A number of foreign airlines, such as Air France and KLM, have halted their flights to Egypt which raises the problem of repatriation of profits again.
The problem also explained the consequential reduction in the volume of direct foreign investment and the slowdown in acquisitions over local companies. Repatriating profits abroad unfolded in 2013 as a result of the erosion of the country’s foreign reserves due to declining tourism and foreign direct investment income.
Egypt has recently resolved part of the crisis. In October 2015 the government paid some $11.6bn as part of profits for the companies operating in research and exploration for gas and oil, which amounted to $14.3bn in total.
By the end of last year, the Central Bank of Egypt (CBE) also allocated $500m to repatriate delayed profits of foreign investors dealing in the Egyptian Exchange that have been standing since 2013.
Direct Investment Manager at the American Cartel Capital Ayman Abu Hend said the problem has been worsening under pressures faced by the pound-dollar exchange rate. The depreciation of the pound makes foreign companies fear the decline of their profits value when they are exchanged into dollars, which would change the profits margins on which parent companies assess the feasibility of foreign investment.
Future contracts in Europe and America set the price of the Egyptian pound at EGP 10.25 against the dollar for 2016, which threatens the value of investments.
Abu Hend said Cartel Capital decided not to establish an integrated investment bank in Egypt because the value of investments will be subject to erosion when the gap between the official rate of the pound and the dollar widens. The delay in profit repatriation also disrupts the completion of the acquisitions over companies operating in Egypt, due to fears of erosion of foreign exchange reserves.
Acquisitions carried out by foreign companies over local entities are one of the sources of foreign exchange. Egypt’s foreign exchange reserves recorded about $16.445bn at the end of 2015.
The head of an investment bank in Egypt, who preferred to remain anonymous, said in October that the repatriation problem scared off a foreign company which planned to acquire a local financial services firm. The canceled deal was worth $100m.
Chairman of Abu Dhabi Capital Karim Helal described the CBE’s burden to manage the foreign exchange and external liabilities as a colossal one. CBE is now focused on directing foreign exchange for the importation of basic commodities and raw materials by raising the foreign deposit cap to $50,000 per month. “But we are not fully aware of the size of the economic pressures placed on CBE when drawing monetary policies to limit the activity of the black market,” he said.
The challenges CBE faces in managing foreign exchange rates have made it harder to contain the delay of repatriating profits, which hinders the completion of acquisitions in the local market and stops the flow of foreign investment.
Over the last fiscal year 2014/2015, Egypt attracted direct foreign investments worth about $6.4bn when the Ministry of Investment had earlier announced it targeted $10bn that year.