Sunday,22 July, 2018
Current issue | Issue 1305, (28 July - 3 August 2016)
Sunday,22 July, 2018
Issue 1305, (28 July - 3 August 2016)

Ahram Weekly

Obstacles to growth

Corruption and a lack of access to credit are obstacles to the growth of the private sector in Egypt and other countries in the region, writes Sherine Abdel-Razek

Al-Ahram Weekly

The political instability leading to the 25 January Revolution and in its aftermath has stripped the Egyptian private sector of a significant part of its strength. Between 2009 and 2012, a typical firm in Egypt saw revenues decline by 6.4 per cent per year and employment by more than one per cent, notes a report issued this week.

The report, “What’s Holding Back the Private Sector in MENA,” is an assessment of the constraints on private-sector development based on the results of the MENA Enterprise Survey (MENA ES) conducted in 2013 and 2014 in eight middle-income economies in the Middle East and North African region.

The results reflect the effects of the uprisings in Egypt, Tunisia and Yemen, unresolved social tensions like those in Lebanon, and regional conflicts like in the Palestinian Territories of the West Bank and Gaza. Djibouti, Jordan and Morocco are also included in the survey.

The survey provides data on a representative sample of the formal private sector. Covering more than 6,000 private firms in the manufacturing and services sectors, political instability stands out as the greatest concern of firm managers and CEOs in the surveyed countries. In Egypt, half of the surveyed firms saw political instability as their top obstacle.

The survey was implemented and co-financed by the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), and the World Bank Group (WBG) and includes data on the experiences of firms in a broad range of dimensions of the business environment, including access to finance, corruption, infrastructure, crime, and competition.

Access to finance, or the lack of it, is another significant obstacle. Despite the relatively large financial and banking sectors in the region and the fact that the loans to GDP ratio in the region is above the standard in peer economies, a small number of large firms corner the bulk of bank financing.

With less than 60 per cent of surveyed firms having a current or savings account and only six per cent of them having a bank loan or line of credit, only 10 per cent of Egyptian firms considered the lack of access to finance an obstacle to growth, however.

The report highlights that only two per cent of corporate financing in Egypt comes from banks, a fact reflected in the large number of disconnected firms — those that have not applied for loans because they have sufficient capital.

40 per cent of formal private-sector firms in Egypt are disconnected, the survey finds.

“Firms disconnected from bank credit are small, less likely to have audited financial reports, and less likely to use the banking system even for payments,” it says.

Another obstacle related to access to finance is the high collateral required to take out loans. While older and larger firms can use fixed assets as collateral, this constrains their ability to recruit more people. According to the report, “firms are less likely to disconnect from the banking sector and more likely to create new jobs if banks accept movable assets like machinery and equipment as collateral.”

While the problem significantly eased this year, the unreliable electricity supply emerges as the third largest obstacle to businesses in Egypt. This is linked to a major deterioration in electricity reliability in 2012, the reference year for the survey. In the peak of the energy crisis in Egypt, which saw recurrent power cuts in 2012, 2013 and 2014, industries shouldered a 10 per cent loss in production every year. 

Egypt this year was able to deal with the problem thanks to deals to import fuel with payment facilities including interest-free instalments. The construction of the floating regasification unit in Ain Sokhna has also helped.

Natural gas shortages have in the past forced the government to ration gas supplies to industry during months of peak consumption, crippling production and hampering Egypt’s economic recovery.

The report presents high perceived levels of corruption as being associated with the lower growth of sales and employment, as well as lower labour productivity in the private sector. In Egypt, while only six per cent of firms pointed to corruption as an obstacle to their development, the problem is widespread as 17 per cent of firms in the region report being exposed to at least one bribe request.

According to the report, corruption deters interactions with the public authorities, preventing firms from making full use of the available opportunities. It leads to state capture by interest groups or elites, corruption at high levels, or even under-reporting for fear of potentially adverse consequences.

One of the man features of the private businesses featured in the report is that they prefer a capital intensive model. The Egyptian companies surveyed lag behind their peers in total factor productivity (TFP), which measures the efficiency of the use not only of labour, but also of capital and intermediate inputs.

In this measure Egyptian manufacturers are more capital-intensive than the average manufacturer in the surveyed MENA countries as well as in peer economies. And while in most economies such large firms pay higher wages, this is not the case in the surveyed firms in the MENA region, including those in Egypt.

“It seems that larger firms, which are more productive mostly due to inefficiently high capital intensity, focus on stronger capital remuneration rather than labour remuneration,” the report notes. This can partly be explained by the presence of energy subsidies, which distort production structures by promoting energy- and capital-intensive industries.

Economies that offer fewer energy subsidies have more efficient management and are associated with lower energy intensity and higher labour productivity, it says.

Except for fast-growing firms, most businesses in MENA do not invest enough in the formal training of employees, which makes the supply of relevant knowledge and skills a severe constraint on company growth. While 17 per cent on average of the companies approached by the survey offer formal training to their employees, the percentage in Egypt is as low as five per cent. The figure is two per cent in Egyptian small and medium-sized enterprises (SMEs).

The country in general suffers from a mismatch between labour supply and demand, particularly in the area of technical and vocational skills. The reason is that post-secondary vocational education is considered to be of low status, the report says, and there is no systematic engagement of employers in developing the programmes and curricula needed to cater to their needs.

The low competitiveness of the economies included in the survey stems from the apparent inability of the region’s small firms to scale up their operations. This factor is especially apparent in Egypt, where the large size of the domestic market makes fewer firms willing to be engaged in international trade and providing local industries with fake protectionism and no incentive to upgrade the quality of production.

Moreover, only a quarter of firms in Egypt are engaged in at least one type of innovation, compared with more than two-thirds in the other seven economies surveyed.  “This may be due to the fact that the Egyptian market is vast and underserved, which means that firms do not need to compete for customers and hence do not feel the pressure to innovate,” the report says.

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