices.

Through Dec. 20, Egypt had received $6.08 billion of the IMF loan.

Egyptian Investment Minister Sahar Nasr welcomed the new bankruptcy law and said in a press release Jan. 28 that it aligns with the investment law passed May 7. She said that while the investment law offers the necessary guarantees and makes it easier for investors to enter the market, the bankruptcy law makes it easier for investors to exit the market.

Once implemented, the law is expected to make it easier for Egypt to conduct business internationally.

“Bankruptcy rulings have [long] been negatively affecting Egypt's ranking,” Nasr said. The World Bank's 2018 Doing Business ranking for "ease of doing business in Egypt" showed that as of October, Egypt had dropped six places, to 128 out of 190.

Bassant Fahmy, a member of parliament’s Economic Committee, told Al-Monitor that parliament passed the law and referred it to the Council of State's Legislative Department for a final review. The law subsequently will be sent to President Abdel Fattah al-Sisi for ratification and then published in the Official Gazette to be implemented.

Mona Zobaa spoke with Al-Monitor last month before she resigned as chairman of the Egyptian General Authority for Investment. She said the new bankruptcy law was more than two decades overdue, adding that its main purpose is to financially restructure troubled projects so they can return to business, while the second objective is to regulate preventive composition.

“All countries have laws regulating the way investors join and exit the labor market, and this was lacking in the investment climate in Egypt, which is why the law was a must,” Zobaa said.

The Egyptian government expects the new law to attract more foreign investment. The Central Bank of Egypt issued data Oct. 24 indicating a rise of net foreign direct investment inflows during fiscal year 2016-17 — which ended June 30 — that reached $7.9 billion compared with $6.43 billion the previous fiscal year.

Moody's credit rating agency believes the bankruptcy law will encourage local as well as foreign investment in the country, speed up the liquidation of nonviable companies and allow borrowers and creditors to reach restructuring solutions more swiftly.

Meanwhile, bankers expect the bankruptcy law to improve their ability to deal with problem loan portfolios, which will help struggling clients restore their businesses once they settle their debt.

“The bankruptcy law improves the safe legislative environment for investors. But the Egyptian government still has to get rid of the bureaucratic measures that have become entrenched in the administrative structure of the state. It also has to get rid of corrupt officials,” Fahmy said. According to Transparency International, Egypt ranked 108th out of 179 countries reviewed in its 2016 Corruption Perceptions Index.

Economist Fakhry El Fiky told Al-Monitor the law is a good step, as it guarantees a “safe exit” for struggling investors, but it doesn't attract immediate investment. He said foreigners are waiting for the presidential election to make decisions about investing in Egypt, once they study the new laws on investment and bankruptcy.

On Dec. 20, the IMF reduced its forecast for the amount of foreign direct investment Egypt will attract during fiscal year 2018-19 to about $9.9 billion from $10.2 billion in the first review issued in September.

In a report published on the official IMF website Jan. 23, head of the IMF team for Egypt Subir Lall advised the government to step back from certain sectors and make room for the private sector to invest and grow. To this end, he said, priorities include ensuring fair competition for private companies in the markets for their input and products, improving the governance and transparency of state-owned enterprises, and reducing the perception of corruption.

Despite the wave of optimism within Egyptian governmental and economic circles, several challenges still lie ahead, including rampant state administrative corruption and political and security instability.

Continue reading this article by registering at no cost and get unlimited access to:
  • Al-Monitor Archives
  • The Week in Review
  • Exclusive Events
  • Invitation-only Briefings