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Egypt: Forex regulations(EIU Viewswire Via Thomson Dialog NewsEdge)COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT Overview Following the passage of the Unified Banking Law, No. 88/2003, on June 15th 2003, the Central Bank of Egypt (CBE) enjoys clearer, stronger oversight powers in the foreign-exchange market. Previous laws--such as Foreign Exchange Law No. 38/1994 and its executive regulations and amendments (Law No. 228/1996)--liberalised forex transactions, although the government continually interfered behind the scenes. The Unified Banking Law, No. 88/2003, legitimised government control in the forex market. Parts of those earlier laws, along with other currency and banking legislation, were incorporated into Law No. 88/2003, which supersedes all previous bank and currency laws. The new law gives a stronger hand to the Central Bank of Egypt (CBE) in regulating the foreign-exchange market. In some ways, it de-liberalises the financial sector, in particular by mandating, in Article 111, that domestic dealing in the Arab Republic of Egypt...shall be in Egyptian pounds. However, on December 13th 2004, the new prime minister, Ahmed Nazif, moved to cancel Decree No. 506/2003, which had required businesses operating in Egypt to channel all of their hard-currency earnings into the banking system, where 75% of these earnings are automatically converted into Egyptian pounds. The move came two days after the Administrative Court ruled the decree illegal. The Unified Banking Laws executive regulations, which appeared in March 2004, contained no surprises. Despite the laws transactions clause, anyone may still engage in foreign-currency transactions, though only through banks or bureaux licensed by the CBE. Initial fears about the right to transfer remittances abroad have thus far proven unfounded. Otherwise, the law preserves the main points of Law No. 38/1994 as far as foreign-exchange procedures are concerned. For example, all individuals and organisations are entitled to hold foreign currency inside the country, and anyone may maintain a local bank account denominated in a foreign currency. Individuals may buy foreign currency and transfer it abroad. In addition, stockmarket investors are guaranteed the right to convert their proceeds from Egyptian shares into foreign currency. Banks and foreign-exchange bureaux must be licensed to trade in foreign currencies and must submit statements of all their transactions to the CBE, which ultimately controls all forex transactions. The CBE can enforce penalties against banks and currency traders for contravening either the banking law or specific CBE regulations. Previously, during periods of exchange-rate pressure, the CBE has used this authority to close down forex bureaux accused of speculating on the Egyptian pound; it has also warned that banks could lose their licences if caught speculating. The CBE is authorised to set the buying and selling prices of foreign currencies. Banks are authorised to deal in foreign exchange, which they may buy either for their own accounts or on behalf of a third party. Licensed foreign-currency dealers (bureaux as opposed to banks) may also buy and sell foreign currency, but not for third parties. Such dealers are prohibited from transferring money abroad. Each forex bureau must adopt the composition of a joint-stock company, and--following a decision by the parliamentary economic committee in June 2003--must maintain paid-up capital of no less than E10m. The Unified Banking Laws executive regulations do not specify the minimum capital requirement for bureaux, as they do for banks, but licensing decisions are left to the discretion of the CBE governor. Earlier in 2003, the CBE had raised the minimum capital requirement drastically, to E20m, up from just E1m under the old forex law. Although the Union of Exchange Bureaux was able to negotiate the requirement down to E10m, many bureaux were still forced out of business. As of late 2005, most bureaux still fell far short of the required capital levels, according to the CBE. Under close CBE supervision, the surviving bureaux can often do little more than cash travellers cheques and buy relatively small amounts of foreign currency. Although banks were looking after their corporate customers adequately, finding forex at posted rates could still be difficult for individual customers as of late 2005. Under a CBE directive, citizens or residents intending to travel abroad continued to find that they could not buy more than US$200 or its equivalent in other foreign currencies, even when showing a valid passport and ticket at a bank. This provision, previously set by the CBE at US$1,000, was lowered temporarily to US$200 because of intense dollar shortages in 2002. Despite claims in early 2005 that forex would be sold freely, availability remained erratic and restrictive for non-business customers. Repatriation of proceeds. The right to convert currency for the repatriation of profits is not explicitly guaranteed by law. Repatriation rights are mainly protected by way of bilateral investment treaties. In addition, the EU Association Agreement that went into force in June 2004 should help to protect the rights of investors from EU countries. Foreign investors encountered considerable repatriation difficulties in 2002, especially with proceeds earned in the local stockmarket. The CBE subsequently established a dual account system for foreign stockmarket investors. Unreasonable delays in profit repatriation were not reported in 2004 or 2005. Ministerial Decree No. 529/1996, issued by the now-disbanded Ministry of Economy, removed all restrictions on foreigners repatriating proceeds from the sale of property in Egypt. The decree followed Law No. 230/1996, which lets foreigners own real estate in Egypt. Law No. 88/2003 allows travellers (presumably foreign or Egyptian) to carry Egyptian pounds into or out of the country, but only up to a maximum of E5,000. Money-laundering controls. Egypt was taken off the international money-laundering blacklist in February 2004. The Paris-based Financial Action Task Force (FATF) had placed Egypt on its list of non-co-operative countries in the fight against money laundering in 2001 because the country had failed to criminalise money laundering to internationally accepted standards. The FATF standards attracted international attention, especially from the US government, amid concerns about terrorist financing after September 11th 2001. The FATF said that Egypt had failed to establish an effective and efficient monitoring system that covered all financial institutions and to implement rigorous identification requirements that applied to all such institutions. It also called for clarifications on rules for access to information covered by the banking secrecy law. Out of 29 FATF criteria for the prevention of money laundering, Egypt fully met only six and partially fulfilled another three. In response to the FATF listing, the Peoples Assembly (the lower house of parliament) approved a new Anti-Money-Laundering Law, No. 80/2002, in May 2002. The law defined money laundering and prohibited the laundering of funds associated with drug trafficking. Importantly, it addressed the illegal financing of terrorism and, under Article 3, established an independent investigative unit at the CBE. However, it did not overturn the problematic banking-secrecy measures. An additional clause in the Unified Banking Law, No. 88/2003, which superseded the banking secrecy law, proved sufficient for Egypt to be removed from the FATF blacklist at the end of February 2004. Although Article 97 of Law No. 88/2003 reaffirmed the secrecy of bank-account information, Article 98 permits prosecutors with a judicial warrant from the Cairo Court of Appeal to examine such information in order to investigate a specific crime. Repatriation of capital Egyptian law guarantees foreign investors the right to repatriate capital, proceeds, income and other gains in compliance with the official central-bank exchange rate on the date of transfer. Capital repatriation is not subject to specific reporting requirements. Capital invested as part of a debt-equity swap is defined as foreign-exchange capital and carries repatriation rights, subject to approval by the General Authority for Investment and Free Zones and the central bank. However, the repatriation of capital for Law No. 159/1981 companies is subject to restrictions. If a Law No. 159/1981 company is liquidated, an annual limit equivalent to E20,000 applies to the amount of capital transferred. The right to convert currency for the purpose of repatriation is not explicitly guaranteed by law, and repatriation rights are protected mainly under bilateral investment treaties. Egypt has signed such treaties with Belgium, China, France, Germany, Greece, Indonesia, Iran, Italy, Japan, Luxembourg, Malaysia, Morocco, the Netherlands, Romania, Sudan, Switzerland, Thailand, the UK and the US. In addition, the EU Association Agreement that went into force in June 2004 should help to protect the rights of investors from all EU countries. Profit remittances The General Authority for Investment and Free Zones (GAFI) reviews all profit and dividend remittances by companies formed under the provisions of Law No. 8/1997, the legal framework of choice for most foreign direct investment in Egypt. As a general rule, foreign investors in projects with adequate foreign currency--assuming their earnings for visible or invisible exports cover all their costs--are permitted to transfer their annual net profits outside of Egypt. Companies formed under the older Law No. 230/1996 are allowed to repatriate all or part of their net profits, provided the amount remitted does not exceed the balance of the projects foreign-currency operating account. Approval is not required from GAFI. Companies established under Law No. 159/1981 do not face profit-repatriation restrictions. For stockmarket investors, Law No. 38/1994 permitted banks and dealers to sell foreign currency for the purpose of transferring abroad the dividends or interest earned on Egyptian securities. The new Unified Banking Law does not specifically address this point, although it appears to permit the continuation of existing practices. Unreasonable delays in profit repatriation were not reported in 2004 or 2005. Foreign investors had encountered considerable repatriation difficulties in 2002, as the government struggled to make its own hard currency payments. In the petroleum sector, where payments to foreign partners are traditionally prompt, the government tried--unsuccessfully--to persuade oil companies to accept delays beyond 90 days. Foreign stockmarket investors, with less leverage on the government, were not consulted about delays. In 2001 the Central Bank of Egypt (CBE) had offered assurances that foreign investors could collect their returns from the local stockmarket in US dollars, calculated at the CBEs official exchange rate on the day of the transaction. In May 2002, however, the central bank froze its foreign-currency account, effectively preventing foreign investors from retrieving either their principal or their dividends. However, the government realised the risk alienating stockmarket investors, and the account was reopened within less than two months. The freeze appeared to be a stopgap attempt by the CBE to prevent currency arbitrage in the Global Depository Receipt (GDR) market. GDRs--designed to facilitate the trading of shares from abroad--automatically pay dividends in dollars. Foreign institutional investors had started capitalising on the opportunity to convert local shares into GDRs and then back again. Returns on such transactions would approximate the difference between the official exchange rate and its black-market counterpart. The price differential between GDRs and local shares has tended to correlate almost perfectly with black-market forex rates in Egypt. The CBE subsequently established a dual account system--one account in Egyptian pounds and one in dollars--for each foreign stockmarket investor. Ministerial Decree No. 529/1996, issued by the now-disbanded Ministry of Economy, removed all restrictions on foreigners repatriating proceeds from the sale of property in Egypt. The decree followed Law No. 230/1996, which lets foreigners own real estate in Egypt. Tax consequences. Law No. 89/1996 abolished the previous 2% tax on capital gains arising from the disposal of shares, as stipulated in Law 95/1992. Under Law No. 89/1996, dividends are paid out of company profits, which are either taxed or specifically exempt. Dividends received from Egyptian entities are 90% deductible from taxable profits. Dividends received from abroad will be subject to the 20% income tax, after allowing for foreign taxes paid as a deduction from income. Yields on bonds, finance share warrants and other securities income are exempt from tax under Article 22 of Law No. 8/1997. But the exemption is permitted only if the securities are offered for public subscription and traded on the stock exchange. Dividends, bonds and interest received from abroad, and the net of foreign taxes paid, are subject to the 20% income tax. Citizens from countries having double taxation treaties with Egypt are handled in accordance with these agreements. Loan inflows and repayment There are no restrictions on borrowing from abroad and no statutory limits on loan terms. Borrowing in foreign exchange is treated the same way as in local currency. Transfer of interest is permitted, as long as there is enough foreign exchange in a projects account to cover the payment. Loans from abroad may be repaid from the projects foreign-exchange account without special permission. Tax consequences. Earnings from lending out money are treated, essentially, like any form of business. This is expected to continue under the new Income Tax Law, No. 91/2005, except that the rate payable would be only 20%. Executive regulations on the new law, which are likely to provide more information about payment procedures, had not yet been published as of December 2005. Transfer of royalties and fees Conversion and transfer of royalty payments are permitted when trademark, patent or other licensing agreements have been approved under Law No. 8/1997. However, some administrative limits apply to transferring remittances of royalties and fees. Tax consequences. Every company operating in Egypt is required to pay taxes on royalties and fees in accordance with the new Income Tax Law, No. 91/2005, and the various regulations and amendments providing clarifications of how the law applies to specific industries and activities. However, fees for writing and translating books and religious, scientific and cultural articles are exempt from taxes. Restrictions on trade-related payments Export regulations and customs procedures issued in 1987 authorised private-sector exporters to price their own products and keep 100% of earned foreign exchange. Decree No. 506/2003 of March 2003, cancelled in December 2004, had imposed a mandatory system of converting 75% of all forex earnings into Egyptian currency via local banks. Many exporters had still found ways to maintain some of their foreign-exchange earnings abroad, as a shield against the Decree No. 506/2003 surrender rule. The right to keep forex proceeds outside Egypt was protected under the liberal Law No. 38/1994, but this former forex law has now been overturned by Law No. 88/2003 (the Unified Banking Law). The Administrative Court ruled in December 2004 that Decree No. 506/2003 was inconsistent with the principle of free trade in foreign currency. Businesses welcomed the cancellation of the controversial forex-surrender rule as yet another sign of a new governments resolve to reform the economy. Medhat Mubarak, the attorney who had brought the case, said exporters and all other entities that had suffered damage under the decrees mandatory surrender provision can file cases to recover the difference in foreign currency that they lost during enforcement. This difference is presumed to mean slight variance between buy and sell rates--not the gap between black-market and official exchange rates at any given point in Decree No. 506/2003s 21-month life span. Moreover, lawyers added, such restitution cases will take 57 years for the courts to process. Although the Unified Banking Law, No. 88/2003, declares that all transactions in Egypt shall be in Egyptian pounds, it also preserves the right to free currency exchange that was established by the earlier, more liberal forex law, lawyers said. Egypts constitution forbids the sequestration or seizure of assets. Official bank exchange rates must still be used for any conversion of export proceeds. Otherwise, there are no formal restrictions on import payments for Egyptian nationals. Article 3 of the Unified Banking Laws executive regulations confirms that banks are authorised to issue letters of credit in foreign currency for import payments based on any terms and conditions negotiated with their customers, subject to approval by the Central Bank of Egypt (CBE). In 2001 a worsening liquidity shortage prompted the government to impose restrictions on local companies financing of imports. The resulting regulations were cancelled in late 2002, however, after protests from local chambers of commerce. Steep inflation in 2003 led the government to make vague statements about restricting luxury imports while subsidising imports of essential commodities. In practice, luxury imports were dampened anyway, thanks to sharply rising forex costs. Despite the pains of inflation, the sharp currency devaluation in the first half of 2003 had resulted, by 2004, in much-improved liquidity flow throughout the economy. There are no restrictions on lags or leads for export or import payments, but the central bank advises that letters of credit must be covered 100% in cash by the importer. Banks adhere strictly to the total-coverage rule, introduced in March 1999. Previously, banks and their clients would work out ad hoc agreements, in which clients usually covered only 1020% of the value of their letters of credit. Foreign exporters should therefore enter into contracts with Egyptian importers only upon agreement that payment will be made against a confirmed, irrevocable letter of credit. Under current Egyptian law, in fact, the foreign-based exporter to Egypt must not ship any goods before an Egyptian bank has given notification of the opening of a letter of credit. If the goods are shipped before the letter of credit is opened, the Egyptian-based importer runs the risk of being fined up to a maximum of the value of the goods. Tax consequences. Under the new tax law, No. 91/2005, profits on export earnings are taxed at 20%, down from the previous rate of 32%. Companies registered in one of the countrys free-trade zones continue to enjoy tax exemptions. Firms locating in the new Special Economic Zones, created by a law passed in 2002, or in remote desert areas, also enjoy considerable tax breaks. |