What startups should know about Egypt’s IMF reforms

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All Egypt is feeling the weight of economic reform, but not all entrepreneurs will feel the impact equally.

Last week, the International Monetary Fund (IMF) outlined in a report changes and implementation deadlines that Egypt will need to undertake to receive a $12 billion loan.

Among those changes, progress of which will be reviewed every six months for the next three years, are proposals to reform the tax code for small businesses, business licensing, bankruptcy regulations and the energy sector, almost all of which are already moving through the legislative process.

What’s not included are any moves to invest in the digital sector, be it in infrastructure or regulations.

What to look for

The biggest change will be the decriminalization of insolvency and simplifying bankruptcy procedures - due to be executed by June 30 this year.

Currently the law says a bankrupt debtor can be thrown into jail or put under house arrest, and prevented from leaving the country for at least three years. You don’t get out of jail free either: a discharged debtor can neither vote nor work in finance or management jobs.

Loay El-Shawarby, angel investor and lawyer for Shehata Law, said the bankruptcy law wouldn’t impact on tech entrepreneurs much. While it would allow entrepreneurs to bounce back from a failed business, tech startups have investors who know the risks and tend not to have creditors.

“Startups should be well positioned to do better business,” El-Shawarby said, adding that factors such as a possible capital tax floor on securities in the stock exchange meant investors would start looking for new opportunities, and some of that may filter into startups.

Another issue to watch is the changes to the small business tax code. These are intended to make the disputes process simpler as well as implement a lower flat tax rate for small taxpayers.

A new ‘one stop shop’ for single proprietor companies won’t mean much to a multi-founder startup. Indeed, this has already been attempted once before with the creation of the General Authority For Investment and Free Zones (GAFI).

Angus Blair, chief operating officer for investment bank Pharos, said the strong focus on SMEs, who are drivers of job creation and economic growth, was important, but said nothing in the flagged reforms indicated bureaucratic “heavy-handedness” would be removed.

“This is not an environment that is a light touch, it remains heavy handed with multi-ministry involvement, which is tedious,” he told Wamda. “[The reforms] need to be put in place quickly, much more quickly… After the devaluation people thought it would be one thing after another, but it wasn’t.”

He said the reforms were to be applauded, but for it to work, Egypt needed a system that wanted change and could cope with them.

While the government has accepted the need for these changes, it’s not clear that its seven million-strong bureaucracy is as keen.

Cleantech for the win

Egypt is the regional leader when it comes to cleantech startups. It could be these companies which feel the biggest benefits from the IMF reforms.

The government re-committed to its plan to remove all fuel subsidies by 2019 and electricity tariffs will continue to rise.

“The current below-the-cost pricing in all three areas (except natural gas) is economically inefficient and not well-targeted. It encourages excessive energy consumption, favors capital-intensive rather than labor-intensive activities, deters private investment in the sector and results in a heavy fiscal burden,” said an amendment to the report from the Egypt government.

Although Egypt’s solar energy entrepreneurs have already banked these reforms, with companies such as Future Energy Corporation and Cairo Solar exploring big projects, it’s reassuring to see them baked into the IMF plan.

Furthermore, the government is promising to abolish industrial licensing in Egypt which could have an impact on the growing agritech sector.

Sectors such as aquaponics currently face the possibility of falling afoul of land use licensing rules. Aquaponics combines fish farming with hydroponics agriculture, and Agrimatic Farms founder Mostafa Hassanen told Wamda in 2014 that combining the two on land designated for one or the other may cause bureaucratic headaches.

Cairo has a four year timeline in which to implement these reforms but many, such as Pharos’ Blair, say they need to happen faster. It’s now up to the government to prove that it can indeed make the reforms it says it will, in the timeframe it’s committed to.

Feature image via Pexels.com

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