Boosting Employment Through Legislative Reform

From the verdant groves of the Nile valley to the oil deposits of the Western Desert, Egypt has long had a wealth of resources—but few have been as underutilized as the country’s human resources. As the most populous country in the Middle East and the third most populous country in Africa, Egypt has a vast pool of potential labor.

Currently, more than 60% of the country’s 95 million people are of working age, and with roughly a third of the population under the age of 15, this is only going to expand further in the coming years. The skillsets of the labor pool are also on track to improve: The literacy rate for youth under 24 years old has passed 92%, and roughly 2 million students are enrolled annually in post-secondary courses.

However, the ability of employers to tap into the country’s vast workforce is constrained by a number of challenges, ranging from limited university matriculation and marketable skills to a difficult business environment. Some of those challenges are the target of long-term government education programmes—such as the five-year Technical Education Strategy—but in many cases, it will be years before results materialize.

But there has been some progress on overhauling business regulations which, though controversial, may help spur a more immediate uptick in hiring and job creation.

In early November, the legislature approved a tranche of legislation, including the Labor Unions Act, which has been the subject of much discussion over the past year. While the recently approved legislation does not significantly alter Egypt’s 2003 Labor Law, which outlines the framework of obligations between employers and employees, it does provide much-needed clarifications of the role of labour advocacy, albeit with some notable restrictions.

Independent trade union activity has flourished in the wake of the 2011 revolution, prior to which all labor organization had been carried out through the government-controlled Egyptian Trade Union Federation(ETUF), which was founded in 1957 as Egypt began its experiment with socialism. Over the past half-decade, new unions have been formed, as well as a new Federation of Egyptian Trade Unions; an independent body that has sought to assume the functions of the ETUF.

As is the case in economies around the world, opinion on the rise of new unions has been mixed; depending on the point of view, it is an essential safeguard of employees’ rights, or a potential inhibitor to job creation.

Regardless, the government’s Labor Unions Act looks to help provide a measure of clarity to labour and employee advocacy by providing more definitive provisions for the powers and freedoms of unions, and more clearly articulate the need for labour unions to focus on employment issues as opposed to political issues.

Articles such as a prohibition on foreign funding, including grants from the International Labour Organisation,and a measure granting the government the power to dissolve unions, however,have been met stiff opposition.

As a result, given the controversy, and the difficulty of ensuring strong protection of employee rights without unduly limiting the ability to hire and fire, the new legislation will not by itself prompt a jump in employment.

However, it will help improve transparency among labour unions and ideally—as it is inevitably amended in the years to come— lead to more productive dialogues between employee advocacy groups and employers.

More importantly, when packaged with the government’s other major reforms, it can serve as a much-needed boost to job creation. The Labor Unions Act is part of a broad legislative agenda which the government hopes will make it easier for businesses to expand in the country.

The most notable component of this legislative reform is the promulgation of a new Investment Law at the end of May. The publishing of this long-anticipated piece of legislation offers a slate of new incentives and protections for corporations and investors, including investment guarantees, equal treatment for foreign and national investors, the granting of residence rights for the duration of projects, a protection against nationalisation or the seizure of funds (without a court order) and the right to transfer profits abroad.

A range of fiscal benefits are also outlined, divided into three categories. The first category is general incentives for all projects not in freezones; includingstamp duty exemptions on loans and a low custom duty rate of 2% on machinery and equipment.
The second category covers specific incentives for some qualifying investment projects like those established in labor intensive sectors or geographical areas in need of employment opportunities.

Those specific incentives include tax deductions of up to 50% on investment costs. The third category covers a number of additional incentives which can be applied on an ad hoc basis, such as the establishment of special customs points for a project’s exports and imports and financial assistance from the government for the cost of technical training of employees.

The ultimate goal of these reforms is to improve the ability of the country’s businesses— or potential businesses—to hire and to grow. However, the country is also hoping the results will be seen in the next edition of the World Bank’s Doing Business ranking, an annual report that evaluates the competitiveness of countries in attracting new businesses.

The report—which is far from comprehensive and faces a number of limitations—has nonetheless become a shorthand way of ranking economies against one another in terms of their openness to investment, measuring performance in areas such as starting a business, dealing with permits, paying taxes and getting electricity.

Following a six-place decline in the most recent 2018 report to 128th out of 190 countries, the government is hoping that several of its reforms will help propel the country up the ranking.

According to Trade and Industry Minister Tarek Kabil, the government will overhaul the procedures at Egypt’s ports to produce a more streamlined system for import and export activity. Egypt was ranked 170th out of 190 assessed economies in the area of crossborder trade.

The minister announced that a committee has already been established to study the current framework and report on areas where the amount of paperwork required to transfer goods through the country’s ports might be reduced.

The reform effort will also include the creation of a central office at all Egyptian ports, where businesses can obtain the necessary shipping, import and export licenses from a single location.

Deputy Minister of Finance Amr El Monayer also revealed earlier this month that the government will make a number of changes to the taxation collection framework in a bid to reduce the number of hours it takes businesses to pay taxes, an area where Egypt ranked 167th globally. Monayer had earlier taken issue with the Doing Business survey’s ability to accurately assess the efficacy of Egypt’s recent tax reforms.

Similarly, a new bankruptcy law, the first dedicated bankruptcy legislation in Egypt, is also under consideration. If passed, the law will minimize the use of courts in bankruptcy scenarios, and if implemented fully, it would reduce the current costly and time-consuming court process required to wind down a distressed company.

Certainly, the sheer volume of changes the government is enacting should yield some fruit in this regard.

That being said, many of the guarantees and incentives introduced by the new Investment Law have little bearing on the criteria measured in the influential index by which competing jurisdictions are rated. The areas where Egypt performed poorly this year, such as the legal frameworks and bureaucracy surrounding paying taxes, trading across borders and enforcing contracts, will require a deeper process of reform, not only of legislation but also the institutions which apply it.

Robert Tashima is the regional managing editor for
Africa at Oxford Business Group