Year in Review: Farewell, Annus Horribilis (Part 1 of 3)

** Enterprise is taking a little year-end holiday this week. From today through Wednesday, we’re running our traditional Year in Review package, including the results of our 4Q2016 Enterprise Reader Poll, which will appear on Wednesday. We will be publishing a bit later this week and should be in your inbox by about 7am. We’ll be off again on 29 December and 1 January and resume our normal publication schedule on Monday, 2 January.

The Ismail cabinet will discuss Investment Minister Dalia Khorshid’s proposed Investment Act at a meeting today.

The Central Bank of Egypt’s Monetary Policy Committee will discuss interest rates for the last time this year on Thursday, 29 December.

Sunday, 1 January 2017, is national holiday in observance of New Year’s Day and Saturday, 7 January 2017 is a national holiday in observance of Coptic Christmas.

El Garhy targets 5% growth next fiscal year as budget is reportedly finalized: The government has set a 5% target for GDP growth and wants to reduce public debt to 94% of the GDP during FY2017-18, Al Mal reports. Finance Minister El Garhy is also hopeful that unemployment rates will be reduced to 11%, down from its current rate of 12.6%, and said that the Finance Ministry is vying to improve living conditions by boosting spending on health, education, and the Takaful and Karama projects, among other things. The budget preview, outlined yesterday, paints the contours of the government’s plan to push ahead with reform, continue building up the manufacturing industry, and attract investments to reach the financial targets. The ministry also touched on medium-term goals, including bringing down public debt to somewhere between 80 and 85% of GDP. The ministry is playing up the social protection angle of the budget in a front-page (digital edition) piece in state-owned daily Al Ahram.

The military economy accounts for no more than 1.5-2% of Egypt’s GDP, equivalent to USD 160-213 bn, Reuters reported President Abdel Fattah El Sisi as saying. Speaking at the inauguration of a military-owned factory, the president said that he “wished” the armed forces contributed 50% of the country’s output, according to Al Masry Al Youm, the reality is that it accounts for only a fraction of that. El Sisi had previously stated in October that the army’s economic activities do not exceed 1-1.5% of Egypt’s GDP — far short, he said at the time, of the 25% figure many were pushing.

Electricity ministry to make good on VAT: The Electricity Ministry has reached an agreement with foreign power companies that will see the ministry cover additional expenses that arose from the VAT and additional taxes, Al Mal reported. The agreement does not entail repricing the projects for which the ministry recently issued tenders, and only applies to older contracts that are affected by rising prices as a result of the VAT, according to the newspaper.

US re-imposes travel warning for Egypt: The US State Department issued a travel warning for Americans traveling to Egypt, alerting them of “threats from terrorist groups” and urging travelers to “consider the risks of travel to the country.” The State Department has prohibited diplomatic personnel from visiting the Western Desert and the Sinai Peninsula, with the exception of Sharm El Sheikh, and noted that, although “the Egyptian Government maintains a heavy security presence at major tourist sites … tourist attacks can occur anywhere in the country.” The story is, sadly, getting wide pickup in the international press: Witness Reuters and NPR.

The Oil Ministry is looking to reach an agreement during the first quarter of 2017 to import 1-2 mn barrels of crude oil from Iraq, Al Masry Al Youm reports. The newspaper also noted that Oil Minister Tarek El Molla met with his Iraqi counterpart and the two discussed opportunities for Egyptian companies to contribute to building Iraq’s oil sector.

Egypt does favour for Israel, Trump and withdraws UN Security Council motion on settlements, sets off diplomatic tussle. Egypt is facing some diplomatic backlash for abandoning a UN Security Council resolution declaring all Israeli settlements on Palestinian land to be illegal, which ended up passing after the United States unexpectedly did not exercise its veto power and instead chose to abstain.

After Israel caught wind of the United States’ intention to abstain from voting, rather than use its veto power as is customary with resolutions condemning Israel, Israeli PM Benjamin Netanyahu contacted US president-elect Donald Trump, who in turn contacted President Abdel Fattah El Sisi, BBC reported. El Sisi and Trump came to an agreement that saw Egypt request to delay the vote, and ultimately withdraw from the resolution altogether.

New Zealand, Malaysia, Venezuela, and Senegal picked up the resolution and pressed ahead with the vote without Egypt’s sponsorship the next day, Reuters reports, although Egypt did vote in favor of the resolution when the vote was finally held.

Embarrassment or banking credit with two top diplomatic partners? Foreign Ministry spokesman Ahmed Abou Zeid said that “Egypt did not realize that the consultations reached [by the UN’s member states] were enough to pass the resolution,” and that the decision was made after “carefully weighing” the options, according to Ahram Online. As the only Arab representative in the 15-member body, Egypt has unsurprisingly been on the receiving end of significant criticism for abandoning the resolution. Domestic talking heads are calling the move “embarrassing to [Egypt’s] position on a local, regional, and international level.” A more realpolitik reading is that Egypt did a solid for two of its most important diplomatic partners, in part to bank credit with the incoming president of the United States.

13 new ambassadors to Egypt have presented their credentials to President Abdel Fattah El Sisi, including:

• Bulgaria: Mr. Lubomir Nikolov Popov
• Denmark: Susanne Shine
• Djibouti: Mohammed Zahr Harsi
• Georgia: Alexander Nalbandov
• Iraq: Habib Mohammed Hadi Al-Sadr
• Kuwait: Mohammed Saleh Al Thuweikh
• Morocco: Ahmed Tazi
• Nepal: Mr. Jhabindra Prasad Aryal
• Oman: Ali bin Ahmed bin Harib Al-Issa’ee
• Papua New Guinea: Mrs. Winnie Anna Kiap
• Romania: Mihai-Stefan Stuparu
• South Korea: Yoon Soon-gu
• Yemen: Dr. Mohamed Ali Maram

Other domestic stories worth noting this morning:

• EgyptAir Cargo has flown to Russia for the first time since the late 2015 Metrojet air disaster, Ahram Online reports.
• The alleged assassins of popular Brig. Gen. Adel Rajaei have reportedly been killed in a shoot-out with police in Sadat City, Ahram Online reports.
• Look for noise on the human rights front as lawyers for activist Esraa Abdel Fattah call from help from the UN’s special rapporteur on freedom of expression ahead of a court heading into her appeal of a travel ban. The Guardian has more.

Recent international media coverage of Egypt worth noting:

• An Egyptian journalist for Al-Jazeera has been arrested in Cairo on charges of “provoking sedition.” The piece is dominating discussion of Egypt in the Western press this morning. Reuters has the basics, and Al Jazeera says the reporter was in Egypt for vacation.
• The sentiment is even more beautiful than the BBC’s tweet is overwrought: “Meet the ‘Ballerinas of Cairo’ — dancing in the streets to reclaim their city from terror.” The package includes what seems to be a Twitter-only video and a link to a crazily cool Instagram page and Facebook presence.
• Over in the New York Times, Mona El Tahawy is back with “Egypt’s Cruelty to Christian.”
• An Egyptian-Australian dual national is one of five people aged 21-26 arrested on suspicion of plotting a Christmas Day attack in Melbourne, Australia, Canada’s CBC reports.
• Peter Schwartzstein rings the bell on climate change in the Nile Delta for the National Geographic in “Battered By Climate Change, Nile Farmers Forge New Course.” It’s hard not to wish they had given him more space in which to write.

Other international stories worth noting things morning:

• Net redemptions from emerging market equity funds hit a five-week high the week before last the Financial Times (paywall) reports. Investors withdrew USD 3.7 bn from EM equities “amid pressure from the rising dollar and uncertainty about trade policy in the US, especially with China.”
• Has the “great rotation” begun? Business Insider has picked up on a Deutsche Bank slide suggesting that USD 3 tn in AUM have left bonds and poured into stocks since the US election in November. Writes the site: “The elusive great rotation from bonds to stocks is finally happening. About a decade ago, investors started a big shift in their asset allocations away from bonds and into stocks. That prompted calls that bond funds would experience an even greater exodus that would end the bull market.”
• Deutsche Bank and Crédit Suisse have both agreed to settle with the US Justice Department “over the alleged mis-selling of mortgage-backed securities in the run-up to the financial crisis,” the FT reports.
• The war on hedge funds broke into mainstream media over the weekend, with prominent pension funds acknowledging they’re pushing to revise the 2 and 20 formula. Read the New York Times’ “Hedge Fund Math: Heads We Win, Tails You Lose.”

• George Michael, the 1980s pop superstar, has died at age 53 in his UK home. Police in are describing the death as “unexplained but not suspicious.” Obits in the Guardian and the New York Times.
• Red Army Choir killed in air disaster: The bad news doesn’t stop there: If you, like us, grew up admiring performances of the Red Army Choir, you’ll be heartbroken to hear that what appears to be the entire Alexandrov Ensemble, one of two companies that has the right to call itself the Red Army Choir, were among the 92 people killed in an air disaster yesterday. The aircraft went down shortly after takeoff; it was flying the troupe to Syria for a New Year’s Eve performance for Russian troops stationed there. More in Reuters and the New York Times. A video of a the ensemble in performance is here (run time: 1:00), or you can listen to them playing Christmas music here (run time: 1:08).

Heading in 2016, we need four things — four themes that run through today’s issue and the others in the series we will be running this week. They are:

• An impatient government that efficiently creates a better business climate and presses ahead with its reform agenda;
• A patient private sector that realizes the reforms will not be fun — and that bellowing for protection, special exemptions or a reversal of course will lead us to disaster.
• Policy stability in everything from taxation (thank you, Amr El Garhy, for your words on this front a few weeks back) to whatever investment incentives are carried in the forthcoming Investment Act.
• Hard work. Exporting isn’t going to be easy. Productivity gains will be the order of the day. The only way forward, folks, is to grow our way out of the current bottleneck.

Uh, say reform much? It would not be unfair to call 2015 a year of disappointments. Despite a promising start with the EEDC, the year was characterized by failed promises and flip flopping on the part of the government. Nonetheless, the delayed political transition of Egypt — itself a reason behind key policies being held back — was completed in January of this year when the House of Representatives first convened. It was time to take stock of what happened and go straight back to the drawing board, with the three words that would set the tone of the year being reform, reform, reform.

First off, a new cabinet was formed to oversee the reform agenda. Finance industry veteran Amr El Garhy was called up to head the Finance Ministry, in effect, making him the steward of the nation’s fiscal policy and the key cabinet minister overseeing financing of the reform agenda. He was joined by former World Bank economist Ahmed Kouchouk (who would help guide fiscal policy) and former PwC tax partner Amr El Monayer (in charge of taxation reform). OCI NV treasurer Dalia Khorshid was brought in to breathe new life into an investment policy that had largely lost its thunder. El Garhy and Khorshid joined cabinet veterans crucial to implementing subsidy reform including Electricity Minister Mohamed Shaker, Oil Minister Tarek El Molla, Supply Minister Khaled Hanafy (the latter of whom would be replaced by Mohamed Ali El Sheikh as a result of the wheat corruption scandal later in the year).

Only a few days after the team was announced, and under the mantra of “Yes, we can” (no footnote to Barack Obama) the Ismail cabinet announced its goals and came out in May with a new budget for the 2016-17 fiscal year. Highlights included a GDP growth target of 5.2%; a budget deficit of 9.8% of GDP; spending on social services was forecast to grow 12.5% to EGP 421 bn; EGP 46.3 bn earmarked for food subsidies; petroleum and fuel subsidies set to fall 43% from this year’s level to EGP 35 bn. The cabinet had also set the ambitious target of lowering the inflation rate to 9% by 2017-18. To achieve these, it would have to tackle:

• Taxation reform: this would be centered around implementing the value-added tax (VAT);
• Subsidy reform: centered around eliminating subsidies for moochers, while expanding social welfare for the poor;
• Spending cuts: cutting the fat of bureaucracy primarily through the Civil Service Act;
• Investment reform: dismantling the defunct investment policies of 2014 with new incentives;
• Energy reform: deregulating electricity and gas.

That was the basis of the plan with which the cabinet went to the IMF for a USD 12 bn extended fund facility in a bid to help the economy turn the corner. After much hemming and hawing, the IMF imposed third-party funding requirements (in part to help wean Egypt off of free GCC money which was squandered over the last two years) and a devaluation of the EGP, which finally came in the form of a full float in November. Egypt signed for the loan later that month.

How has the reform agenda fared this year? Better than the previous three years, simply because the cabinet got some of the toughest measures passed. The VAT was passed by the House in August after the Civil Service Act was approved a month earlier. Power subsidies were partially lifted when prices for top tier consumers were raised, with a five year plan set to eliminate them. Executive regulations for the Electricity Act, which would deregulate the electricity sector, were passed in May. Immediately following the devaluation, fuel prices were raised, while the Natural Gas Act, which would deregulate the market, slowly made its way to the House for a vote. The government began informing the freeloaders that their time was up, while the Investment Ministry drew up plans for a new law and instituted new incentives.

Having said that, implementation was not smooth at the outset, but appeared to gain steam as the year ground on — and as economic conditions worsened amid the FX crisis. Continued fear of the street’s reaction had delayed some policies, while others were a victim of a slow bureaucracy trying to keep up. The executive regulations for the value-added tax were a bit over two months late coming out, and key legislation on fuel subsidy cuts are still technically on hold. Growing pains from these reforms and the float took the form of a 19.43% rise in inflation as of November. However, considering how until September, most of the reform agenda was on paper, it is still too soon to tell. But by setting a direction and taking action, the die is cast. If the economy crawled out of 2015, 2016 was the year it stood up and took its baby steps.

The value-added tax (VAT) had been the cornerstone legislation of the Ismail cabinet’s reform agenda for 2016, and it proved to be one of the most difficult to bring to life. The years-long journey to get the law passed was so exhausting, you could get a fairly detailed history by reading our last year in review. As the main reason behind its failed implementation all these years stemmed from the government fearing a public outcry at the resulting inflation (a concern exacerbated by a grandstanding parliament), much of 2016 was devoted to simply making the bill more palpable to the street to get it out the door. The VAT was eventually passed in August, just in time for the IMF delegation’s arrival (it had made passing the VAT a condition of receiving the USD 12 bn loan).

At the core of the battle to get the VAT passed were two main issues: timing and more importantly, the baseline rate. The ministry had anticipated revenues from the VAT to reach EGP 32 bn in the FY2016-17 year, assuming it was implemented in October and the baseline rate was set at 14%, far lower than most countries, Finance Minister Amr El Garhy told the House. Anything lower would risk Egypt losing EGP 13 bn from those projections. El Garhy promised MPs that the tax’s inflationary effect would be around 1.5%. After fierce debate in which MPs tried to push a rate of 10-13%, and industries of all description pushed to keep the rate low, a compromise was struck that would see the baseline rate set at 13% for the first year of the VAT and then raised in year two. This cut the ministry’s projected revenues to EGP 20 bn. The bill was signed into law on 8 September with a mandate for all businesses making EGP 500K or more having one month to register, something which the Federation of Egyptian Industries vehemently opposed. It also mandated that the Finance Ministry had one month to issue the executive regulations, which had not come out until late December 2016.

Another crucial point for contention on the VAT was the exemptions list. Almost every business and industry lobby pushed for their industry to be placed on the exemptions list. If that wasn’t enough, members of parliament used a very broad definition of “essential goods” in its scrutiny of the act, with some even suggesting that small refrigerators should qualify. In the end, the Finance Ministry — struggling to meet its October deadline for implementation and attempting to get it passed to secure the IMF loan — allowed 52 goods and services to stand as VAT-exempt. Surprisingly, tourism, which has been stagnating particularly since the Metrojet plane went down in 2015, was not granted an exemption.

In the end, expediency and consensus had led to a more watered down version of the VAT than was originally intended. The cost of these compromises, and of the delay in issuing the regs, has yet to be determined and will be a key issue in 2017. Still, the bill’s passage in the face of significant bellowing from some in the business community has to stand as one of the Ismail government’s key legislative accomplishments of the year. With the law in place, the government can adapt it and amend it according to circumstances. The next challenge will be on the rollout and enforcement. Will people accept it, pay it and start keeping receipts? 2017 will be the year to determine that.

Before we dive into subsides, we interrupt your program to issue the following PSA: This is Kramer. Kramer lives in a nice apartment and has food. Kramer likes to barge into (runtime: 2:12) his neighbor’s house and take his food. Don’t be like Kramer. —Best regards, the Egyptian Council of Ministers.

If the Ismail cabinet was to be taken seriously on its reform agenda, it had to start tackling head on the problem of subsidies. Urgency was spurred not just by the need to meet the IMF’s conditions — the falling value of the EGP had a direct impact on the subsidy program, massive chunks of which are USD-linked. As fear of social unrest as a result of inflation still loomed over the cabinet, a measured gradual approach was adopted. Easing subsidies for the rich would be matched by raising them for the poor, a transition into cash subsidies and away from commodity subsidies, with a dose of price monitoring. By the end of the year, the government had done more to strengthen the social safety net — and to lay the groundwork for a cleanup of welfare rolls — than it has actually cutting subsidies. Still, heading into 2017, one thing is relatively certain: If you earn above a certain income level, your mooching days are over.

On fuel subsidy reform, the Ismail cabinet acted only when the gun was to its head. The night of the EGP float saw fuel prices rise for the first time since 2014. This was touted by some as a major move towards cutting subsidies, but by the cabinet’s own admission this was merely a step to keep up with global oil prices and the devaluation, which pushed the fuel subsidies bill from a budget allocation of EGP 35 bn to EGP 65 bn. Oil Minister Tarek El Molla then said this might be expected to rise to EGP 80 bn with an expectation that fuel prices will rise again before July of 2017. The government had hedged its fuel subsidy reform plan on the fuel smart cards, but had held off on that since 2015 with no word if it had abandoned the policy altogether. Judging by the performance of the supply smart cards, it is more than likely that the policy has been nixed. We would not be surprised to simply see a complete phase-out of subsidies at the fuel pump over the coming two years.

Tackling food subsidies primarily meant fixing the poorly managed smart card system for distribution of bread and commodities. This mismanagement had manifested in ration cards being hacked and forged (costing the state untold mns, if not bns) and in the mns of middle-class Kramers who were plugged into the system. To guard against the hack, the Ismail cabinet handed over management of the cards to the armed forces. As for the Kramers, the government plans to purge 3-4 mn of them from the system in its initial phase. The government opened the snitch line in December, offering incentives for those who voluntarily removed themselves or any dead relatives or those living abroad. Cabinet was also setting up new criteria for eligibility in the system, and will announce those next year. Authorities made a nod to inflation by raising the monthly allocation of commodities to EGP 21 per month from EGP 18 at a cost of EGP 5 bn, and raising the price of buying agricultural crops from farmers. Raising the purchasing prices of domestically harvested goods will cost the state EGP 5 bn, raising the commodities subsidies budget to c. EGP 49-50 bn.

Perhaps the most effective policy adopted this year was cutting of electricity subsidies. In July, the cabinet raised electricity prices across all consumption tiers (including the poor) in an unprecedented move. It had announced back in February an ambitious five-year plan which would see power subsidies cut 50% from their 2014 levels by 2020 and fully eliminated by 2025. However, with the devaluation and fuel price hikes doubling the power subsidies budget to EGP 60 bn, ministry officials have stated that this could mean slowing down the phase-out. The ministry is considering three options to replace the plan: raising prices by next July as planned and scrapping subsidies entirely by FY2018-19; cutting subsidies completely from FY2017-18 except for low-tier consumers; keeping subsidies for the lower-tier segment until 2019 while eliminating subsidies for high-tier consumers by FY2017-18. The Ismail cabinet will review the policy at the end of January.

Strengthening the social safety net to cushion the impact on the subsidy phase-out and of inflation was a key priority in 2016 and will be high on policymakers’ agendas in the new year. The budget for pensions has been raised to EGP 15 bn, a four-fold increase over last year. Retirement benefits under the Karama program will now be extended to retirees aged 60 and up from a previous age of 65. The Social Solidarity Ministry announced plans to increase beneficiaries of both Takaful and Karama to 1.7 mn families by next year at a cost to the state of EGP 2.5 bn. This figure will rise to 4.3 mn families by June 2017.

The ministry will also be charged with moving to a program of cash subsidies in 2017, abandoning the wasteful commodity subsidies that benefit the wealthy more than they do the poor.

How bad will inflation get? Since the November float, the Central Bank reported that inflation accelerated to its highest level in eight years, as the annual headline inflation rate increased to 19.43% in November from 13.56% in October. Prior to the float, the IMF had projected an inflation rate of 14%, amending that to 18.2% for FY2016-17. The European Bank for Reconstruction and Development is projecting inflation will reach 18%, while Capital Economics is anticipating inflation will increase to 22% by mid-2017. Still, Finance Minister Amr El Garhy told Bloomberg that the government is targeting to pull inflation down gradually to 10% “sometime mid-next year.” The government is, in essence, projecting that inflation is a one-off driven by the float — imported inflation, if you will — and not structural inflation in the economy.

2016 could also be called the year of shortages: From wheat to pharma products, baby formula, and sugar, the country has seen shortages due to difficulty in sourcing USD, a plummeting EGP, and limits on banking facilities for importers. This shortage has been a major driver of consumer inflation — which (as we noted above) is public enemy number one as far as the reform agenda is concerned.

The government’s flip-flop summersault on ergot contamination levels in wheat didn’t help. In February, the government okayed ergot in wheat, went back to a zero-tolerance policy of ergot in June. This was followed by a directive accepting 0.05% ergot the following month, before banning ergot again in August, followed by a final reversal in September. That whole flap meant that Egypt canceled multiple wheat shipments needed for the country’s reserves. The domestic wheat harvest was also tallied by a corruption scandal as there were discrepancies between the reported harvest and what was actually found at shounas. Investigations started in June and culminated in the Supply Minister’s resignation in August. Blumberg Grain Storage facilities which were supposed to come online in April have not been operational as they were not provided with the electricity needed to function and track grain storage. Private sector silos will be used in the 2017 wheat harvest collection season. Blumberg is bidding for phase two of the shounas program, with competition from a consortium led by Russia’s Melinvest.

Egyptians were also faced with shortages of meds, 90% of which the country imports. Following the March devaluation, and the November float, pharma companies have not tired of speaking out about the inability to make profits and continue getting products into the market. Multinationals threatened to exit the market, and shortages of imported products can still be found in pharmacies nationwide. A baby formula shortage sparked anger, prompting the Armed Forces to step in and import it in September. The government allowed hiking prices on meds costing less than EGP 30 by 20% in May and after tough negotiations, the Health Ministry reportedly allowed price hikes on meds in December.

A population with a heavy sweet tooth also couldn’t find sugar on shelves, and if found, was overpriced. Despite the government and media’s best efforts to pin this on the private sector, the Egyptian Competition Authority vindicated the companies. That didn’t stop the government from trying as Edita and Pepsi had to shut down production on some lines after the government raided their factories and seized (legally owned) sugar.

For sugar and other commodities, part of the government’s response has been to cut customs and build reserves for up to six months. But more frightening are hints of potential price controls. A government committee had been formed to explore capping profit margins on basic goods. It downplayed the move by saying it was merely exploring the option, all while legislation was being driven through the House that would give the cabinet the authority to move on prices. These include provisions in the Investment Law and Consumer Protection Act. Signs point to this being the policy if inflation continues to pin the cabinet’s back against the wall.

A possible lifeline for the government is if FX reserves stabilize in 2017, and since the float, it is looking like it is heading there. But if that doesn’t happen, it is becoming clearer that the private sector may be the government’s only way out — whether it is relying on it for greater efficiency on imports or maximizing exports to draw in FX. Perhaps not scaring them with pricing controls might do more to encourage them to take a temporary hit, as many companies have shown they are willing to hold off on raising prices.

The Electricity Act and the Natural Gas Act, which would deregulate their respective sectors were two of laws that excited us the most when they were announced. With so many sectors of the economy still under government control, it would almost seem inconceivable that such strategically vital sectors would be slated for privatization for Egyptians and foreigners. At the time they were proposed, Egypt had become a net importer of natural gas and suffering through critical power shortages. It was hoped by allowing the private sector in supply and distribution would be made more efficient by introducing competition, spur domestic and foreign investment in the sector, and reduce the immense expenses incurred by the government as a result of being the sole operator. More crucially, it would help ease the government’s transition away from subsidizing electricity and gas to the Kramers. Neither law has been implemented as of the end of 2016, but slow progress is still progress.

The Electricity Act would see the state become the regulator and (separately) owner of transmission infrastructure, but not the sole market player. Initially, there will be two markets: one competitive and one in which prices are set by the state, the state said in 2015. The executive regulations mandated that the Egyptian Electricity Transmission Company would be the sole entity charged with transmission of power, regulating the market, and setting a strategy for deregulating and expanding the national grid over 5-10 years. As of the November, the EETC had begun procedures to splinter off from the Egyptian Electricity Holding Company and restructure to meet its new role. This will continue at what we hope will be a quicker pace in 2017, although some in the industry have warned us they do not expect much in the way of deregulation this coming year given the state’s investment in excess generation capacity.

More likely, they said, is that the Natural Gas Act will move forward, reducing the state’s role reduced to that of a regulator, with private sector players allowed to directly trade gas using the pipeline and network infrastructure. The act would also establish a new authority that will regulate the gas market. Unlike the Electricity Act, the Natural Gas Act had been moldering in the shelves of the Egyptian Council of State for over a year before it was finally sent to the House in November. But all good things come to those who wait, as the law received preliminary approval from the House and is expected to be passed in 2017, said Oil Minister Tarek El Molla. Right on time, as the giant Zohr field is set to come online next year.

The hype over the investment climate after the Egyptian Economic Development Conference in 2015 wore off very quickly. The current Investment Act had cut free zones, alienated investors and other government bodies alike with its one-stop shop policy, and sent the wrong message on policy stability. Egypt did see its ranking in the World Bank’s Doing Business 2017 rise to 122 from 131 on improvements to electricity supply, establishing a new company, and improvements in protecting minority shareholder rights. We fell short, however, in cross border trade, getting credit, resolving insolvency, obtaining construction permits, and registering property while showing no improvement in enforcing contracts.

Investment Minister Dalia Khorshid came in with plans to raise foreign direct investment to USD 10-15 bn per year and foreign portfolio investment of some USD 5-10 bn. She is also targeting raising Egypt’s ranking in the Doing Business report to 90. It became a ministry priority that any policy decision taken to achieve these would not be top-down and would include input from the investment and business communities. Her policies will focus on tax and non-tax incentives, cutting bureaucracy, and increase promotion for investment projects.

The first major policy decision announced was the program to IPO state-ownedcompanies to generate FDI, starting with the banking and energy sectors. The first of the banks will be Banque du Caire, which is expected in the market sometime in the first half of 2017 and which will be managed by EFG Hermes and HSBC. On the energy front, the Misr Fertilizers Production Company (MOPCO) kicked it off in September, with share prices rising 295% on the first day of trading. Egypt’s biggest refiner, the Middle East Oil Refinery (MIDOR), has been slated for an IPO, though no date has been announced. Energy contractor Enppi is being considered for the second wave of IPOs, reportedly some time in 2017.

Then came the Supreme Investment Council (headed by President Abdel Fattah El Sisi), which adopted a basket of 17 measures designed to promote investment, many of them long called for by the business community. These are expected to form the backbone of the new investment act, with policies including five-year tax exemptions for strategic industrial and agricultural projects that have export value or that are imported; holding off on the capital tax for another three years; discounts on land for urban development; temporary one-year permits for unlicensed factories; free land in Upper Egypt for industry project. With Ittihadiya’s blessing, these incentives would supersede other government policies, in effect, a guarantee that they would be protected from bureaucracy. The announcement was met with much fanfare from the business community.

For good measure, much of these incentives will be codified into law through a rewrite of the Investment Act. Khorshid had affirmed that the law will reintroduce free zones. The act will reportedly offer special income tax breaks to labor-intensive companies in strategic sectors and geographies and could see custom duties on imported capital goods reduced from 5% to 2%. The legislation will set rigorous deadlines for the approval and issuance of permits. The law will include provisions for facilitating the repatriation of USD profits, in addition to enforcing contracts, or so ministry officials promised.

That’s not the say the Investment Act will pass without debate. The Finance Ministry was reportedly not happy with the tax incentives and prefers to adopt rebates. Some business associations have also come out against the law, attacking in particular the one-stop shop policy, which was maintained in the new act. While consensus appears to elude the law, Khorshid is adamant on getting cabinet approval before the year is out.

Spending on health and education fell far short of the constitutional requirement, despite having been raised significantly higher — partially due to a shortage of funds, partially due to a lack of capacity in the two sectors to absorb an influx of cash. This will begin to change in 2017: A new national health insurance scheme — which will include the private sector — may come to life next year in the form of the new Universal Healthcare Act. The Ismail cabinet hopes to expand the number of schools in partnership with the private sector.

The needs of the reform agenda had outweighed the constitutional requirement for health and education spending. While the FY2016-17 saw spending on health and education rise to 4.7% of GDP, it fell far short of the 10% mandated by the constitution (projected then at EGP 3.2 tn). To pass the budget, the Finance Ministry had to compromise with the House of Representatives, raising health and education spending to 10% of the EGP 2.8 tn FY2015-16 budget.

We got our first glimpse of the Universal Healthcare Act in September. The Finance Ministry plans to allocate EGP 5 bn to the Health Insurance Authority, the state entity in charge of funding the health insurance program once the law passes Parliament. Under the health scheme, employers must pay into the national health insurance scheme a sum equivalent to 3% of an employee’s salary, while 1% of the salary will be deducted from an employee’s paycheck. Funding for the program will also come from taxes on alcohol, cigarettes and nightclubs. The law would require the government to upgrade and modernize the 550 hospitals it operates to provide better service. The government hopes to get the legislation passed in 2017.

The private sector will help with schools. A EGP 15 bn public-private partnership program which aims to build private-sector administered schools targeting medium-income families with a total capacity of up to 60k classrooms by 2018 was announced last year. A tender for 200 schools under the program was announced in November, generating interest from some 79 companies, including from Orascom Construction and BPE Partners which locked down a UAE partner.

Apart from the legislation mentioned above, key laws that were passed this year included:

• The Civil Service Actwhich aimed to implemented reform of the bureaucracy, but ended up being a very watered down version of its original goals;
• The Tax Dispute Resolution Act has expert committees, rather than courts, handling tax dispute cases for one year to accelerate the resolution of tax disputes and clear the backlog;
• The Food Safety Authority Act will establish a new industry regulator to ensure that food products in the market meet the specified health and safety standards;
• The Anti-Illegal Immigration Act sets more stringent punishments for human trafficking offenses;
• The Church Construction Act contains articles that tie the size of a church being built in any one district to the size of its Christian population.

Laws to watch out for during 2017 include:

• The Industry Permits Act is expected to minimize the wait time for industrial licenses to as little as 30 days;
• The Automotive Directivewhich aims to give incentives to the local auto industry to go further up the value chain into manufacturing;
• The Consumer Protection Act, will reportedly grant the cabinet the authority to fix prices for a number of “strategic” goods for a set period of time;
• The Labor Act outlaws discrimination in the workplace and seeks to strike a balance between the needs of workers and their employers by setting regulations that guarantee the rights of both;
• The Media Act, or what we call part 1 of the legislation, establishes three new regulatory bodies to monitor the activities of state-owned and independent media in Egypt;
• The new NGOs law seeks to safeguard national security by regulating the work of civil society in Egypt, covering everything from licensing and permits to sources of funding and follow-up;

There might be more irons in the fire still. The recent attack on a Coptic cathedral in Cairo gave rise to calls for amendments to Egypt’s penal code and Criminal Procedures Act that would expedite legal proceedings for cases of terrorism and allow for military trials. According to media reports throughout the year, other laws we might be seeing during 2017 include a legislation from the Egyptian Financial Supervisory Authority to govern factoring companies, a legislation to ease conditions for SMEs — such as credit facilitation and financing schemes, an anti-discrimination law, a law for intellectual property protection, and laws against data theft and identity fraud.