80244 April 2013 . Number 90 ANOTHER PIECE OF THE JOB CREATION PUZZLE: DEVELOPING THE MSME SECTOR IN EGYPT Sahar Nasr and Laila Abdelkader1 to expand private-sector led employment and create entrepreneurship opportunities. Introduction: The Egyptian revolution resulted The recent slow-down in economic growth as in key challenges but also opportunities. It has well as on-going demonstrations and political highlighted the need for more jobs, a level unrest has sharply exacerbated the problem of playing field, good governance (transparency unemployment, especially among youth and and accountability), as well as a fair and women. Furthermore, the demographic competitive environment to accelerate inclusive transformation in Egypt has led to an growth. It is essential to address the challenges abundance of young working-age adults. the country faces and build on the Egypt faces a rising labor supply that has opportunities at this historical time. outstripped demand, leading to stubbornly Cronyism and the Egyptian Revolution : Crony high unemployment rates—with even higher capitalism—the privileged access of certain female unemployment rates – which at 23% are elites to favorable legal and regulatory twice as high as the rates for men. The informal treatment, access to markets, and the economy has expanded and absorbed a large coincidence of political and economic power— number of both unskilled and discouraged was a major contributing factor to the uprising educated workers. Broad-based growth is in Egypt. Many saw privilege and corruption as essential, to boost employment and improve the source of unemployment and inequality, productivity. effectively raising barriers to entry and growth MSMEs Contribution to Job Creation: Micro, for most entrepreneurs. Among others, Small and Medium Enterprises (MSMEs) are practices such as lending to those who were the main source of private sector jobs in Egypt, well connected and providing preferential land and in the MENA region as a whole (Figure 1). allocations, contributed to the poor A recent World Bank analysis of 99 countries performance of key institutions underpinning shows that firms with less than a hundred the market economy. At this historic time, for employees account for the lion’s share of the Egyptian government to achieve the employment creation.2 MSMEs make up over aspirations of their people and attain 99% of private enterprises in Egypt. In sustainable and inclusive development, it needs addition, over 80% of MSMEs are informal enterprises, with low value-added, low 11 Sahar Nasr and Laila Abdelkader, work in the Finance and Private Sector Development Unit, the Middle East and North Africa Region (MNSF1), the World Bank. The Quick Note was 2 cleared by Simon C. Bell, Sector Manager, MNSFP. Ayyagari, Demirguc-Kunt, and Maksimovic (2011). production quality, and poor export 2011) confirms that small firms are important performance. contributors to total employment and job creation, but suggests that their productivity A growing literature on the vital role of fast- and growth is held back by MSME-specific growing SMEs (“gazelles�) in employment constraints. Among others, key constraints creation has focused attention on the include the regulatory and supervisory characteristics of high-growth firms, framework, poor financial infrastructure, the highlighting the importance of building their weak capacity of financial intermediaries to capacities and skills, while reducing constraints effectively reach MSME borrowers, as well as to their entry and operation. enterprise management skills and capabilities. Challenges to MSME Development : Despite MSME’s Importance to the Egyptian the important role MSMEs play in the Economy: Despite these constraints, the economy, they are confronted with major number of MSMEs has grown at an average obstacles, which constrain their development annual rate of over 4% and associated and hinder their potential to create private- employment has increased at an annual rate of sector jobs and entrepreneurship opportunities. over 5% - underlining the dynamism of the MSME’s access to finance is limited (Figure 2) sector and its potential even in the absence of a and their growth potential constrained by lack significantly improved enabling environment. of access to start- These numbers make MSMEs the primary source of employment growth in the labor force over the last ten years, albeit much of it in an informal way. However, this growth did not have an effect on poverty reduction – and the current slow-down in economic growth threatens to worsen the poverty situation further. Creating a more enabling environment and improving access to finance is essential to accelerate MSME growth and create much needed employment opportunities. World Bank Support to MSEs: Launched in 2010, The World Bank’s Egypt Enhancing Access to Finance for Micro and Small Enterprises Project Source: World Bank ICA (2012) (MSE) is the first project in the MENA region Figure 2: % of Firms with a Bank Account by up or growth capital. Although MSMEs Size for Selected Countries contribute significantly to GDP and to private sector employment in Egypt and the MENA region, they often lack access to the type of investment and financial services that they need to start-up, operate and grow. Access to employment and income-earning opportunities through MSMEs, whether as owners or employees, is a topical and prominent issue in the MENA region. Research by Ayyagari, Demirguc-Kunt and Maksimovic (World Bank, April 2013 · Number 90· 2 Source: World Bank Enterprise Surveys (2012). that comprehensively addresses the reform measures: (i) removed ceilings on development of the MSE sector. The project interest rates that microfinance institutions aimed at improving enterprises access to (MFIs) and Microfinance NGOs charged to end finance, with the objective of creating beneficiaries; (ii) raised the previously low LE 5 employment and entrepreneurship million ceiling of its loans to NGOs to LE 25 opportunities for MSEs. Through gender million, allowing for further expansions; mainstreaming, the project has also promoted (iii) moved from the balloon payment women’s economic empowerment, and arrangement to quarterly or semi-annual improved the quality of life of their families payments over a longer period of time; and children. (iv) developed a performance-based system for allocation of funds to the best performing Moreover, it has played an instrumental role in NGOs; (v) improved and streamlined the helping to narrow geographic disparities by reporting requirements for NGOs to make it targeting poor rural villages that were less burdensome and focus instead on a few previously underserved. All this will ultimately key profitability, portfolio quality, efficiency lead to poverty reduction, and improvement in and productivity indicators; (vi) implemented the standard of living of those who were CGAP best practices from the Consultative adversely affected by the deteriorating Group to Assist the Poorest (CGAP)3 and economy and contribute to shared prosperity in revised its operational manual accordingly; and Egypt at this critical time of transition. (vii) set up an integrated, reliable information system that included accounting, procurement, This operation, with its US$ 300 million line of and monitoring systems with on-line links to all credit, of which 65 % has been disbursed, and SFD Regional Offices in rural and urban areas more than 91 % has been committed, has thereby strengthening accountability and helped unlock the potential of the MSE sector transparency. while using innovative delivery mechanisms and financial products to reach out to the Despite today’s challenging environment of underserved segments of society. ongoing political and economic uncertainty, actual disbursement has remained ahead of the The project also built upon strong synergies projected schedule. The total amount between the International Bank for disbursed from the World Bank to SFD is Reconstruction and Development (IBRD), and US$ 193 million, accounting for 65% of the total the International Finance Corporation (IFC). loan amount. More importantly, of the US$ 163 This project was also developed in cooperation million, SFD has disbursed to participating with other development partners, active in financial institutions; approximately US$ 140 supporting MSE development, to ensure million has now been disbursed to end effective coordination of efforts. beneficiaries. The Social Fund for Development (SFD) and Overall, this means that more than 50% of the the MSE Sector: The Bank team working on the full US$ 300 loan has been disbursed to end MSE project redefined the way in which the beneficiaries at a difficult and challenging time Social Fund for Development (SFD), the apex for Egypt. It is worth noting that to date 91% of institution for MSEs, operated in Egypt, thereby the loan is already committed through existing impacting micro and small finance operations contracts with banks and microfinance NGOs. in a broader and more general sense. Specifically, in accordance with international best practices, SFD undertook the following 3 For more see: http://cgap.org/ April 2013 · Number 90· 3 Text Box 1 demonstrated the World Bank is at its best, helping countries achieve poverty reduction, Egypt Enhancing Access to Finance for Micro inclusive growth and enhancing shared and Small Enterprises Project (MSE) economic prosperity. The project has been widely recognized for its Moving Ahead on the MSME Agenda : gender mainstreaming feature – one of the key Credible reforms, effective policies, and cross-cutting themes in the strategy of the World Bank’s MENA region. The project was also equitable enforcement of laws are needed for selected by the International Women's Business sustainable, private-sector led growth. In that Leaders Council to showcase the importance of context, it is important to remove constraints to the economic empowerment of women. Time Warner prepared a video usable for websites, competition and entry, enabling a new blogs, and tweets on women and access to generation of entrepreneurs to emerge who can finance. The project has also been selected as engage in global and domestic markets based part of the Think Equal Campaign, and videos, on their firms’ performance, not on privilege. showing the impact of the project on the life of women were broadcast during the IMF/World For this to happen, business-friendly policy Bank Annual Meeting 2012 (See links below) It reforms will need to level the playing field for and has been awarded a SMART Economics first all entrants and remove inequitable sources of prize for contributing to the Gender and rent and privilege. Development, Women in Business Special Competition entitled: Banking on Women— How Credit Lines Can Target Women Most The government can play an important role in Efficiently. enhancing access to finance for MSMEs as a regulator and enabler. Investing in improving http://www.youtube.com/watch?v=aV2X9rHnrtU&l ist=PLF492053A176B1716&index=100 the financial infrastructure, reforming the http://www.youtube.com/watch?v=4ilvvjmcejI&list= regulatory framework, enhancing the data PLF492053A176B1716&index=98 available, and supporting product The project contributed to improving access to diversification is critical. Increasing the capacity finance for MSEs between 2009 and 2012. This of regulators to monitor MSME finance is evidenced by the increase in the number of providers, and strengthening consumer MSE loans provided by participating financial protection are all important steps that need to intermediaries by 68%; and the rise in the be taken by the state if they wish to see the volume of the outstanding MSE portfolio by MSME sector flourish. 115%. The SFD micro finance portfolio doubled over the same period with a portfolio at risk of less than 5%. Furthermore, the project reached out to disadvantaged areas and poor villages, strengthening inclusion. To date, approximately 82% of small enterprises financed under the line of credit are located outside of the urban metropolises of Cairo, Giza and Alexandria, and 38% of the small enterprises served by the project are located in the much poorer Governorates of Upper Egypt (Assiut, Menia, Sohag). All this has led to an increase in job and entrepreneurship opportunities, especially for previously marginalized segments of society—a key demand of the revolution. The operation April 2013 · Number 90· 4